top of page


“Those interested in putting together a real estate investment businesses may unknowingly find themselves in danger of facing serious legal ramifications. It is important to closely evaluate any investment ventures to be sure that you and your entity are not in violation of federal or state statues regulating business.”

You are well known for your business acumen. Friends and acquaintances are constantly approaching you to invest in business opportunities. You are interested or passionate about real estate. So, you decide to create a real estate investment group, association, or business.

This is a fairly common scenario with many variations. The New York real estate market is still booming overall. Even considering recent lulls in sales. Inventory is low and properties are being snatched up before they hit the market. Sales prices in Brooklyn are up 2.7 percent1, sales in Manhattan are down; however, low rates and fast consumption continue to stimulate the market to a degree.

2. A common trend among new investors and developers is the creation of real estate syndications. Real estate syndication occurs when funds are pooled together from several investors and those funds are used to fund real estate projects, developments, and other real estate investment opportunities. Usually, these projects or ventures require much larger resources than each individual investor would be able to fund on their own. However, counsel should be well aware that an interest in a real estate syndication is considered a security by law. As such, counsel must advise real estate entrepreneurs beyond simply offering entity creation. Additional services should concern regulatory compliance by way of securities filings on both the state and federal level.

Technically, a brick and mortar investment in real property is not a security, but with levels of ownership, multiplicity of owners, varying business acumen, and the capital of others, distinctions become less clear.

3. A security is basically the sale of an interest in a business and is technically defined, by way of the Howey Test, as “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 could be in the form of shares of stock, bonds, or other financial instruments that represent interest in a company, asset, or project. Qualifying as a security matters because securities are heavily regulated by both state and federal laws.

When it comes to regulation, there is a distinction between public and private securities. A public security offers interest to the public at large. Compliance with federal securities laws require extensive disclosure statements with the Securities and Exchange Commission (SEC) detailing the intricacies of the issuer’s business. A private security is the sale of equity or debt to a limited group of investors. A private security does not require extensive SEC disclosures; however, it can be difficult to determine the difference between private and public offerings.

4. Compliance with SEC laws is a burdensome and expensive process for issuers.

The Martins Act is a New York State specific securities law, codified under Chapter 20, Article 23-A of General Obligations Law, which was implemented in 1921 to protect the investing public from fraud, deception, and misrepresentation of those offering securities.

5. Regardless of federal or state securities laws, counsel must appreciate that persons offering an interest in a real estate syndicate to the public are considered dealers. Dealers must register as such before approaching or soliciting investors. They must file a “state notice” and if necessary a “further state notice.”

6 Among other exceptions, the Attorney General allows a permissive exemption from these filings for certain limited offerings with up to 40 persons or less, and sometimes above where consistent with exempt purposes.

The Martin Act does not expressly specify the distinction between a public versus private offering. As a result, the courts consistently look to the Federal Securities Act of 1933 for the interpretation as to whether or not The Martin Act exempts dealers of “Private offerings.” The consensus is that the interpretation is pursuant to Rule 506 of Regulation D under the Securities Act.

7. There is an automatic exemption available to small offerings within New York State that are made to a promoter group, which consists of directors, principals or controlling individuals in a venture and or their spouses or children. There are other permissive exemptions that require an application to the Attorney General. However, it is not so black and white.

On the public securities front, Real Estate Investment Trusts (“REIT’s”) are a commonly advised form of investment because of their reliability and high payout rates. REITs often attempt to invest in real estate in an effort to promote community growth or revitalization. They are obligated to pay out 90 percent of their income to investors as dividends. Many REITs however, have found themselves on the biting end of the Martin Act.

8. Those interested in putting together a real estate investment businesses may unknowingly find themselves in danger of facing serious legal ramifications. The Martin Act empowers the Attorney General to punish those believed to have either knowingly or inadvertently engaged in fraud, deception, or misrepresentation in the purchase, sale, giving of advice, as it relates to financial activity. The Attorney General and District Attorney may do whatever they deem necessary in order to gather information on an individual or entity suspected of fraudulent financial activity. If a violation is found, both you and your business entity, facilitating the investment or financial activity, can face civil and or criminal charges from a misdemeanor to class E felony. Lack of mens rea or criminal intent is no defense.

9. It is important to closely evaluate any investment ventures to be sure that you and your entity are not in violation of federal or state statutes regulating business.

Note: Sabine K. Franco, is the principal attorney at Franco Law Firm, P.C., located in Hempstead, New York.

41 views0 comments


bottom of page