by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

SECURITIES; DEFINITION; CONDOMINIUMS; TIME-SHARE: Important Seventh Circuit ruling that a condominium with a time-sharing and rental arrangement is not a "security" for Federal law purposes. Wals v. Fox Hills Development Corp., Fed. Sec. Law Rep. (CCH) ¶698,226 (7th Cir. 1994). This important decision written by Judge Posner reaffirms a requirement for "horizontal commonality" in order to reach the conclusion that an investment in what would otherwise be real estate alone could also constitute a security subject to Federal (and likely state) regulation.

Horizontal commonality requires a pooling of interest among the various condominium investors, as well as with the developer, as opposed to a simple shared interest in the time share rental enterprise between the individual investor and the developer alone. In this case, since the purchasers of the condominium only received rentals from their unit, and not a share of all units in the condominium that were also part of the rental program, there was no pooling of profits between the developer and each of the investors (purchasers), which is essential to horizontal commonality. Although not the basis for its decision, the court did state that since the rental program was voluntary, "it is difficult to conceive of the sale of the condominium itself as the sale of a security," which sale was what the purchasers desired to rescind.

Judge Posner cites cases in the Second, Third and Sixth Circuits that, he believes, concur in the stricter "horizontal commonality" requirement in order to impose security laws regulation. He cites cases in the Fifth, Eighth, Ninth and Tenth Circuits as imposing a weaker test.

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