Does George Babbitt Need a Broker-Dealer License (Part I)?

A developer wants to acquire a piece of property but lacks sufficient capital.  She forms a limited partnership to acquire the land and begins looking for investors.  If a licensed real estate broker is involved, must that broker be licensed as a broker-dealer under the Corporate Securities Law of 1968?

Some may be surprised to learn that a real estate broker may not need a California securities broker-dealer license if the:

  • Broker is licensed by the California Real Estate Commissioner;
  • Broker is engaged in transactions in any interest in any general or limited partnership, joint venture, unincorporated association, or similar organization (but not a corporation);
  • Entity is owned beneficially by no more than 100 persons (with an interest held by husband and wife considered held by one person); and
  • Entity is formed for the sole purpose of, and engaged solely in investment in or gain from an interest in real property, including, but not limited to, a sale, exchange, trade or development.

Cal. Corp. Code § 25206.  Note that limited liability companies aren't mentioned in the statute at all.  This was not an oversight by the legislature. Limited liability companies didn't exist when the statute was enacted.  Also, the Commissioner has taken a narrow view of the last requirement.  In Opinion No. 79/17C, the Commissioner found that promissory notes secured by deeds of trust on real property were personal property and thus a limited partnership formed to invest in those types of notes could not rely on the exemption.

The purpose of this exemption is to permit real estate brokers to sell real estate syndicate securities of a type that had been under the exclusive jurisdiction of the Real Estate Commissioner under Californias Real Estate Syndicate Act.  The legislature repealed that act in 1977 and the securities are now under the Commissioner of Corporations' exclusive jurisdiction.

Remember, this is a California exemption and thus has no impact on whether a real estate broker must be registered as a broker under the Securities Exchange Act of 1934 or under the laws of another state.  Interestingly, the statute does not require that the real property be located in California.

In a later post, I'll discuss a Commissioner's rule providing other exemptions to real estate brokers.