A purported real estate investment fund violated the Investment Company Act because investments in real estate limited partnership interests and mortgage loans constituted “securities.” A fund that invests more than 40% of its assets in securities must register under the Investment Company Act, absent an exemption (e.g. fewer than 100 investors, solely offered to qualified purchasers). According to the SEC, the fund exceeded the 40% threshold when the real estate related securities were added to other publicly-traded stocks and bonds in which the fund invested. The SEC also accused the fund manager and its principal of failing to fully disclose how the fund would invest.
OUR TAKE: For purposed of the Investment Company Act, the SEC applies a broad interpretation of “security” to include pooled interests in real estate, even though a direct investment in the underlying property would not be counted. Real estate private equity firms should not assume that they can avoid registration without a deeper analysis of their investments.