[Filed July 20, 1998, 9:42 a.m.]
Preproposal statement of inquiry was filed as WSR 98-07-101.
Title of Rule: WAC 460-32A-400 Sales in condominiums or units in a real estate development.
Purpose: To eliminate duplicated text of federal Securities and Exchange Commission Securities Act Release No. 5347 from the language of WAC 460-32A-400. The federal release will be incorporated by reference.
Statutory Authority for Adoption: RCW 21.20.450.
Statute Being Implemented: Chapter 21.20 RCW.
Summary: This proposal would eliminate from the text of WAC 460-32A-400 text of Release No. 5347. The release will continue to be referenced in the rule.
Reasons Supporting Proposal: To eliminate text of Securities and Exchange Commission Securities Act Release No. 5347 from the language of the rule.
Name of Agency Personnel Responsible for Drafting: Brad Ferber, 210 11th Avenue S.W., Olympia, WA, (360) 902-8760; Implementation: John L. Bley, 210 11th Avenue S.W., Olympia, WA (360) 902-8760; and Enforcement: Deborah Bortner, 210 11th Avenue S.W., Olympia, WA, (360) 902-8760.
Name of Proponent: Department of Financial Institutions, Securities Division, governmental.
Rule is not necessitated by federal law, federal or state court decision.
Explanation of Rule, its Purpose, and Anticipated Effects: WAC 460-32A-400 incorporates the text of federal Securities and Exchange Commission Securities Act Release No. 5347, which addresses the applicability of the federal securities laws to the offer and sale of condominium units, or other units in a real estate development, coupled with an offer or agreement to perform or arrange certain rental or other services for the purchaser. The Securities Division concurs with the federal position, but proposes to reference the release in the rule rather than incorporating its text. Duplicated text is eliminated and the same result achieved by retaining by the reference to the federal release.
Proposal Changes the Following Existing Rules: During rules review according to Executive Order 97-02, Securities Division staff recognized that text contained in a federal release duplicated in a state rule. This text could be eliminated and the same result achieved by incorporation by reference to the release.
No small business economic impact statement has been prepared under chapter 19.85 RCW. The proposal does not have economic impact on business.
Section 201, chapter 403, Laws of 1995, does not apply to this rule adoption. The Department of Financial Institutions is not a listed agency in section 201.
Hearing Location: Department of Financial Institutions, Securities Division, Executive Conference Room, 300 General Administration Building, 210 11th Avenue S.W., Olympia, WA 98504, on August 25, 1998, at 2:00 p.m.
Assistance for Persons with Disabilities: Contact Darlene Christianson by August 21, 1998, TDD (360) 664-8126, or (360) 902-8760.
Submit Written Comments to: Brad Ferber, P.O. Box 9033, Olympia, WA 98507-9033, fax (360) 586-5068, by August 24, 1998.
Date of Intended Adoption: August 26, 1998.
July 17, 1998
John L. Bley
AMENDATORY SECTION (Amending Order 304, filed 2/28/75, effective 4/1/75)
WAC 460-32A-400 Sales in condominiums or units in real
estate development. The Washington Securities Act provides that
its interpretation and administration be coordinated with related
Federal regulations. In light of such policy and due to the
relevance and importance of the Securities and Exchange
Commission Securities Act Release No. 5347, the division of
securities hereby adopts Securities and Exchange Commission
Securities Act Release No. 5347((
, which is hereinafter set forth
in its entirety)).
"The Securities and Exchange Commission called attention
to the applicability of the federal securities laws to the offer
and sale of condominium units, or other units in a real estate
development, coupled with an offer or agreement to perform or
arrange certain rental or other services for the purchaser. The
Commission noted that such offerings may involve the offering of
a security in the form of an investment contract or a
participation in a profit sharing arrangement within the meaning
of the Securities Act of l933 and the Securities Exchange Act of
1934. Where this is the case any offering of any such securities
must comply with the registration and prospectus delivery
requirements of the Securities Act, unless an exemption therefrom
is available, and must comply with the anti-fraud provisions of
the Securities Act and the Securities Exchange Act and the
regulations thereunder. In addition, persons engaged in the
business of buying or selling investment contracts or
participations in profit sharing agreements of this type as
agents for others, or as principal for their own account, may be
brokers or dealers [for a special exemption from the Washington
Securities Act, see WAC 460-20A-235] within the meaning of the
Securities Exchange Act, and therefore may be required to be
registered as such with the Commission under the provisions of
Section 15 of that Act. The commission is aware that there is uncertainty about when
offerings of condominiums and other types of similar units may be
considered to be offerings of securities that should be
registered pursuant to the Securities Act. The purpose of this
release is to alert persons engaged in the business of building
and selling condominiums and similar types of real estate
developments to their responsibilities under the Securities Act
and to provide guidelines for a determination of when an offering
of condominiums or other units may be viewed as an offering of
securities. Resort condominiums are one of the more common
interests in real estate the offer of which may involve an
offering of securities. However, other types of units that are
part of a development or project present analogous questions
under the federal securities laws. Although this release speaks
in terms of condominiums, it applies to offerings of all types of
units in real estate developments which have characteristics
similar to those described herein. "The offer of real estate as such, without any collateral
arrangements with the seller or others, does not involve the
offer of a security [for certain land located outside the state
of Washington this is not true, see RCW 21.20.005(12)]. When the
real estate is offered in conjunction with certain services, a
security, in the form of an investment contract, may be present.
The Supreme Court in Securities and Exchange Commission V.W.J.
Howey Co., 328 U.S. 293 (1946) set forth what has become a
generally accepted definition of an investment contract. "'A contract, transaction or scheme whereby a person invests
his money in a common enterprise and is led to expect profits
solely from the efforts of the promoter or a third party, it
being immaterial, whether the shares in the enterprise are
evidenced by formal certificates or by nominal interests in the
physical assets employed in the enterprise.' (298) "The Howey case involved the sale and operation of orange
groves. The reasoning, however, is applicable to condominiums. "As the Court noted in Howey, substance should not be
disregarded for farm, and the fundamental statutory policy of
affording broad protection to investors should be heeded. Recent
interpretations have indicated that the expected return need not
be solely from the efforts of others, as the holding in Howey
appears to indicate. For this reason, an investment contract may
be present in situations where an investor is not wholly
inactive, but even participates to a limited degree in the
operations of the business. The 'profits' that the purchaser is
led to expect may consist of revenues received from rental of the
unit; these revenues and any tax benefits resulting from rental
of the unit are the economic inducements held out to the
purchaser. "The existence of various kinds of collateral arrangements
may cause an offering of condominium units to involve an offering
of investment contracts or interests in a profit sharing
agreement. The presence of such arrangements indicates that the
offeror is offering an opportunity through which the purchaser
may earn a return on his investment through the managerial
efforts of the promoters or a third party in their operation of
the enterprise. "For example, some public offerings of condominium units
involve rental pool arrangements. Typically, the rental pool is
a device whereby the promoter or a third party undertakes to rent
the unit on behalf of the actual owner during that period of time
when the unit is not in use by the owner. The rents received and
the expenses attributable to rental of all the units in the
project are combined and the individual owner receives a ratable
share of the rental proceeds regardless of whether his individual
unit was actually rented. The offer of the unit together with
the offer of an opportunity to participate in such a rental pool
involves the offer of investment contracts which must be
registered unless an exemption is available. "Also, the condominium units may be offered with a contract
or agreement that places restrictions, such as required use of an
exclusive rental agent or limitations on the period of time the
owner may occupy the unit, on the purchaser's occupancy or rental
of the property purchased. Such restrictions suggest that the
purchaser is in fact investing in a business enterprise, the
return from which will be substantially dependent on the success
of the managerial efforts of other persons. In such cases,
registration of the resulting investment contract would be
required. "In any situation where collateral arrangements are coupled
with the offering of condominiums, whether or not specifically of
the types discussed above, the manner of offering and economic
inducements held out to the prospective purchaser play an
important role in determining whether the offerings involve
securities. In this connection see Securities and Exchange
Commission V.C.M. Joiner Leasing Corp., 320 U.S. 344 (1943). In
Joiner, the Supreme Court also noted that: "'In enforcement of [the Securities Act], it is not
inappropriate that promoters' offerings be judged as being what
they were represented to be.' (353) "In other words, condominiums, coupled with rental
arrangements, will be deemed to be securities if they are offered
and sold through advertising, sales literature, promotional
schemes or oral representations which emphasize the economic
benefits to purchaser to be derived from the managerial efforts
of the promoter, or a third party designated or arranged for by
the promoter, in renting units. "In summary, the offering of condominium units in
conjunction with any one of the following will cause the offering
to be viewed as an offering of securities in the form of
investment contracts: "1. The condominiums, with any rental arrangement or other
similar service, are offered and sold with emphasis on the
economic benefits to the purchaser to be derived from the
managerial efforts of the promoter, or a third party designated
or arranged for by the promoter, from rental of units." "2. The offering of participation in a rental pool
arrangement; and "3. The offering of a rental or similar arrangement whereby
the purchaser must hold his unit available for rental for any
part of the year, must use an exclusive rental agent or is
otherwise materially restricted in his occupancy or rental of his
unit. "In all of the above situations, investors protection
requires the application of the federal securities laws. "If the condominiums are not offered and sold with emphasis
on the economic benefits to the purchaser to be derived from the
managerial efforts of others, and assuming that no plan to avoid
the registration requirements of the Securities Act is involved,
an owner of a condominium unit may, after purchasing his unit,
enter into a nonpooled rental arrangement with an agent not
designated or required to be used as a condition to the purchase,
whether or not such agent is affiliated with the offeror, without
causing a sale of a security to be involved in the sale of the
unit. Further, a continuing affiliation between the developers
or promoters of a project and the project by reason of
maintenance arrangements does not make the unit a security. "In situations where commercial facilities are a part of the
common elements of a residential project, no registration would
be required under the investment contract theory where (a) the
income from such facilities is used only to offset common area
expenses and (b) the operation of such facilities is incidental
to the project as a whole and are not established as a primary
income source for the individual owners of a condominium or
cooperative unit. "The Commission recognizes the need for a degree of
certainty in the real estate offering area and believes that the
above guidelines will be helpful in assisting persons to comply
with the securities laws. It is difficult, however, to
anticipate the variety of arrangements that may accompany the
offering of condominium projects. The Commission, therefore,
would like to remind those engaged in the offering of
condominiums or other interests in real estate with similar
features that there may be situations, not referred to in this
release, in which the offering of the interests constitutes an
offering of securities. Whether an offering of securities is
involved necessarily depends on the facts and circumstances of
each particular case. The staff of the Commission will be
available to respond to written inquiries on such matters.
[Request for interpretative opinions from the Washington
Securities Division should follow the procedure set out in WAC
[Order 304, § 460-32A-400, filed 2/28/75, effective 4/1/75. Formerly chapter 460-32 WAC.]
Reviser's Note: The brackets and enclosed material in the text of the above section occurred in the copy filed by the agency.