Real Estate Investments
When is a Real Estate investment a security?
When a person purchases real estate, a warranty deed is granted to the buyer and it is recorded with the County Recorder; such real estate investments are not securities. These real estate transactions are done without any involvement by the Securities and Exchange Commission (SEC) or Utah Division of Securities.
When one person solicits another to purchase a “tenant-in-common” (or TIC) interest, the interest is typically considered a security under federal securities laws and most state securities laws. However, Utah is a state where the buying and selling of TIC interests are not considered securities transactions.
That said, investments that are secured by a Trust Deed on real estate may or may not be a security. Investments involving real estate are securities when:
- The investment (usually evidenced by a Promissory Note) purports to be secured by a Trust Deed on real estate, but the Trust Deed is not recorded with the County Recorder and/or there is insufficient equity in the real estate to cover the investment.
- The investment is pooled with other investors' money to purchase real estate, but the real estate is held in the promoter's name, not the investors. Again, the investment is usually evidenced by a Promissory Note.
Any promoter who seeks investor money for an investment that is defined as a security must:
- properly register the security under Utah law;
- demonstrate the security is exempt from registration under Utah law; or
- if the security is a federal covered security, notice file in Utah.
In many cases, promoters fail to properly follow securities laws and offer unregistered securities to Utah investors, which is a violation of the law.
Many promoters either fail to provide investors with a disclosure document as described above or provide inadequate disclosure in their document. Some promoters even mislead or misrepresent information in their disclosure documents. The information should include a clear description of the business, risks of the business, audited financials, and any commissions to be paid to the person soliciting your investment. The omission or misrepresentation of material information in the offer or sale of a security is considered securities fraud. Sometimes investors trust the person selling the investment and rely on that relationship rather than the written disclosures, which is often a strategy known as affinity fraud.
Depending on the structure of the investment, the promoter may or may not need to be licensed as a broker-dealer or investment adviser. They also may be required to be licensed as a real estate agent or mortgage broker. Licensing provides outside oversight of the activities of the promoter to ensure they are acting in accordance with industry regulations.