Orange Groves, Pay Phones, Visas, and Violins: Why Your Real Estate or Small Business Investment May be Subject to Securities Regulation

By Elizabeth A. Whitman

A recent Wall Street Journal (WSJ) headline announced “SEC Looks Into Kushner Cos. Over Use of EB-5 Program for Immigrant Investors.”[1]

It is not unusual to hear that a company is being investigated by the government over immigration issues. But, what is unusual about this particular investigation, however, is that it is being conducted by the Securities and Exchange Commission (SEC), which regulates securities, rather than the United States Citizenship and Immigration Services (USCIS), which regulates immigration and visas, including EB-5 visas.

To understand why the SEC has jurisdiction over Kushner Co.’s EB-5 program, one needs to go back more than 70 years.

In 1944, the then ten-year-old SEC failed to convince a Florida federal court that the sale of Florida orange groves with an optional management and production agreement (for buyers who did not have the knowledge to manage an orange grove themselves) was in the nature of agriculture and was not under SEC jurisdiction.[2]  A youthful, but determined SEC appealed but once again lost, when in 1945, a federal appeals court agreed with the Florida district court.[3]  Not to be outdone, the SEC appealed to the United State Supreme Court.

In 1946, the Supreme Court held in SEC v. W.J. Howey Co. [4] that the sale of the orange groves with the optional management agreement was an “investment contract” under the Securities Act of 1933. In Howey, the Supreme Court developed the investment contract test, which is still in use today.  Simply put, a business dealing or transaction is an investment contract if:

  1. There is an investment of money (or other assets).
  2. The investment is in a common enterprise (generally this means a pooling of assets).
  3. There is an expectation of a profit.
  4. The profit comes from the efforts of a promoter or a third party.

The Howey test brings many routine transactions under securities law regulation, much to the chagrin of clients coming to me wanting to move into a new business venture. They may want to build a new hotel, buy and operate an assisted living community, flip houses, or engage in another commercial real estate project.  They may want to buy an existing business, or they may have an idea for an entirely new business involving a cloud-based application or to provide a service to busy parents.  Many times, those clients need funding to start their business or pursue their commercial real estate venture, and they may turn to friends and family to invest in their new business venture.

Many of these new businesses or commercial real estate investment structures, however, meet the requirements in the Howey test because they involve an investment of money by the family or friend into a common enterprise with an expectation of profits from the efforts of my client. Unfortunately for my clients, there is no securities exemption for investments by relatives or friends, so even though the only investors may be friends and family, my clients in those situations must comply with securities laws.

Indeed, over the years there has been a surprising variety in the types of investments which have been found to be investment contracts. Whiskey warehouse receipts, commercial real estate funds, pay phones and ATMs with placement contracts, interests in a lumber mill, fine art collections, certain time share arrangements, and, of course, investments as part of the EB-5 immigrant visa program have been found to be investment contracts subject to SEC regulation based upon the Howey test.  Generally, those investments have involved situations in which investors expected a profit from a passive investment.

Further, when the stock market is high and there is a concern bond values might drop due to future interest rate increases, many people turn to alternative investments for diversification. Those alternative investments, traditionally available only to high income or high net worth accredited investors, include commercial real estate funds, oil and gas investments, and even musical instrument collections.[5] For instance, even fine violins are becoming more popular as investments and could be sold to a syndication of investors.[6] Most of those alternative investments are structured so that they are investment contracts under the Howey test.

Yet, not every investment in a common enterprise is an investment company subject to SEC regulation.

In 1975, the Supreme Court held in United Housing Foundation, Inc. v. Forman[7] that investments in stock in a New York City cooperative housing project were NOT investment contracts even though the investors might expect a profit from that common enterprise from the efforts of the developer.  The Supreme Court differentiated the housing cooperative from the investment in, for instance, the Howey orange groves or commercial real estate funds, because the primary purpose of the investment in the housing cooperative was to obtain housing, not to generate a profit.

Investors in EB-5 visa programs, are primarily investing to obtain one of a limited number of available annual immigrant visas from USCIS leading to conditional permanent resident status. To qualify, they must invest at least $500,000 ($1,000,000 under some circumstances) in an investment that results in the creation or preservation of a requisite number of permanent, full-time jobs for US workers.[8]

EB-5 investors typically receive a small, fixed return on their investment, but their main incentive for investment is to obtain permanent resident status in the US, rather than to make a profit. Nevertheless, the SEC treats EB-5 investments as securities under the Howey test, and most reputable EB-5 sponsors attempt to comply with US securities laws when offering and selling EB-5 investments.

It’s not clear why the SEC is interested in Kushner Cos.’ EB-5 commercial real estate investment program. However, traditionally, the SEC has used its regulatory authority over EB-5 investments to combat fraudulent use of funds.  For instance, in 2017, the SEC resolved a complaint against Serofim Muroff, an Idaho EB-5 sponsor, who allegedly used EB-5 money for his personal expenditures and for other projects outside of the purposes for which the investments were made.[9]  A similar case is underway involving EB-5 investments in Vermont ski resorts, which the SEC alleges were used by Ariel Quiros and his partner for personal expenditures.[10]

Unless the SEC believes there has been a violation of securities laws, we may never find out why the SEC is interested in Kushner Cos.’ EB-5 program. However, what we do know is that the SEC has jurisdiction over a commercial real estate investment through a vehicle created by Congress to be administered by USCIS. That, in and of itself, should serve as a reminder to businesses, commercial real estate sponsors, and even to future violin syndicators that if they are asking others to invest money with the expectation of a profit, the securities regulators also may have jurisdiction over them, as well.

Before attempting to raise funds from third parties, everyone should consult with an experienced business and securities attorney, who can help assure that the transaction is in compliance with any applicable securities laws.


[1]  Article by Erica Orden, The Wall Street Journal, Politics, January 6, 2018.

[2] SEC v. W.J. Howey Co., 60 F. Supp 440 (S.D. Fla. 1945).

[3] SEC v. W.J. Howey Co., 151 F.2d 714 (5th Cir. 1940).

[4] 328 U.S. 293 (1946).

[5] E.g.,

[6] There have always been investors interested in vintage violins. Some invest out of a philanthropic desire to support the arts, but yet, investments in violins can result in a steady gain in value, without the need to pay taxes on the gain until the violins are sold. According to a 2017 article by Emily T. Lane, President & Curator of Elan Fine Instruments, in Futures Magazine, interest in violin instruments has moved from the famous Cremonese masters, such as Stradivari and Guarneri del Jesu, which have a minimum value in seven figures, to more “moderately” priced instruments in the $100,000-$500,000 range, including Vuillaume (who was mentioned in my previous blog You Now Can Trade Up Your Violin, but Not the Bow or Case – New things to Consider in Section 1031 Exchanges After the 2017 Tax Law) and Balestrieri, an 18th century violin-maker from Mantua.  See . Although I am not aware of any violin-specific syndications, Liquidity Exchange (mentioned in the previous footnote) does offer a musical instrument syndication, which includes the possibility of investment in violins.

[7] 421 U.S. 837 (1975).

[8] For more information about the EB-5 program, check out the USCIS website at



© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.
This blog’s reference to any third-party website is for illustration and attribution purposes only and does not indicate endorsement or approval of the website or any product mentioned on or sold through the website or its owner.

When it Looks Like a Stradivari Violin but Isn’t: Protecting Yourself from Wire Fraud in Your Real Estate Transaction

Fine violins do not have serial numbers, but they do typically have a label inside identifying the maker and frequently the year and location where the violin was made. Many violin makers, or luthiers[i] as they are known, like to copy well-known instruments, sometimes even down to the label inside the instrument, and the most famous violin maker, Antonio Stradivari, is also the most frequently copied.

Usually, the luthiers do not try to pass their Stradivari copies off as originals.  Even if they were to try to do so, the instrument’s age and sound quality of the copies usually would fall far short of a Stradivari and give them away.

Where there is a question regarding the origin of an old violin, modern technology provides additional tools, such as chemical analysis of varnish and dating of the wood, which can further aid in distinguishing genuine violins from famous makers from copies. Yet, identification of old instruments remains as much art and conventional detective work as it does science.

Unfortunately, in the banking world, fakes may not be as easy to detect. Many title and escrow companies have started putting warnings on their e-mails, which read something like this:

Online banking fraud is on the rise. If you receive an email containing Wire Transfer Instructions call your escrow officer immediately to verify the information prior to sending funds.

The National Association of Realtors has recommended that its members include the following language on their e-mail signature lines:

IMPORTANT NOTICE: Never trust wiring instructions sent via email. Cyber criminals are hacking email accounts and sending emails with fake wiring instructions. These emails are convincing and sophisticated. Always independently confirm wiring instructions in person or via a telephone call to a trusted and verified phone number. Never wire money without double-checking that the wiring instructions are correct.

Unfortunately, computer hackers are increasingly targeting real estate investors and home buyers for wire fraud via phishing. Unlike the luthiers who make Stradivari copies, the hackers in the real estate transactions can create realistic communications which can fool even the discerning investor.

How Hackers Can Steal Your Money in a Real Estate Transaction

In August 2017, a Washington, DC couple filed a lawsuit against their title company, claiming either title company fraud or lack of adequate security measures. The couple received an e-mail appearing to be from the title company requesting a wire transfer for their closing.  Since the e-mail appeared legitimate, they wired more than $1.5 million.  When the title company said it did not receive the money, the couple had to come up with an additional $1.5 million to close on their home purchase.

It sounds like this couple and title company may have been the victims of an all-too-common hacking scheme, which has been occurring in real estate transactions in recent years.  Here is how the fraud is carried out:

A hacker gains access to the e-mail account for one of the parties of the transaction.  Real estate brokers and title and escrow companies are common targets, because they advertise their services and conduct many transactions.

The hacker monitors the e-mail relating to one or more transactions, gathering detailed information about the transaction only known to the parties to those transactions. The hacker may even participate in communications by sending spoofed e-mails to parties so as to better set up the hacker’s end game.

When the hacker sees that the transaction is nearing the closing so that the buyer might be amenable to wiring funds into escrow, the hacker acts.

The hacker sends the buyer an e-mail, which appears to come from the real estate broker or title/escrow agent (and which in fact may be from the hacked account).  The e-mail provides wire transfer instructions, along with detailed information about the transaction and the amount of money to wire into the “escrow account,” which make the request seem legitimate.

If the buyer wires the funds, they go into the hacker’s bank account, possibly in a foreign country, and the funds are nearly immediate withdrawn.  It may be one or more days before the buyer shows up for his/her closing, only to learn that the payment is not in escrow and in fact has been stolen.

How to Protect Yourself  from Wire Fraud in Your Real Estate Transaction

Given this very real and potentially expensive threat, every real estate investor should take the following steps to protect him/herself from these very convincing phishing schemes in real estate transactions:

When entering financial information into a website, be sure it is legitimate and that it is secure (it should start with https, rather than http).

If you receive wire transfer instructions via e-mail, call to verify the information.

Before calling to verify the wire transfer instructions, verify the phone number you are calling – do not use a phone number from the e-mail sending the wire transfer instructions.

Both real estate investors and professionals should take the following steps so that they do not become the “weakest link” in the security for the real estate transactions in which they participate:

Do not send financial or other confidential via unencrypted e-mail.

Keep your virus and malware software up-to-date.

Install all security patches to your computer’s operating system.

If you use your laptop or tablet on a public Wi-Fi be sure your firewall is turned on

Use complex passwords containing a combination of capital and lower-case letters and numbers, and do not use the same password for every account. Passwords consisting of the first letters of the words in a phrase you find easy to remember combined with a number may be a good option.

Do not open attachments to e-mails or click on links in e-mails unless you are expecting them.

Use an account that does not have administrator privileges for your everyday computer usage. That makes it less likely that malware will be able to make changes to your system.

Modern technology may provide tools which aid in the evaluation of old violins, but other modern technology also can be used by hackers to commit wire fraud in real estate transactions.  By using a combination of old-fashioned detective work and the thoughtful use of technology where appropriate and being aware of the existence of copies or fakes, both string instrument professionals and real estate investors alike can prevent themselves from being the victims of fraud.

[i]  Music Geek Fact:  The term “luthier” is used to describe someone who makes or repairs string instruments.  Originally, however, luthiers made only lutes. The term “luthier” derives from the French word for lute, which is luth.

© 2017 by Elizabeth A. Whitman


Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

How Your Real Estate Transaction is Like an Orchestra (And Why You Need a Conductor)

Recently, while in the midst of a managing a complicated commercial real estate closing, I took a few hours off to attend an orchestra concert. During intermission, while orchestra took a break, a string quartet played in the lobby.

The quartet, which has only four musicians, each playing his/her own part, played beautifully together and created a unified musical expression without an obvious leader.  The orchestra, which had about 75 musicians playing at least 15 different parts, also played beautifully together and created a unified musical expression, but under the direction of a conductor.

It was then that I realized that the typical commercial real estate transaction frequently has at least 15 different roles and is much more like an orchestra than a string quartet.  A commercial real estate transaction has a huge cast of characters, including a buyer, seller, and each of their respective real estate brokers, mortgage lenders, property managers, and attorneys.  In addition, there is a title company and escrow agent, a surveyor, and in a more complicated ownership structure, partners or investors in the buyer and/or seller or mezzanine or other secondary lender, and many of them have their own attorneys, as well.

Just as each instrument in an orchestra has a role, each of the parties and attorneys involved in a commercial real estate transaction has a role.  Just as the instruments in an orchestra sometimes will have the melody and sometimes will provide supporting harmony, the parties and attorneys involved in a real estate transaction may migrate from central roles to supporting ones and back again during the course of the transaction.

The members of an orchestra have a common goal – a unified musical expression. The parties to a commercial real estate transaction also have a common goal – the successful completion of the transaction on terms acceptable to the party they represent.  And, like an orchestra conductor, an attorney experienced in transaction management helps the players in a commercial real estate transaction work together to reach their common goal.

Michael Tilson Thomas, conductor of the San Francisco Symphony, said “Being a conductor is kind of a hybrid profession because most fundamentally, it is being someone who is a coach, a trainer, an editor, a director.” World-famous violinist Joshua Bell commented on the plight of the conductor:

Being a director or a conductor is a balance of many things. And to do it right is a very difficult tightrope to walk. I’ve come to the conclusion that there’s really no way to be one hundred percent popular as conductor.

Like an orchestra conductor, an attorney serving as transaction manager likewise must wear many hats and carefully navigate while serving as both attorney and business advisor to his/her client (frequently the buyer), while also creating a roadmap for the transaction and taking steps to remove obstacles blocking the road to closing.

There is a difference between the role of an orchestra conductor and an attorney transaction manager, however. An orchestra conductor is coordinating individuals who do not probably could do his or her job themselves. Virtually every musician in an orchestra has studied conducting – it is usually a requirement to obtain a music degree – and some probably have conducted orchestras themselves.

Many orchestra musicians may have studied the music score being performed and even more frequently, the musicians have played the music with an orchestra previously, so they are familiar with its intricacies. String quartet members similarly are likely to be intimately familiar with the music they are playing.

With the string quartet, it is that experience with the music, combined with the collaborative nature of a quartet that enables the musicians to create a common musical message without the benefit of a formal conductor. With an orchestra, however, due to the sheer number of different parts, someone needs to select the path the orchestra will follow to a unified musical message. Among other things, a conductor fills that role.

Unlike either an orchestra or a quartet for that matter, a real estate transaction, the parties may have varying degrees of experience in commercial real estate. Unlike a musical ensemble, real estate transaction parties most likely have received on-the-job training, as it is uncommon for people to formally study real estate in college or graduate school.

Further, unlike with an orchestra or string quartet, it is very rare for the individuals in a transaction to have previously worked with the real estate involved and to be aware of its intricacies – and its pitfalls.

Therefore, in addition to selection of a unified pathway to the common goal of closing, the parties to a real estate transaction need someone walking ahead of them with a machete to create that pathway by the most direct route possible. As Joshua Bell noted, this may not always make the real estate transaction manager popular, but it does make her essential to the transaction’s efficient and successful closing.

The rare real estate investor may be a swashbuckling, real estate guru who is familiar with every square inch of the property, is experienced in real estate titles and finance alike, and is willing to personally forge a new trail towards the closing. However, if that doesn’t describe you, then you, like a major orchestra, should consider hiring your own real estate transaction to “conduct” your transaction.

© 2017 by Elizabeth A. Whitman

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

The “Tourte” of a Real Estate Investment

Most people have heard of Antonio Stradivari, who likely is the most renowned violin maker of all time. Few outside of the violin world, however, have heard of Francois Tourte, who developed the modern violin bow and has been called the “Stradivari of the bow.”

People understand that a quality violin can make a huge difference in the quality of sound produced. Students will spend weeks trying different violins to find the one which is “just right” for them. In the 17th and early 18th centuries, as is the case for many today, the bow was an accessory that came as part of the “violin package.”

Francois Tourte, an 18th century French violin maker, elevated the bow so great violinists now know that finding a bow of the best material[1], weight, balance, and suppleness for the violin and the violinist can make just as much difference in the music produced as the quality of the violin, itself. Indeed, many of the advanced violin techniques found in 19th and 20th century music are not playable using a 17th century-style “Baroque” bow.

Like the violin student, some real estate investors will spend months seeking out the perfect parcel of real estate. After signing a contract, the investor will spend a month or more and thousands of dollars conducting due diligence to be sure that the property meets the investor’s requirements.

Just as the violin student may overlook the importance of the bow, the real estate investor may overlook the importance of financing options and structure. Yet, the types and terms of financing used in the capital stack for a real estate investment, like the violin bow, can make just as much difference in the returns produced by a real estate investment as the selection of the real estate, itself.

In real estate finance, the various components of the “capital stack,” which can consist of various types of debt and equity are comparable to the material from which the bow is made. A simple structure might be one where the purchase puts 30% down as cash equity and obtains a standard, fixed-rate, 30-year mortgage from a bank for the remaining 70%.  More complex structures can contain preferred equity, mezzanine debt, and even multiple tiers of ownership.

However, the types of debt and equity and the balance between them isn’t all that needs to be considered, however.   The terms of the debt and equity also are important.  If the required debt service payments and preferred equity returns are too high, then the real estate investment may not be able to survive even a small, temporary dip in revenue or a small downturn in the economy.

Aside from the interest rate, the terms of the loan can make the difference between a successful investment and a financial failure. For instance, the term of the loan generally should be at least as long as the expected holding period for the property, so re-financing is not necessary.  On the other hand, prepayment penalties should be minimized or avoided altogether, as they may provide economic obstacles to disposition of an asset when necessary.  Further, in times of low interest rates, an assumable loan which, as interest rates increase will have a below-market interest rate, can add additional value to a real estate investment.

While in general increased leverage may improve returns on equity, an unrealistic debt service ratio could lead to foreclosure. Aggressive terms for triggering a lockbox will tie up cash, reduce flexibility in handling the property and very easily spiral into a mortgage default.

A real estate lender may be willing to negotiate some flexibility in the terms to accommodate the specific needs of the investor and accommodate unexpected events. However, once the situation arises all the negotiating power is with the lender. Taking the time and spending the money to have an experienced real estate attorney review and negotiate loan documents up front when the borrower still has some negotiating leverage will save time, reduce friction, and could save a real estate investment from loss.

Finally, capital stack structure can impact the tax consequences of a real estate investment, including the amount of deductions, whether cash flow is taxed at ordinary income or capital gains rates, and whether a Section 1031 exchange will be feasible upon exist from the investment. An experienced real estate attorney can, to the extent the investor’s needs are foreseeable, structure the capital stack optimally for the individual investor.

Just as Francois Tourte enabled violinists to perform at new, higher levels, an experienced real estate attorney can help the real estate investor structure the capital stack and negotiate debt and equity terms which provide greater protection of the investment and help to maximize investment returns.

[1]  Geek Note: Violin bows come in many different materials, the most desirable of which is Pernambuco, the heart of a tree grown in Brazilian rainforests. As modernization has encroached upon the rainforest, Pernambuco has become increasing scarce. Bow makers have turned to “Brazilwood,” which despite its name comes from a completely different tree and may not even be from Brazil. More recently, manufacturers have developed bows made with carbon fiber, which can compete with wood bows in responsiveness and are virtually indestructible, making them good options for young, advancing players, like my 12-year-old son, who enjoy testing bow destructibility. Finally, beginner bows may be made from fiberglass, which is also almost indestructible, but lacks in the suppleness necessary to produce more advanced bow techniques.

© 2017 by Elizabeth A. Whitman

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC.