St. Mary's Law Journal


John W. McLeod


The purpose of this article is to examine the kind of protection afforded to real estate investors through the securities acts passed the 1930s. The Supreme Court decision in SEC v. W.I. Howey Co. (1946) held that a security exists when (1) there is an investment of money (2) in a common enterprise (3) with profits to come solely from the efforts of others. This study considers the criticisms of Howey by two legal commentators of the late 1960s, Professor Coffee and Professor Long, in its examination of three main types of real estate investments: land syndications, condominiums, and cooperative housing corporations. While differing in their approaches to the Howey test, both Coffee and Long agree that a risk-capital assessment should apply, which emphasizes a focus on the nature and formation of the investor-investee relationship to determine a security. Under this guide, land syndications and condominiums have passed the security test relatively easily, but cooperative housing corporations, by nature, have more obstacles to overcome. A land syndication forms with the anticipation of a profit on the property purchased, and the investor relies solely on the talents and efforts of the general partner, which satisfies the definition of a security interest. Condominiums are securities if they are sold with 1) restrictions on use and occupancy, 2) requirements that the rents from the unit must be pooled with those of the other tenants, and 3) the requirements that a particular rental agent must be used. Cooperative housing agreements have been more difficult to prove a security interest exists because the nature of the arrangement is to provide affordable housing, not profits; therefore, more flexible approaches succeed in showing that a security interest exists.


St. Mary's University School of Law