Ninth Circuit Issues Decision on What Constitutes a Security

In Salameh v. Tarsadia Hotel (, the Ninth Circuit explored the issue of what exactly constitutes a security within the meaning of federal and California securities laws.  The definition of a security is critical because many legal obligations are imposed on persons who seek to sell a security such as the requirement to register it or establish that the sale falls within an established exception to the registration requirements.  Specific liability provisions of federal and state law also attach. In Salameh, plaintiffs attempted to plead securities claims based upon the sale of condominium units in the Hard Rock Hotel in San Diego.  The Ninth Circuit confirmed prior holdings that a security includes an "investment contract" which is in turn defined as the investment of money in a common enterprise with the expectation of profits from the efforts of others.  The definition is clearly quite broad and can be a trap for the unwary.  In this case, however, the court held that the units did not constitute a security.  The mere sale of real estate is not itself a security.  While the plaintiffs entered into management contracts thereafter from which they hoped to reap a profit from renting the units, the real estate management contracts were entered into later with a different entity and were not a "package" with the sale of the condominiums.  Although the case highlights the risk that a wide variety of investments -- even those that appear on their face to look nothing like stock sales -- can be held to be securities, here the condominium units were held to be exactly what they appeared to be:  sales of real estate.