Re: Securities laws
From: Sherri Zann Rosenthal (76671.1561compuserve.com)
Date: Sun, 8 Oct 1995 22:55:46 -0500
Steve Farley asked:
>Do our memberships still fall under the category of securities, and thus 
>need to be regulated by SEC rules, even if we are a non-profit? Either 
>way, how do we word our offerings?

I grappled with the securities law question for quite a while, and my best
understanding is this: A "security" is defined as a passive investment made with
the expectation of profit. If your membership will have an active role, their
investment in the corporation, whether it is a for-profit or non-profit
corporation in structure, is not a security. If there is no expectation of
profit, it is not a security.

Although I am a lawyer, securities law is not my field. But my training did make
me suspicious as a high powered firm here that specializes in corporate and
securities law tried to convince me that we needed to spend a bunch of money to
hire them to do a securities offering. I sought out a Duke Law professor who
authored a widely used corporate law text, and met with him to mull this over.
He felt that going back to the basic definition of a security, as above,
resolved the question. This doesn't guarantee that one of us won't be sued one
of these days--nothing can do that. It does mean that we don't seem particularly
legally vulnerable. 

I advise that you include language in all of your membership materials and
applications that says something like that all members will actively participate
in the enterprise, and that all contributions are made to further the aims of
the enterprise (corporation, LLC, etc.) without any expectation of profit.

Going beyond Steve's question, I'll throw this out to our list readers: I feel
that it is very easy for groups to get all enmeshed in sorting through legal
entities, questions, accounting specifics and a lot of other technical details.
In some ways, it is more comfortable to bustle off toward some technical horizon
of knowable, externalized knowledge. I do not think this is a very good use of
group members' limited energies and time. 

Instead, identify and hire an accountant and a lawyer who have a lot of
experience with housing development, some sympathy for the cause, and healthy
doses of decency and common sense. Your members' need to grapple with
identifying what actual involvments in the development process they want and are
able to handle. This will form the basis for your development paradigm: whether
the group will act as developer, or hire a developer on a fee basis, or recruit
a developer who will actually raise the money and take the risks. Then let your
professionals craft legal and accounting structures to fit the development
paradigm articulated by the members.

CoHouser by spirit, attorney by training,
Sherri Zann Rosenthal
Eno Commons CoHousing, Durham, NC

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