Two friends identify an attractive commercial real estate investment. They’ll form a limited liability company (LLC) for the investment and both invest. They’ll also raise more capital from friends and family, a great opportunity for all concerned. Before the two friends go out and find investors, though, they should think about the federal Securities Act of 1933 (the “Securities Act”) and state securities laws (“Blue-Sky Laws”).

These laws can apply whenever deal sponsors bring investors, even just a few, into a typical real estate deal, because the investors will purchase equity interests in the entity that undertakes the investment. Those equity interests almost certainly constitute “securities” as a legal matter. So a typical real estate deal structure involves a sale of securities that is prima facie subject to the Securities Act and Blue Sky Laws.

As a starting point, all sales of securities must: (i) either be registered with the federal Securities and Exchange Commission (the SEC) or qualify for an exemption from registration; and (ii) comply with the Blue-Sky Laws of each state where offered and sold. Typically that means the states where the actual or potential issuer or seller of securities (an “Issuer”)1 and investors reside.

In particular, two important federal exemptions from registration could apply: (i) Securities Act Section 4(a)(2)2 and (ii) the related “safe harbor” under SEC Rule 506(b), part of Regulation D issued by the SEC under authority of the Securities Act (Reg. D).

The Practical Real Estate Lawyer

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