When will an orderly transaction for the purchase of an apartment, which includes registration in the tax register, be considered a security – even though it is ostensibly a consumer transaction for all intents and purposes? A report by the Securities Authority’s audit and valuation department provides specific clarifications on the subject, which can often be misleading, and refutes the notion that the purchase and listing of the property in an orderly manner is sufficient so that securities law does not apply to the transaction.
We will first explain the basic principle around the matter: Usually, the purchase of an apartment registered as proprietary in the name of the buyer, legally, in the Land Registry, will essentially be defined as a consumer purchase, which is not financial. However, there are cases – especially in the field of real estate investments – where the purchase of the property itself is accompanied by additional clauses, which in the eyes of the Securities Authority have to define the transaction as a security, for all that this implies.
The remarks were published today (Sunday) in an audit findings prepared by the Authority’s Audit and Evaluation Department regarding a public offering of securities, following several inspections conducted by the department, in collaboration with the Corporations Department, on ventures that appeal to potential investors and offer them to invest in the venture. The report presents two cases as an example of cases in which a financial investment in a real estate project, including registration in the Land Registry, will indeed be considered, in the position of the Authority’s staff, as an investment in securities.
“In the circumstances of the specific case, the system of agreements in the project constitutes ‘securities'”
In the first case, it is the purchase of housing units in a real estate project in a foreign country, in which an agreement is signed, in addition to the purchase itself, according to which the investor rents the unit purchased to the entrepreneur, for ten years, in exchange for an annual payment of 10% of his investment. “It does not depend on the income from renting its unit, and the developer manages the unit including its rental at its discretion,” the authority said in a statement. The name of the investor in the Land Registrar. “
Another case included in the report relates to the marketing of a hotel resort unit abroad, where it is stated in the fabric of investment agreements that investors are entitled to receive a share of the hotel profits, according to their relative share to all resort unit holders, regardless of the specific unit purchased by them. 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. “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.”
The report dealt with two other issues: one – the involvement of brokers and marketers in investment marketing, a matter in which the PA staff states that “the law does not recognize the status of a ‘broker’ as one that grants an exemption from its applicability.” Therefore, if an entity, including a broker, seeks to offer the public securities of any corporation, it is required by law to do so.
Another issue – the use of “objective” financial data for marketing investment, such as the publication of average rates of return in the neighborhood or city where a real estate project is located – in this regard Even if it is external data for the activity of the enterprise. According to the faculty, the explicit prohibition on providing financial data in the context of the ‘general publication’ exemption indicates the importance of financial data in the context of an offer of securities. Therefore, publications intended to circumvent this provision cannot be covered by the exemption. “
Another step in the attempt is to make order in the field
The report released today appears to be part of a broader move aimed at making order in the area of unsupervised investments, as defined by the Securities Authority. Only about a month ago, the authority conducted a kind of “procedure refresher” in which it emphasized how to raise money from the public properly, without breaking the law – a refresher aimed at both entrepreneurs and investors, in order to clarify when a transaction may be perceived by the authority as a security.
In this context, we will note the ruling of Judge Ruth Ronen of the Tel Aviv District Court, as part of a lawsuit against the Fulfillment Fund and a request for approval as a class action, which well illustrates the significance of defining a real estate transaction as a ‘security’. “The investors ‘investment in the fund is not an investment in a real estate transaction, but in a financial transaction. Indeed, the investors’ money was invested in real estate projects, but the investors had no interest in the property itself, and the purpose was to achieve a return on their investment. I believe that even if the fund did not actively manage the investments, and even though investors could have chosen which project to invest in, the bond between the investors and the fund is designed in a way that should be seen as a passive investment managed by the fund.
Passive investments are usually characterized by power gaps between the fundraiser and investors, power gaps that justify the application of the protections provided by law. “If an investment is more characterized by power gaps between the recruiter and investors – including gaps in the negotiating power between the parties, in the information and management of the investment – this will indicate that the investment is passive and that there is justification for applying the securities laws.”
Having ruled this, Judge Ronen went on to conclude that a warning sign should be used for any entrepreneur working in this field: Is legal. “
“In the case of a security, the application must comply with strict rules of law”
The director of the audit and valuation department, Adv. Amir Helmer, said after the publication of the report: “In some cases, a real estate investment, which includes a real estate registration, may be considered a security if the investment characteristics and manner of execution indicate a passive financial investment.
Entrepreneurs seeking to recruit investors to set up real estate projects should exercise caution and check carefully whether the transaction their son does not fall within the scope of securities law. “Securities, the application must comply with strict rules of law, which limit the application to 35 offshoots, and no publication of a prospectus is required.”
Advocate Helmer also referred to the importance of issuing reports such as the one published today to the investing public, saying that “the Securities Authority reiterates to investors the great risks of unsupervised investments in securities. The Authority’s publications aim to bring to the attention of entrepreneurs and investors the Authority’s position on issues relevant to such investments, and to increase awareness of the conduct and standards expected of entrepreneurs and investors. “