USA: when a tokenised property pool is also an investment company

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Kooky

Builder of Shaka, the payment router that pays every agent their commission on closing date.

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A vehicle that pools money from several holders, buys United States real estate and issues tokens for the interests has two separate federal questions to answer. The first is whether the token is a security and how it may be offered. The second, which this guide covers, is asked about the vehicle itself: is the issuer an investment company under the Investment Company Act of 1940? The answer does not depend on the technology. It depends on what the vehicle owns, how it holds it, how many people hold its securities and what those holders may ask of it.

The guide follows the order of the statute. It sets out the definition in section 3 of the Act, the 40 per cent test and how property held through subsidiaries is counted, the real estate exclusion in section 3(c)(5)(C) and the asset tests the staff of the Securities and Exchange Commission (SEC) has used, the two private fund exclusions, the place of a real estate investment trust, what the Act says when no exclusion applies, and the separate question of whether the sponsor is an investment adviser. Both statutes, the Investment Company Act and the Investment Advisers Act, were read in the copy published by the Legal Information Institute at Cornell Law School, which is a copy and not the official government text; the SEC material is the Commission's own. The worked examples use invented figures and are labelled as such.

Investment Company Act of 1940, section 3, as copied by the Legal Information Institute; SEC Concept Release IC-29778 of 31 August 2011.

The definition: three ways in

Section 3(a)(1) of the Investment Company Act gives three definitions, and an issuer that meets any one of them is an investment company unless something else in the section takes it out.

The first, in paragraph (A), covers an issuer that, in the statute's words, "is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing", reinvesting or trading in securities.

The second, in paragraph (B), covers issuers of face-amount certificates of the instalment type. The third, in paragraph (C), is arithmetic. It covers an issuer that is engaged in the business of investing or trading in securities and that owns or proposes to acquire investment securities worth more than 40 per cent of the value of its total assets. Two things are left out of total assets before the percentage is taken: Government securities and cash items. The statute adds that the calculation is made on an unconsolidated basis, which means the issuer is measured by its own balance sheet and not by a group balance sheet that folds its subsidiaries in. All three definitions turn on securities, which is why the legal form in which a pool holds its buildings matters.

The 40 per cent test and property held through companies

Section 3(a)(2) defines "investment securities" as all securities, with three exceptions: Government securities, securities issued by employees' securities companies, and securities issued by majority-owned subsidiaries of the owner that are not themselves investment companies and do not rely on the private fund exclusions in sections 3(c)(1) or 3(c)(7).

The third exception is the one a property pool meets first. Section 2(a)(24) of the Act defines a majority-owned subsidiary as a company 50 per cent or more of whose outstanding voting securities are owned by the person in question, or by a company that is itself that person's majority-owned subsidiary. A token-issuing vehicle that holds each building through its own company therefore has to ask, for each of those companies, whether it owns at least half of the voting securities, whether the subsidiary is itself an investment company, and whether the subsidiary depends on section 3(c)(1) or 3(c)(7). An interest in a subsidiary that passes all three questions is outside "investment securities". An interest that fails one of them counts towards the 40 per cent.

A worked example, with invented figures, shows the calculation. Assume a vehicle with total assets of US$20 million. It holds US$2 million in cash items and no Government securities, so the base for the test is US$18 million. Forty per cent of US$18 million is US$7.2 million. Assume the vehicle owns 100 per cent of the voting securities of two property-owning companies, worth US$9 million together, and that those companies are not investment companies and do not rely on sections 3(c)(1) or 3(c)(7). It also owns minority stakes of 30 per cent in three other property companies, worth US$9 million together, and the example assumes those stakes are securities. The majority-owned interests are left out of investment securities. The minority stakes are counted: US$9 million of US$18 million is 50 per cent, which is above the 40 per cent line. On these assumptions the vehicle meets the definition in paragraph (C) and needs an exclusion. With minority stakes of US$6 million instead, the share would be 33.3 per cent, below the line. Whether a given interest is a security, and how assets are valued, are questions of fact that the pages read for this guide do not settle.

Operating businesses and the Commission's order

Section 3(b) offers two ways out before any exclusion is reached. The first is written as an exception to the 40 per cent definition in paragraph (C).

Under section 3(b)(1), an issuer is not an investment company if it is primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than investing, reinvesting, owning, holding or trading in securities.

Under section 3(b)(2), the SEC may, on application, declare by order that an issuer is primarily engaged in a business other than securities. The statute attaches a procedure to the application. An issuer that is not registered and files in good faith is exempt for 60 days from the filing; the Commission may extend that period for cause; and the Commission must revoke the order if the circumstances that justified it no longer exist.

The real estate exclusion in section 3(c)(5)(C)

Section 3(c) lists persons that are not investment companies even if they meet a definition. Paragraph (5) covers three businesses: purchasing receivables in (A), making certain merchandise loans in (B), and, in (C), the one that concerns property. SEC Concept Release IC-29778 quotes subparagraph (C) as covering persons primarily engaged in "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate".

Two conditions come with it. The person must be primarily engaged in that business, and the person must not be engaged in issuing three kinds of instrument: redeemable securities, face-amount certificates of the instalment type, or periodic payment plan certificates. The concept release records that the bar on redeemable securities was added by Congress in 1970.

The redeemable security point is the one a token design can touch. Section 2(a)(32) of the Act begins its definition of a redeemable security as any security, other than short-term paper, under the terms of which the holder is entitled to something on presenting it to the issuer or to a person the issuer designates. The copy of the section read for this guide breaks off before the end of that sentence, so the full definition is not reproduced here. What can be said from the text read is that the exclusion looks at the terms of the security, and that a vehicle relying on section 3(c)(5)(C) is one that does not issue redeemable securities. Whether a particular buy-back or exit feature written into a token falls inside the definition is a question for the complete statutory text and the facts of the feature.

As read in the Legal Information Institute copy, section 3(c)(5)(C) states no limit on the number of holders and no test of who the holders are.

The staff's 55 per cent and 45 per cent tests

The statute says "primarily engaged" and "interests in real estate" without defining either. The working content has come from the SEC staff. In Concept Release IC-29778, dated 31 August 2011 and titled "Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments", the Commission described how its staff had approached the exclusion and asked the public whether that approach should change. Comments were due by 7 November 2011.

According to the release, the staff has generally focused on whether at least 55 per cent of an issuer's assets consist of what it calls qualifying interests, and has looked for the remaining 45 per cent to consist primarily of real estate-type interests.

Qualifying interests, as the release describes them, are assets that are actual interests in real estate or loans fully secured by real estate. Its examples are fee interests, fully secured mortgage loans, second mortgages, deeds of trust, instalment land contracts and leasehold interests. The staff has also accepted certain assets it regards as the functional equivalent of a real estate interest.

Real estate-type interests are a wider second category. The release gives as examples loans where at least 55 per cent of the fair market value of each loan was secured by real estate when it was acquired, and agency partial pool certificates.

The release does not state a general ceiling for assets that fall in neither category. One footnote describes a single staff letter in which the applicant represented that it would hold no more than 20 per cent of its total assets in miscellaneous investments. That figure is a representation made in one letter, and the release does not present it as a rule.

One line in the release matters for any pool that holds property indirectly. The staff, it says, generally does not consider securities issued by real estate investment trusts and similar entities to be qualifying interests. An interest in the land is one thing under these tests; a security issued by an entity that owns land is another.

In this example the fee interests are 60 per cent of assets, above the 55 per cent the staff has looked for, and US$5 million of the remaining US$8 million is in real estate-type interests. If the same pool sold a building and its fee interests fell to US$10 million of US$20 million, the qualifying share would be 50 per cent and the first test would no longer be met, even though nothing about the tokens had changed. The tests describe a balance sheet at a point in time.

Private funds: 100 owners or qualified purchasers

A vehicle that cannot use the real estate exclusion, or prefers not to depend on its asset mix, may look at the two exclusions that define a private fund. Each restricts who may hold the securities, and each requires that the issuer is not making a public offering. The SEC's page on private funds, dated 12 June 2024 and last reviewed on 24 April 2026, puts it in one sentence: "A private fund cannot publicly offer its securities."

Section 3(c)(1) excludes an issuer whose outstanding securities are beneficially owned by not more than 100 persons. The count is of beneficial owners, and the statute has a look-through rule for a company that owns 10 per cent or more of the issuer's outstanding voting securities; the conditions of that rule are in the statutory text and are not detailed here. A larger limit of 250 persons applies to a qualifying venture capital fund. On the size of such a fund the two sources read give different figures: the Legal Information Institute copy of the statute states US$10,000,000 in aggregate capital contributions and uncalled committed capital, indexed for inflation every five years, while the SEC's private funds page states no more than US$12M. The indexing may explain the gap, but neither page says so.

Section 3(c)(7) excludes an issuer whose outstanding securities are owned exclusively by qualified purchasers. The paragraph treats securities received by gift, bequest or involuntary transfer as owned by a qualified purchaser. The SEC's page describes a 3(c)(7) fund simply as "limited to qualified purchasers". The term is defined in section 2(a)(51) of the Act; its dollar thresholds were not on the pages read for this guide and are not given here.

Section 3(c)(1) is written in terms of the persons who beneficially own the securities, and a token can change hands. A worked example with invented figures, which assumes that each new holder counts as one beneficial owner: a vehicle relying on section 3(c)(1) has 96 beneficial owners. Six of them each sell half of their tokens to a new holder. The vehicle now has 102 beneficial owners, two more than the statute allows, without having issued a single new token.

Where a REIT fits

A real estate investment trust is described by the SEC's investor education site as a company that owns, and typically operates, income-producing real estate or related assets: office buildings, shopping malls, apartments, hotels, self-storage, warehouses, and mortgages or loans. The site adds that a REIT, unlike other real estate companies, does not develop property in order to resell it.

Being a REIT does not by itself answer the investment company question. The 2011 concept release recalls the Commission's 1960 position: a REIT may fall within the definition of an investment company, and may rely on the real estate exclusion depending on its assets. A REIT that invested exclusively in fee interests in real estate or in mortgages and liens secured by real estate could qualify, the 1960 release said, while one that invested to a substantial extent in other real estate investment trusts might not. The concept release notes that many mortgage-related pools are REITs and that most REITs seeking the exclusion are mortgage REITs.

For a tokenised vehicle the consequence runs in two directions. The SEC's investor education site adds that many REITs are registered with the Commission and traded on a stock exchange, that others are registered but not traded, and that most REITs pay out at least 100 per cent of their taxable income to shareholders. On the 1960 position recalled above, a vehicle organised as a REIT is not outside the definition by that fact alone; whether it can rely on the exclusion depends on its assets. And a vehicle that holds shares in REITs, instead of the buildings, holds securities that the staff generally does not count as qualifying interests.

When no exclusion applies

An issuer that meets a definition and has no exclusion is an investment company, and section 7(a) of the Act says what an unregistered one may not do. It applies to an investment company organised under the laws of the United States or of a state and having a board of directors. Unless it is registered under section 8, such a company may not, by the mails or any means of interstate commerce:

1. offer for sale, sell or deliver after sale any security or interest in a security;
2. purchase, redeem, retire or otherwise acquire any security or interest in a security;
3. control an investment company that does either of those things;
4. engage in any business in interstate commerce;
5. control any company that is engaged in any business in interstate commerce.

The only transactions left outside the list are those merely incidental to the company's dissolution.

Section 47 of the Act then reaches the contracts. A clause that binds a person to waive compliance with the Act is void. A contract that is made in violation of the Act, or whose performance involves a violation, is unenforceable by either party, unless a court finds that enforcing it would be more equitable than not enforcing it and would not be inconsistent with the purposes of the Act. Where such a contract has been performed, a court may not deny rescission to a party unless it finds that denial would be the more equitable result. The lawful part of a contract that can be severed from the unlawful part is preserved, and so is recovery for unjust enrichment.

Registration is the other path, and it brings the Act's substantive rules with it. The concept release summarises the concerns those rules address: unsound or misleading valuation of assets; excessive borrowing and the issue of senior securities, limited under section 18; overreaching by insiders, limited under section 17; and the safekeeping of assets under section 17(f).

The exclusions are tested against the vehicle as it stands, so a sale of one building or a transfer of one token can change the answer.

The sponsor as investment adviser

The Investment Advisers Act of 1940 asks a different question, about the person who manages the pool. Its sections were also read in the Legal Information Institute copy. Section 202(a)(11) defines an investment adviser as any person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing or selling securities, or who issues analyses or reports concerning securities as part of a regular business. The definition has listed exclusions, among them banks, lawyers, accountants, engineers and teachers whose advice is incidental to their profession, brokers and dealers whose advice is incidental to their business, publishers, and family offices.

The definition, like that of an investment company, turns on securities. The pages read do not say how the definition applies to a pool that holds only fee interests in land.

Section 203(a) makes it unlawful for an investment adviser to use the mails or interstate commerce in its advisory business unless it is registered or falls within an exemption. Three of the exemptions are tied to the kind of fund advised. Section 202(a)(29) defines a private fund as an issuer that would be an investment company but for section 3(c)(1) or 3(c)(7). Section 203(m) directs the SEC to exempt an adviser that advises solely private funds and has assets under management in the United States of less than US$150,000,000, and requires exempted advisers to file reports. Section 203(l) covers advisers solely to venture capital funds, with records and reports. And a foreign private adviser, under section 202(a)(30), is one with no place of business in the United States, fewer than 15 clients and investors in the United States in the private funds it advises, less than US$25,000,000 of assets under management attributable to them, and no holding out to the United States public as an adviser.

The private fund definition, as quoted in the copy read, names sections 3(c)(1) and 3(c)(7). None of the pages read says how the adviser exemptions treat a vehicle that relies on section 3(c)(5)(C) instead, and this guide draws no conclusion on that point. The SEC's private funds page adds that advisers to private funds are generally required to register with the Commission unless an exemption applies, and that the antifraud provisions of the federal securities laws apply to all funds and advisers.

What the sources leave open

Several points could not be settled from the pages read on 10 October 2026. The dollar thresholds of a qualified purchaser sit in section 2(a)(51) of the Act and were not read. The amount for a qualifying venture capital fund differs between the statute copy and the SEC's page. The definition of a redeemable security was read only in part. The percentages for section 3(c)(5)(C) are staff positions, and no Commission action later than the 2011 request for comment was read. None of the pages applies these provisions to a tokenised vehicle by name: the statute speaks of issuers, securities, holders and assets, and a token-issuing pool is measured by those words like any other issuer.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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