In this video, securities attorney Kim Lisa Taylor explains why labeling an arrangement as a joint venture (JV) does not shield it from securities law. She traces the regulatory origins of the Securities Act of 1933, then focuses on the Supreme Court’s Howey Test, which determines whether an arrangement is an investment contract and thus a security. The four Howey elements—investment of money, common enterprise, expectation of profits, and profits derived from the efforts of others—are broken down, with emphasis on the fourth element as the key factor for real‑estate syndications, funds, and JV structures. Taylor illustrates how passive investors who rely on the sponsor’s work satisfy the Howey test, making the sponsor the issuer of securities and obligating compliance with federal and state securities regulations, typically via a Regulation D exemption (Rule 506). She warns of the severe consequences of misclassification, including rescission rights, repayment with interest, and potential enforcement actions. The video concludes with a call to action for viewers to schedule a consultation to assess their structures.
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Your attorney set it up as a joint venture. The operating agreement says joint venture. The entity is structured like a joint venture. Your investors signed a joint venture agreement and your investors are passive. They put in money, they wait for you to send them checks. You earn fees and a share of profits for running the deal. In a joint venture, all investors must be actively involved in generating their own profits. And if they're actually generating their own profits, why would they pay fees or a share of profits to someone else for running the deal? I want to walk you through what the SEC actually looks at to decide whether an arrangement is a securities offering, because the word joint venture doesn't appear anywhere in their analysis. My name is Kim Lisa Taylor. I'm a securities attorney and the founder of Syndication Attorneys. Let me start with where securities laws come from, because the regulatory history explains why labels don't control the outcome. The Securities Act of 1933 was born out of the stock market crash that triggered the Great Depression. A lot of people had invested money in things they didn't understand. They lost everything, and their argument to Congress was We didn't know there were risks. Nobody explained what we were putting our money into or the risks of investing. So Congress created the Securities Act to define what a security is, require disclosure when securities are offered to the public, and to make violations a federal crime. And then a separate question immediately emerged: what exactly is a security? Stocks and bonds, clearly, but what about other arrangements where people put money into an opportunity expecting returns? What about the phrase investment contract that appears in the definition of securities within the Securities Act? What exactly constitutes an investment contract? That question went to the Supreme Court, and in 1946, the court decided a case called SEC versus W.J. Howey Company. The investment in that case was a citrus grove. The question was whether selling interests in the citrus grove where the operator agreed to grow, harvest, and sell the citrus and share profits with investors was an investment contract. The court created a 4-part test that we still use today. It's called the Howey Test. Here's the Howey Test in plain terms: an investment contract exists when there is: 1, an investment of money 2, in a common enterprise; 3, with an expectation of profits; 4, derived from the efforts of others. That 4th element is the one that matters most for real estate syndications, funds, and JV arrangements. Derived from the efforts of others means the investors are relying on the sponsor, the operator, the person promoting or running the deal to generate their returns. If your investors are passive, if they wrote a check and they're waiting for you to do the work and send them distributions, the 4th element of the Howey Test is satisfied. And if all 4 elements are satisfied, you are selling securities in the form of investment contracts. It's not a joint venture, it's a securities offering regardless of what the documents call it. It's not what you say, it's what you do that counts. Your operating agreement can say joint venture 100 times. The signature block can say joint venture partner. The name of the company can include JV. None of that determines the legal outcome. What matters is the economic reality of the arrangement and what actually happens during the course of the deal. Are investors passive? Are they relying on your efforts? Did they invest money expecting profits that come from what you do? Not what they do. Did you get paid fees for coordinating and running the deal? Did you share in profits in exchange for sweat equity? Did you take control of investor funds and make decisions on how the money was spent without input from investors? If you said yes to any of these, that's a securities offering, and selling securities requires compliance with. Federal and state securities laws, regardless of the label. Courts have looked at arrangements structured as JVs, partnerships, LLCs, loans, profit-sharing agreements. If economic reality meets the Howey Test, the label JV doesn't protect you. What if your investors have some say in the deal? What if they can vote on certain decisions? Having nominal rights on paper Doesn't change the analysis. If investors have limited voting rights but never participate in management decisions and they rely entirely on the promoter or sponsor to run the deal, the arrangement still looks like a passive investment. Genuine active participation where investors are actually making real management decisions can change the analysis, but giving them a vote on major decisions while you run everything else Doesn't reach that threshold. They need to have an actual job and do it. What does it mean to be an issuer of securities? When you structure a company that raises money from investors, regardless of whether you call it a syndication, a fund, a JV, or a partnership, if your investors buy interest in your company but remain passive, your company is the issuer of the securities. If you're the person running the company, that makes you responsible for complying with securities laws. The SEC and state securities regulators will treat the company interests you're selling to investors as a security. That's the legal classification that attaches to those interests. That means federal and/or state securities laws apply. You need to be raising capital under a valid federal securities exemption in order to legally raise Money. The most often used federal exemption is Regulation D, Rule 506 or Rule 506. To be eligible for one of these exemptions, you must be able to demonstrate through your recordkeeping system and securities offering documents how you followed all the rules of your selected exemption. Not knowing you were an issuer doesn't change your obligations. What happens when people get this wrong? A typical scenario: a syndicator structures several deals as JVs, raising money from investors without complying with Reg D. One deal underperforms. An investor's attorney reviews the arrangement and identifies that it was a securities offering without valid securities compliance. At that point, investors may have the right to rescind, to demand their money back. Not just the complaining investor, you may have to pay all of them back at once. Plus interest, regardless of how long they've been invested in the deal. Depending on the circumstances, there may be additional regulatory exposure. This isn't a hypothetical. The SEC has brought enforcement actions against sponsors who use JV structures to avoid securities classification. The classification isn't a choice. It's a legal determination based on facts. The practical question to ask about any structure you're using or considering: Are your investors passive? Are they relying on your efforts to generate their profits? If yes, you are issuing securities and you need to make sure you're doing it in compliance with applicable securities laws. If you're not sure whether your current structure classifies as a securities offering, or if you've been using JV agreements and you want to understand your actual position, please schedule a strategy call. We'll look at how your deals are actually structured and tell you where you stand. All you need to do is click the link in the description or visit syndicationattorneys.com/schedule to schedule a free consultation with us. Subscribe for more content like this. We're issuing a new video every week.
