Is My Real Estate Syndication a Security?
A real estate syndication is usually a security. Under the Howey test, an investment contract exists when a person invests money in a common enterprise expecting profits primarily from the efforts of others, and passive investors in a syndication fit that description. Labeling the deal a joint venture, a loan or a membership does not change the answer. A security needs registration or an exemption, and anti-fraud rules apply either way.
The Howey test
- An investment of money. Investors pay cash or other value.
- In a common enterprise. Investor fortunes are pooled or tied to the sponsor or each other.
- With an expectation of profits. The investor expects a return from rent, appreciation or sale.
- Derived from the efforts of others. The sponsor finds, manages and operates the property.
If all four exist, the arrangement is an investment contract and a security under federal and Texas law.
Common structures and where they land
| Structure | Likely a security? |
|---|---|
| Passive LLC or LP interests in a sponsor-managed property | Yes |
| Notes issued to investors who fund a sponsor's deals | Often yes, depending on the terms |
| Tenant-in-common interests sold with a sponsor managing the property | Often yes, depending on the management arrangement |
| Two or three active partners each with real management rights and experience | Possibly not |
When a joint venture may not be a security
Courts have found general partnership or joint venture interests are not securities when each partner has real power and the ability to control the business. Powers that exist on paper but are not practical for passive investors do not count. A true active partner who can really run the project or replace the manager is different from an investor who sends money and waits. The facts matter more than the label.
Consequences of getting it wrong
- A sale without an exemption can give investors a right to rescind and get their money back.
- Anti-fraud liability can extend to the sponsor and the people who control it.
- Unregistered selling by people who are paid commissions raises broker-dealer issues. See finders and unregistered broker risk.
What to do
Assume a passive investor offering is a security and use an exemption, usually Rule 506. Prepare a PPM, collect accredited investor information, file Form D and make state notice filings. See 506(b) vs 506(c) and real estate fund vs syndication.
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Book Free ConsultationFrequently asked questions
Is a real estate loan from an investor a security?
It can be. A note offered to many investors in a program may be a security even though it is called a loan.
Does the size of the deal matter?
No. A small raise can be a security. The test does not depend on size.
Does a Texas deal follow state law too?
Yes. The Texas Securities Act has its own definition and anti-fraud liability, which can be broader than federal law.
Can I avoid securities law by calling investors partners?
No. Courts look at the real economic arrangement, not the label.