Reits

Statement of Fact

American Real Estate Company (AREC) is a real estate investment firmed headquartered in Atlanta, Georgia. They invest primarily in Class-A commercial real estate through joint ventures. To increase the size of their investments, the company wanted to switch to a real estate investment trust so that they could solicit funds from smaller investors. In 2008, AREC created a new class of investments called “Non-traded REITs”. A non-traded REIT is a non-liquid security that does not trade on a stock exchange. It is essentially an IPO that investors buy in at a set price of $10.00 per share. The money is then invested into real estate, collects a dividend, and then is listed on a stock exchange at a future date. Once listed on an exchange, the $10.00 price will be reset to what the markets believe the investment is worth.

These complicated investments were sold to investors through AREC financial advisors, who were paid a substantial commission for each sale. Investors were led to believe that the investments were safe relative to the stock market, and would return a 6% dividend from the rent collected on the real estate buildings. Since the price was fixed at $10.00 per share, clients enjoyed the fact that their principal would not fluctuate like the stock market. AREC coached their financial advisors that now was a good time to buy real estate, and that the market would most likely price the stock higher then $10.00 per share when they got listed on an exchange. In early 2012, the non-traded REIT was listed on the NASDAQ and the market price the stock at $7.50 per share. Even including dividends, every investor lost money no matter when they purchased the REIT. Investors flied a class-action lawsuit against AREC for violation of Section 10(b) of the Securities Exchange Act of 1934, making a misstatement or omission of material fact.

Statement of Legal Issue

Is AREC in violation of Section 10(b) for misleading investors?

Conclusion

AREC...