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001-41971

DIVISION OF CORPORATE REGULATION

SEC 1103 2-69
TTi ICY2OLLI

PURCELL NELSON

888 SEVENTEENTH STREET N.W

WASHNGT0ND-C 20006

ROGER NELSON GANSON PURCELL

June 1971 1951-1987

FRANRLIN SCHULrZ

RICHARD WILLIAMS SECURITIES EXCANE COMISSOi O2 296 -9000

SUI-INEfl JONES

STEPHEN PARKER CA6.E PURNEAW

JOHN BLOUCH

JUN 1971

Division of Corporate peguiation ST.ON OF CORPORATE REGUJJ1O1

Securities and Exchange Cornmiso--.-.. ..

500 North Capitol Street N.W.

Washington 205i9

Attention Sidney CimmetEsq

19O Act/3a

Dear Sirs

Pursuant to recent telephone conversations with

members of the Staff we are writing on behalf of

Urban Land Investments Inc TJLI or -the Company

to obtain Staff views concerning the possible appli

cability of tie Investment Company Act of i940 the

1940 Act to proposed financing plan involving

the offer and sale to the public of participation

interests in limited partnership interest of real

estate partnership

ULI whose principal office address is 7850 Metro

Parkway Minneapolis Minnesota 552420 is engaged in the

business of syndicating real estate investments In the

fall of 1970 through its Minnesota counsel Haverstock

Gray Plant Moody and Anderson ULI asked our opinion

concerning proposal to offer publicly limited partner

ship interests in newly organized partnershio Partner

ship which would acquire limited partnerships interests

in an operational partnership Partnershin engaged

in the business of owning and ooerating office buildings

At that time we indicated that if 90 or more of the value

of Partnership As investment securities were represented

by securities of Partnership it would appear that the

former would be excepted from the definition of nestent

company by virtue of Section 3c8 read together with 3c6 We indicated however that the Investment Company

Amendments Act of 1970 then-pending called for the elimina

tion of Section 3cB and the proposed program was abandonad
-2

The Company is now considering offering participation

interests pursuant to arrangements similar to those of

Investment Properties Associates Associates which in

December 1969 offered to the public units consisting of

junior mortgage bonds and limited partnership participation

interests pursuant to an effective registration statement

File No 2-33132 under the Securities Act of 1933 .l933

Act ULI has asked our opinion regarding the applicability

of the 1940 Act to such arrangements particularly in view

of the repeal of Section 3c8

We are advised by ULI that financing real estate syndi

cations through the sale of participation interests along

the lines of Associates offers number of advantages over

the sale of limited partnership interests as such As

practical matter sales of the latter must be restricted to

well-to-do investors who can afford to purchase relatively

illiquid partnership interests costing from $5000 to $10000

Such sales require substantial selling efforts and considerable

time must be spend with each prospect or with his attorney

accountant or financial adviser By contrast participation

interests which may be sold in small denominations and which

may become freely transferrable open the way to much broader

market In addition to having wider investor appeal parti

cipation interests because of their small denomination and

ultimate prospect for over-the-counter trading may be marketed

through the use of small brokerage firms.

The unique features of this form of financing have been

stressed in professional publications See The November 27

1970 Bulletin published by the Institute for Business Planning

IBP Bulletin The IBP Bulletin notes that this form of

doing business has revolutionary implications for real estate

investments and that it represents great new breakthrough

which opens the door to mass marketing of real estate invest

ment interests It emphasizes that this form of financing

offers investors substantially all the advantages of invest

ments in corporate enterprise without the disadvantage of

double taxation and in addition provides reasonable assurance

of continuity of life limited liability for investors and free

transferability of their interests

We understand that there are indications that this

financing approach is being widely adopted and ULI has called

our attention to at least one instance involving the distri

bution of participation interests in the State of Minnesota

in reliance on the so-called intrastate exemption provided

by Section 3all of the 1933 Act
-3--

Proposed Financ

Briefly stated the proposed TiLl program contemplates

the formation of Minnesota limited partnership the

Partnership pursuant to the provisions of the Minnesota

Uniform Limited Partnership Act named individual who

is resident of Minnesota doing business therein will

acquire the initial limited partnership interest therein

the Limited Partner The general partnership interests

will be acquired by one or more general partners the

General Partners The Partnership will be primarily

engaged in the business of acquiring and owning interests

in real estate

The Limited Partner proposes to offer to the public

participation interests representing undivided economic

interests in his limited partnership interest Participa

tion Interests Participation Interests will be sold

in relatively small denominations probably in the range

of $10 to $25 The offering will be made exclusively to

Minnesota residents with restrictions on resale for

specified period of time following completion of the offering

Accordingly market for Participation Interests will not

be established until after the securities have come to rest

in the hands of the ultimate purchasers The offering will

be made without registration of the securities under the

1933 Act in reliance on the exemption provided by Section

3all thereof The proceeds of the ofering received

by the Limited Partner will be contributed by him to the

capital of the Partnership

Description of Participation Interests

Purchasers of Participation Interests will not be

limited partners or members of the Partnership They will

be entitled however to rateable portions of any distribu

tions by the Partnership in respect of the limited partner

ship interest of the Limited Partner Purchasers of

Participation Interests will not have voting rights but the

Limited Partner will be restricted under certain circum

stances from taking action without approval of the holders

of Participation Interests For instance no amendment to

the Limited Partnership Agreement relating to the crediting

of income or gain or payment of net revenues which may

adversely affect the rights of the Limited Partner may be

made unless the Limited Partner obtains the affirmative vote

or consent of specified percentage of the outstanding

Participation Interests In addition the Limited Partner

will not create additional Participation Interests without

prior approval of specified percentage of the holders of

the outstanding Participation Interests Each Participation
_L

Interest will have equal distribution and other rights and

no Participation Interest will be subject to assessment

call or redemption In addition the certificates evidencing

Participation Interests will provide that no holder thereof

shall be subject as such to any liability obligation or

duty of any kind to the Limited Partner the Partnership

its Partners or their respective creditors

The Limited Partner or his successor will be required

to maintain at all times an agreement with natural person

who will agree to become the successor Limited Partner upon

the resignation bankruptcy incapacity or death of the

Limited Partner and to assume all the obligations of the

Limited Partner as provided in the certificates For further

information concerning the rights of holders of Participation

Interests and the respective rights duties and obligations

of Limited Partners and General Partners reference is made

to the registration statement of Associates and the exhibits

thereto

The legal issue presented is whether if the proposed

financing plan is adopted the Limited Partner may be deemed

to be an investment company or whether he and others associated

with him in the enterprise may be deemeci to have created an

investment company within the meaning of the 1940 Act

Definition of Investment Company

For purposes here pertinent the 1940 Act contains

the following definition of investment company

Sec When used in this title

investment company means any issuer which --

is or holds itself out as being en

gaged primarily or proposes to engage pri

manly in the business of investing re

investing or trading in securities

or

is engaged or proposes to engage in

the business of investing reinvesting owning

holding or trading in securities and owns or

proposes to acquire investment securities having

value exceeding 40 per centum of the value of

such total assets exclusive of Govern

ment securities and cash items on an unconsoli

dated basis
As used in this section investment securities

includes all securities except Government

securities securities issued by employees

securities companies and securities issued

by majority-owned subsidiaries of the owner

which are not investment companies

Legal Discussion

The Limited Partner would appear to be an issuer within

the meaning of the 1940 Act The issuer definition contained

in Section 2a33 includes every person who issues or

proposes to issue

anr security or has outstanding any security

which it has issued Despite the use ot the impersonal

pronoun in the last clause any doubt as to the issuer

status of the Limited Partner would appear to be removed

by Section 2a28 which defines Persontt to mean

natural person or company In this connection recent

noaction request to permit James Landauer the sole

Limited Partner of Associates to dispense with the filing

of periodic reports under the Securities Exchange Act of 1934

1934 Act is of interest The request acknowledges

that Mr0 Landauer is an issuer within the technical meaning

of the 1933 Act and as such signed the xegistration statement

in that capacity CCH Fed Sec Rep 78060 Feb 22

1971

It is equally clear that the Participation Interests

constitute securities within the meaning of Section 2a36

which includes within the security definition any certificate

of interest or participation in any profitsharing agreement

investment contract or in general any interest or

instrument commonly known as tsecurity or any certificate

of interest or participation in any of the foregoing

The inquiry then is whether the Limited Partner can

be regarded as being or holding himself out as being engaged

primarily or proposing to engage primarily in the business

of investing reinvesting or trading in securities

threshold question is whether in the circumstances here

preserted the limited partnership interest itself which

is to be acquired by the Limited Partner Is to be deemed

security within the meaning of Section 2a36

Applying the test in SEC W.J Howey Co 328 U.S

293 1946 distinction Tusuarty drawn between general

and limited partnership interests Since general partners

are viewed as active participants in the common enterprise

who expect to derive profits through their own efforts

their interests are normally not deemed to be securities

By contrast since limited partners are viewed as investing
-6-

in the common enterprise with the expectation of profits

from the efforts of others their interests have customarily

been deemed to be securities It has been said in fact that

the use of the.vord partner in connection with limited

partner is really misnomer that he is merely passive

investor having no vote or active voice in the conduct of

the finns affairs and that the Uniform Limited Partnership

Act provides that limited partner is not liable to the

firms creditors beyond the amount of his investment unless

he takes part in the control of the business 11 Business

Organizations Sowards The Federal Securities Act

2.Ol12 1970 Sowards concludes that the interest of

limited partner is an investment contract and certi

ficate of interest or participation in any profit-sharing

agreement and therefore security within the meaning

of Section 21 of the 1933 Act This is consistent with

the definition of equity security contained in Rule 3all-l

under the 1934 Act which includes any limited partnership

interest and Securities Act Release No 4877 Aug 1967

issued jointly with the Maryland Virginia and District of

Columbia securities administrators There the Commission

stated Under the Federal Securities Laws an offering of

limited partnership interests generally constitutes

an offering of profit sharing agreement or an investment

contract which is security within the meaning of Section

21 of the Securities Act of 1933

On the other hand it has been said that it is at

least arguable that one should be able to advertise publicly

for small number of limited partners without regard to

the 1933 Act if the partnership certificate does not permit

free substitution of limited partners Loss Securities

Regulation 504 2d ed 1961 Professor Loss states further

that it may be questioned whether in statutory context

private offering of limited partnership interests which is

exempt from registration under 241 of the Securities Act

that is to say personal negotiation with prospective

limited partners involves security fOr purposes of the

fraud provisions whether or not the certificate contains

provision on substitution without the consent of all the

partners

It is contemplated that purchasers of Participation

Interests will be permitted to apply to the Partnership to

be admitted as Limited Partners Such admittance will be

subject to the consent of the General Partners which may

be withheld or granted by them in their sole discretion

so-called right of delectus personarum the execution

of such documentation as may be required by the Partnership
-7-

the payment of expenses of effecting such admission and

to the surrender for cancellation of his certificate covering

Participation Interests

Since it is contemplated that the basis of the Limited

partner1s participation in the common enterprise as repre

sented by his limited partnership interest will be arrived

at through personal negotiation and in view of the General

Partners right of deleetus sonarum case can be made

for the proposition that the limited partnership interest

should not be regarded as security for purposes of either

the 1933 Act or the 1940 Act However it must be recog

nized that the Limited Partner will be acquiring his limited

partnership interest with view to dividing up such interest

and distributing to the public participations therein This

raises the question whether the proposed transactions can

be equated with the type of Section 41 transaction Professor

Loss had in mind We would appreciate being advised whether

the Commission in the circumstances here presented would deem

the limited partnership interest to constitute security

or the purposes of either the 1933 or 1940 Act

If the limited partnership interest is to be viewed

as security within the meaning of Section 2a36 the

inquiry becomes whether the Limited Partner by acquiring

and holding hi limited partnership interest can be said

to be engaged primarily in the business of investing re

investing or trading in securities Two points should be

stressed at this juncture First it is contemplated that

the Limited Partner will acquire single security namely

the limited partnership interest But Section-3a1

speaks of securitiest in the plural It thus appears to presup

pose transactions in more than one security

The second point calls for comparative analysis of

Sections 3a1 and 3a3 The latter refers not only to

investing reinvesting or trading in securities but also

to owning or holding securities Accordingly it has been

held that company may be within Section 3a3 even though

its portfolio is not active if investment securities comprise

O2 of its assets It has been stated on the other hand

that Section 3a1 does not include an issuer who merely

owns or holds securities but only one whose primary business is

investments and whose portfolio is active See Kerr The In

advertent Investment Company Section 3a3 of the Investment

Company Act 12 Stan Rev 29 34 1959

If this distinction hasvalidity it would appear that

the Limited partner would not come within the Section 3al

definition of investment company since he will do no more
-8-

than invest in the limited partnership and thereafter own

and hold such interest We would appreciate knowing whe

ther the Commission concurs in the foregoing interpreta

tion of Section 3al If it does not the Limited Part

ner would appear to come within the definition of invest

ment company contained therein

If it accepts such interpretation it becomes neces

sary to deal with Section 3a3 The question then

presented is whether the Limited Partner

may

be viewed as

acquiring and owning investment securities having

value exceeding 4Q of the value of his total assets ex

clusive of Government securities and cash items This

in turn depends upon whether the limited partnership in

terest of the Limited Partner comes within the definition

of investment securities the latter for present purposes

being defined to include all securities except securi

ties issued by majority-owned subsidiaries of the owner

which are not investment companies Section 2a24- de

fines Majorityowned subsidiary of person to mean

company 50 per centuru or more of the outstanding voting

securities of which are owned by such person or by com

pany which within the meaning of this pararaph is

majority-owned subsidiary of such person strict

reading of the statute leads to the conclusion that the

Partnership cannot be viewed as majorityowned subs

diary of the Limited Partner Moreover the proposed Arti

cles of Limited Partnership will provide that the General

Partners will have charge of the management conduct and

operation of the Partnership business and that neither the

Limited Partners nor the holders of Participation Interests

will take part in or interfere in any manner with the

management control or conduct of the Partnership business

In these circumstances no grounds exist for treating the

Partnership as majority-owned subsidiary of the Limited

Partner Accordingly if limited partnership interests

constitute securities they are also investment securi

ties Even so it would appear that the Limited Partner

could escapte the Section 3a3 definition of investment

company if it could be shown that the value of his limi

ted partnership interest did not exceed 40% of the value

of his total assets exclusive of Government securities

and cash items We would appreciate confirmation of this

view

Assuming that the Limited Partner himself does not come

within the Section 3al definition of investment company

for the reason that his portfolio is inactive and that he

would not come within the Section 3a3 definition on the

grounds just stated one further area of inquiry remains

In The Prudential Ins Co of America 41 S.E.C 335 1963
-9-

the Commission held that the variable annuity contracts

there under consideration created relationship subject

to the Act and that although Prudential was not itself

an investment company it was the ttcreator of one In

its Findings and Opinion the Commission pointed out that

the Acts definition of company included trust

fund or any organized group of persons whether incorporated

or not It stated that the variable annuity contracts

created trusttt in the hands of Prudential for the contract

holders and it also added 345

The contracts also constitute the holders

an organized group of persons Prudential

states that the holders are merely scattered

individuals and companies who happen to have

purchased variable annuity contracts They

have formed no organization among themselves

they take part in no joint activity of any

kind and they have assumed no responsibility

toward each other But this is to argue that

group is not group because it was some other

person who brought it together It -is princi

pal purpose of the Act to require that group

such as this have certain role and take part

in certaiti responsibilities it does not leave

these matters to contractual whim

omitted

We seek assurance that the proposed relationships

by parity of reasoning will not be deemed to .create

an investment company We are particularly interested

in being assured that the proposed arrangements will

not be construed to create trust We note that Section

141 of the 1940 Act defines Unit investment trust

to mean

an investment company which is organized

under trust indenture contract of custodian

ship or agency or similar instrument does

riot have board of directors and issues

only redeemable securities each of which repre

sents an undivided interest in unit of speci

fied securities but does not include voting

trust

The proposed Articles of Limited Partnership will

acknowledge that the Limited Partner intends to assign

substantially all of his economic interest in his limited

partnership interest in the form of transferable Participa

tion Interests each representing ratable undivided interest
10

in the limited partnership interest of the Limited Partner

and will require the Limited Partner to maintain an -agency

satisfactory to the Partnership for the registration of the

assignment and transfer of Participation Interests and to

advise the Partnership from time to time of the identity

of holders of record of Participation Interests We note

that in the no-action request on behalf of Mr Landauer

referred to above the statement is made that ttMr Landauer

was an issuer only in nominal sense and functions essentially

in representative capacity for hqlders of Participation

Interests

It is arguable that under these circumstances there

i1l be created an investment company which is organized

under contract of custodianship or agency or simi

lar instrument does not have board of directors and

issues securities each of which represents an

undivided interest in unit of specified securities0

The foregoingquotation omits the word redeemable

which modifies securities in Clause It is not contem

plated that the Participation Interests will be redeemable on the contrary by their terms they will not be subject

to redemption But the fact that the issuer does not intend

to make the Participation Interests redeemable does not

necessaril3i end the matter Such securities may be required

to be redeemable or if appropriate they may be exempted in

whole or in part from the Actts redeernability requirements

In the Prudential matter sura the Commission acknowledged

that variable annuity contract by their very nature could not

be surrendered during the annuity payment or Jtpay_out period

It nevertheless categorized them for legal purposes as

redeemable securities It dealt with their non-redeemability

feature during the pay-out period by granting an exemption

from Section 27c1 of the Act during such period

In sense the question whether unit investment

trust may be created is secondary issue It relates not

to whether an investment company may he present but rather

to its proper classification assuming such company is

found to exist The primary issue remains namely whether

the proposed arrangements will be deemed to give rise to the

creation of an investment company under either Section 3al or 3a3 of the 1940 Act

Resolution of the interpretative questions under the l0 Act raised herein is necessary not only to ascertain

what if any steps must he taken to effect compliance

with that Act but also to determine the status of any public

offering of Participation Interests under the 1933 Act
11

Section 24d of the 1940 Act makes the intrastate exemp

tion provided by Section 3al1 of the 1933 Act inappli

cable to any security of which registered investment

company is the issuer If the issuer of Participation

Interests is an investment company public offering of

such securities in purported reliance on Section 3ll

of the 1933 Act would be misplaced and would result in

violation of such Act

We would appreciate receiving guidance with respect

to the interpretative questions raised herein at the

earliest practicable date so that ULI may proceed promptly

with its financing program II it is concluded that the

proposed arrangements will not give rise to the creation

of an investment company within the meaning of the 1940

Act we also request assurance that the Staff will not

recommend any action to the Commission if ULI proceeds

with its financing plan on the assumption that the pro

visions of the 1940 Act have no applicability to its

operations

Very truly yours

Ladd Thurston
Based on the facts nd representations in this letters we are of the opinion

that if the propoed firancing plan is adopted he Limited Partner and others

assdciated with him in the enterprise will have created an investment company

within the meaning of the Investment Company Acc of 1940 Act The Limited

Partner would be the creator of company within the meaning of Section 2a

of the Act consisting of fund or an unincorporated organized group of persons

Fund whose only investment would be the security of single issuer the

Limited Partner In our view the Limited Partners interest is certificate

of interest or participation in profit-sharing agreement or in an investment

contract and thus security See Section 2a36 of the Act In this

instance it is as well an investment security within the meaning of Section

3a3 of the Act0 The exclusion from the definition of investment company

in Section 3c5 of the Act which may be available to the limited partnership

would be unavailable to the Fund since company primarily engaged in purchasing

or otherwise acquiring securities of companies engaged in the real estate business

does not qualify for the exclusion See Investment Company Act Release No

3140 November 18 1960 Participation Interests inthe Fund which is invested

solely in the interest of the Limited Partner are of course themselves securities

being certificates of interest or participations in security

In this connection comparison of Sections 3c5 and 3c9 of the Act

is revealing The latter Section specifically excludes from the definition

of investment company any person substantially all of whose business consists

of owning or holding certificates of interest or participation in or investment

contracts relative to oil gas or other mineral royalties or leases This is

in contrast to the exclusion in Section 3c5C limited to any person

who is primarily engaged in the business of purchasing or otherwise acquiring

rtgages and other liens on and interests in real estate

As you know Section 3c8 of the Act was repealed by the Investment

Company Amendments Actof 1970 P.L 91-547 December 14 1970 Section 3c8

had excluded from the statutory definition of an investment company company

90 per cent or more of the value of whose investment securities are those of

any single financial institution including among others the type enumerated

in what is now Section 3c5C The availability of that exclusion to

companies which hold solely as an investment securities of certain types of

financial institutions was deemed to be wholly inconsistent with the statutory

policy of the coverage of the Act and was removed See Investment Company Act

Release No 6440 April 1971 pp 1-2

For the foregoing reasons we cannot give you the no-action assurance

you request

Alan Rosenbiat Chief Counsel

Division of Corporate Regulation

September 24 1971 SLClam

/0 k/u