A sponsor that intends to raise capital from third-party investors for investment in real estate or real estate-related assets should consider whether the general partner, managing member or outside adviser to the vehicle that will be formed to undertake the investment will be required to register as an investment adviser under, and comply with the other requirements of, the Investment Advisers Act of 1940.1 While it is generally accepted that direct investment by an investment vehicle in “bricks and mortar” assets, such as a fee or leasehold ownership interest in real estate, would not trigger the application of the Advisers Act, further inquiry will be warranted where some or all of the investments made by entities managed by the general partner or managing member are arguably “securities” under the act.
Overview of the Act
The Securities and Exchange Commission (SEC) regulates investment advisers pursuant to the terms of the Advisers Act, which defines an investment adviser as any person or firm who satisfies the following three elements: (1) the adviser engages in the business of advising others, (2) in consideration for providing such advice, the adviser receives compensation, and (3) the advice concerns the value of, or the advisability of purchasing or investing in, securities.2
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