The majority of TIC sponsors market their properties as a security under the SEC regulations. However, a number of sponsors take the position that TIC’s may be sold as real estate under the jurisdiction of the State Department of Real Estate. This discrepancy is due to the fact that there is no clear judicial precedent either at the appellate or Supreme Court level. The question as to whether a TIC is a security or real estate governs how it is marketed to the general public and does not prevent the transaction from enjoying the benefit of a section 1031 exchange. Furthermore, both security and real estate TIC’s are relatively uniform in their structure, as they must comply with Revenue Procedure 2002-22.

If a real estate transaction or interest is deemed a "security" by SEC regulators, then the securities laws may apply. This means there should have been a registration (or an Exemption thereof) with both the Securities Exchange Commission (SEC) and applicable state securities regulator(s).

How do you know if the securities laws apply? Generally, the § 2 of the Securities Act of 1933 contains definitions of the term "security. "There is a "catch all" category known as an "investment contract" which constitutes a security. In the landmark case of SEC v. W.J. Howey Company, the U.S. Supreme Court defined an "investment contract" as any transaction in which:

1. A person invests money;
2. In a common enterprise, and is
3. Led to expect profits,
4. Solely from the efforts of others.

Many, if not most, real estate syndications are considered "securities" because they involve the selling of fractional interests coupled with some type of promised return and management contract. There can be differences based upon how the transaction is structured (i.e. LLC, partnership, corporation or tenants in common), whether the investors "materially participate" in the management and control of the investment and how the deal is marketed. These are but a few of the many factors. In the event the interest or transaction is considered a "security" then there must either be a registration or applicable exemption.

As far as the I.R.S. is concerned, if the sponsor has syndicated the property offering following the Revenue Procedure 2002-22, they will consider the TIC interest as real estate available for 1031 exchange, whether marketed as security or real estate. So all "conservative" sponsors will strive to meet the 15 points of the Revenue Procedure (see tab 9—What is Revenue Procedure 2002-22?)

From the point of view of the SEC, the pooling of funds; to attain a return on those funds, based solely on the efforts of others (like a common stock for example) should be classified as a security for their purposes, and subject to their jurisdiction. Although this has nothing to do with being classified as real estate for the I.R.S. As such, it should require a private placement memorandum (PPM) under Reg D. of the Securities Act of 1933, and have all of the appropriate disclosures, disclaimers and information to allow an investor to make an informed decision. Some TIC sponsors agree with the SEC’s rationale and market their fractional ownership investment as a security.

The real estate TIC's feel that since certain decisions and actions are available to the TIC owners, the investment does not rely only solely on the efforts of others and is not an investment that should be considered a security (see.Rev. Proc. Section 6.05). They provide a level of disclosure similar to what be performed in purchasing any other commercial real estate investment.

As far as the investments, security TIC properties tend to be more expensive, with higher minimum investment levels. They also are more likely to have credit tenants. This may make the property more attractive to institutional purchasers and REITs, when the property is going to be sold. Regarding the court case, there has been no decision in any court case with the appropriate fact pattern relating to TIC's, that can be relied on, as to whether TIC's should be security or real estate.

In order to purchase a tenants in common interest marketed as a security, the investor must be an "accredited investor" as defined by the SEC. This means the investor must have net equity in all assets owned of $1,000,000 or have an income level of $200,000 ($300,000 if married) for the prior two years, and expect the same for the current year.