The Audit and Evaluation Department of the Securities Authority publishes an audit report on the offer of securities to the public. The report is published later in a number of reviews conducted by the department in collaboration with the Corporations Department, in ventures that appeal to potential investors and offer them to invest in the venture. The report concentrating the findings presents two cases in which a financial investment in a real estate project that includes registration in the Land Registry will be considered, in the position of the Authority’s staff, as an investment in securities.
In the first case, it is the marketing of housing units in a real estate project in a foreign country. The investment required the conclusion of an agreement to purchase a housing unit while registering the right in the name of the investor in the Land Registry in that country. Beyond that, another agreement was signed under which the investor leases the unit he purchased back to the entrepreneur for a period of 10 years, in exchange for an annual payment of 10% of his investment volume. In practice the payment to the investor does not depend on the income from renting his unit, and it is the developer who manages the unit including its rental at his discretion. The Authority’s staff states that in the circumstances of the specific case, the system of agreements in the project constitutes “securities”, despite the existence of the registration of the property in the name of the investor in the Land Registrar.
The Authority’s staff notes in the report that in most cases, the purchase of an identified apartment registered in the name of the purchaser in the Land Registry will in essence be a consumer purchase of a non-financial nature. For example, when a person purchases an apartment for the purpose of living in it or for the purpose of investing in real estate directly and independently. At the same time, the existence of a registration in the Land Registry alone does not necessarily mean that the transaction in question does not constitute a “security”.
The Authority’s staff states that the characteristics of the investment and the manner in which it is carried out indicate that the commitment is essentially to make a financial, passive investment, which has a clear economic character and while expecting a return. In these cases, this consensual system should be seen as an investment in a security.
Vacation units abroad
Another case included in the report relates to the marketing of a hotel holiday unit abroad. Investors were required to purchase an individual holiday unit in a specific location at the hotel. Each unit is registered in the name of the investor in the local land registry. However, the fabric of investment agreements stipulated that investors were entitled to a share of the hotel’s profits, in proportion to their share in front of all the holiday unit holders, regardless of the performance of the specific unit purchased by them.
The position of the Authority’s staff is that in these circumstances the investment agreements constitute “securities” even though the investor has purchased a specific hotel unit registered in his name in the Land Registry. According to the faculty, the fact that the investor is entitled to a return derived from the overall activity of the venture, and not only from the housing unit purchased by him, reinforces the need to protect securities law.
In addition, the report addresses two additional issues:
- Involvement of Realtors and Marketers in Investment Marketing – In this context, the Authority’s staff states that “the law does not recognize the status of” broker “as one that grants an exemption from its applicability.” To the extent that any entity, including an “intermediary”, wishes to offer to the public the securities of any corporation, the obligations under the law are imposed on it.
- Use of “objective” financial data for investment marketing – The Authority’s staff has identified cases in which enterprises have published “objective” financial data originating from various public publications for the purpose of marketing the investment. The data do not refer to the project itself, but are presented in a way that suggests the expected results of the investment in the recruiting venture. For example, advertising average yield rates in the neighborhood or city where a real estate project marketed by the developer is located, and more. The Authority’s staff states that publications of financial data of this type are not included in the exemption from “general publication” provided by law, even if it is data external to the activity of the enterprise.
According to the faculty, the explicit prohibition on providing financial data as part of the “general publication” exemption indicates the importance of financial data in the context of a securities offer. Therefore, publications intended to circumvent this provision cannot be covered by the exemption.
Director of the Audit and Valuation Department, Adv. Amir Helmer: “In some cases, an investment in real estate, which includes a real estate registration, may be considered a security, if the characteristics of the investment and the manner in which it is performed indicate that it is a passive financial investment.”