The recent economic crisis and the low yields on savings accounts mean that investors are increasingly resorting to direct or indirect investments in tangible movable or immovable goods such as works of art, commodities and real estate. Providers of such alternative investments often overlook the fact that the offering of such investment instruments is subject to strict financial regulations intended to protect financial consumers, specifically the relevant provisions of the Prospectus Act.
On 1 November 2014, article 4, §1, 3°bis of the Prospectus Act entered into force. This provision introduced a new category of investment instruments: alternative investments in movable tangible goods and agricultural exploitation. In its communication of 13 November 2014 to companies that commercialise investments in tangible movable or immovable goods (the "Communication"), the FSMA draws attention to the possible application of financial regulations to (amongst other things) the offering of real estate investments. These provisions are crucial for those who wish to offer real estate investments to the (broader) public (e.g. in the form of hotel rooms, holiday homes, or assisted living residences), because they impose numerous restrictions and conditions, non-compliance with which can lead to criminal sanctions, administrative fines, and even nullity of the subscriptions to the alternative investment instruments.
The FSMA uses the term "alternative investment products" for "products which are offered to the public for investment purposes and that have directly or indirectly to do with movable or immovable goods and which do not take the form of classic investments, which are clearly defined in the financial legislation". These alternative investments products can qualify as an "investment instrument" for the purpose of the Prospectus Act (Act of 16 June 2006 on public offers of investment instruments and admission to trading of investment instruments on regulated markets). In addition, they could also constitute an offer of a "financial product" within the meaning of the "Transversal" Royal Decree (Royal Decree of 25 April 2014 concerning certain information requirements for the offering of financial products to non-professional clients – "Transversal RD"). Finally, other provisions of the Economic Law Code in relation to "financial services" could also apply.
Real estate as an "investment instrument" within the meaning of the Prospectus Act
Qualification as an investment instrument
Article 4, §1, 3° of the Prospectus Act, which targets real estate investments, provides that the following "rights" should be classed as an "investment instrument" within the meaning of the Prospectus Act: "rights that are directly or indirectly associated with movable or immovable goods held in a de facto or de iure association, joint ownership or group in which the right-holders do not have personal enjoyment of those goods, and whereby those goods are managed collectively by one or more person(s) acting in a professional capacity".
To qualify as "investment instruments", a real estate investment should cumulatively have four constitutive elements: (i) it should relate to rights on immovable goods, (ii) be held in a de facto or de iure association, joint ownership or group, (iii) with renunciation of personal enjoyment of the immovable goods, and (iv) be collectively managed by one or more persons acting in a professional capacity.
The first and fourth constitutive elements give little cause for debate and are not explained in more detail, so the Communication mainly provides clarification on the interpretation of the second and third conditions.
The second condition requires the investment to be held in a de iure or de facto association, joint ownership or group. The FSMA clarifies that this applies not only to cases where rights on immovable goods are held in a company, association or joint ownership, but also to the situation where individual goods are de facto grouped together. Examples could include holiday homes or bungalows that belong to various owners but which are located on the same terrain without being part of a single legal entity – which will be the case, for example, with a group of assisted living residences.
The third condition requires renunciation of personal enjoyment. The FSMA clarifies that the concept of "personal enjoyment" does not merely cover physical enjoyment (the use of or the right to live in the underlying immovable goods), but also economic personal enjoyment, i.e. the individual pecuniary return on the underlying immovable goods. According to the Communication, the concept should be understood in the context of article 4 of the Prospectus Act, which seeks to protect financial consumers from alternative investments that show strong similarities to investments in securities of companies.
As long as an investor personally has full individual economic personal enjoyment (the "individual return") of the immovable goods, the FSMA is of the opinion that the investment will not qualify as an investment instrument under the Prospectus Act. Conversely, if the investor fully renounces individual economic personal enjoyment (and physical personal enjoyment), i.e. there is a "collective pooling" of the returns, then (subject to other conditions being met) the "investment" qualifies as an "investment instrument" within the meaning of the prospectus legislation. For example, a situation where an investor acquires a certain hotel room, student flat or bungalow without being entitled to a personal residence period (except under the same conditions as normal guests, residents or travellers) and where the investor receives part of the "pooled" returns of the rental income of the entire hotel, building or park.
Less obvious is the situation where an investor renounces economic personal enjoyment without completely or irrevocably renouncing physical personal enjoyment. This can be the case when the investor can temporarily live in his individual room or bungalow or if, at the time of the purchase, the investor can choose between making the property available via a third party or occupying or renting out the property himself (in part, temporarily, or completely). The FSMA states that these investments do not qualify as investment instruments, except in cases where the physical personal enjoyment is not effective, which will always need to be examined in concreto. This assessment should not only take into account the intentions of the offeror, but should also examine whether physical personal enjoyment is not rendered meaningless in reality and how the offeror has offered its product. The way in which an investment is presented in advertising brochures and other forms of publicity will serve as an important indication. Although the Communication seeks to provide guidance, practice will have to determine exactly how this condition will be applied.
Consequences of classification as investment instruments within the meaning of the Prospectus Act
The consequences of classification as investment instruments within the meaning of the Prospectus Act are significant.
A prospectus must be published for every public offer of investment instruments on Belgian territory. A "public offer" on Belgian territory is "a communication to persons in any form and by any means […] presenting sufficient information on the terms of the offer and the investment instruments offered so as to enable an investor to decide to purchase or subscribe to these investment instruments, and which is made by the person who is in a position to issue or transfer the investment instruments or by a person who acts for the account of the aforementioned person". If an alternative investment product qualifies as an investment instrument and if the offer itself qualifies as a "public offer" on Belgian territory, then the offeror is required to publish a strictly regulated prospectus in relation to the real estate investment. The prospectus must be approved by the FSMA. This will result in a significant administrative burden and significant costs. Nevertheless, the usual exemptions for keeping a transaction "private" (the "private placement safe harbours" included in article 3 §2 of the Prospectus Act) will apply.
Most real estate investment offers will probably be able to invoke article 3 §2 part c) and d) of the Prospectus Act. Offers of an investment instrument with a total investment value of at least EUR 100,000 per investor and per separate offer, or of an investment instrument with a nominal value per unit of at least EUR 100,000, will not be required to publish a prospectus. In many cases, the value of the real estate investment instrument will exceed that threshold. It cannot be excluded, however, that e.g. investments in student housing will not exceed this threshold and that thus, if no other exemption can be invoked, the offeror will be required to prepare a prospectus.
In addition, the advertising and other documents and announcements relating to a public offer requiring a prospectus will need to meet certain requirements as to their content and will be subject to the control and prior approval of the FSMA (articles 58 and following of the Prospectus Act).
Classification as investment instruments can also lead to the application of the rules relating to the intermediation monopoly (articles 55 and 56 of the Prospectus Act). Intermediation in respect of public offers of investment instruments (issued by another entity) is only allowed for certain "qualified" parties (exhaustively listed in the Prospectus Act), such as credit institutions and investment firms. This means in practice that intermediation by certified real estate brokers and insurance intermediaries in the offering of real estate investment instruments is prohibited. This intermediation monopoly also applies to certain offers for which a private placement can be invoked, particularly in relation to offers of alternative investments with a value per unit or investor of more than EUR 100,000 (which thus are not required to publish a prospectus). Again, e.g. real estate brokers may not act as intermediaries in relation to such private offers.
Immovable goods as "financial products" within the meaning of the Transversal RD
The Royal Decree of 25 April 2014 concerning certain information requirements for the offering of financial products to non-professional clients, better known as the "Transversal RD", contains additional rules relating to the advertising and other documents and announcements that are distributed to non-professional clients when marketing investment instruments, as provided in the Prospectus Act. The application of these provisions is not dependent on the possible public nature of the offer. For example, the benefits of the financial product/investment instrument may not be emphasised without a fair, prominent and balanced indication of the relevant risks, limitations or conditions, which should be legible in a font size that is at least as large as that used to present the benefits.
The applicability of this RD, which should enter into force on 12 June 2015, specifically entails that an offeror should include a risk label in advertisements relating to the investment instruments. This risk label, comparable to the existing European energy label for, refrigerators, freezers and other equipment, will vary from risk class A (low risk) to risk class E (high risk). Alternative investments (as well as shares) will need to be included in the second highest risk category, risk class D.
Real estate as a "financial service" within the meaning of Book VI of the Economic Law Code
Finally, the provisions of Book VI "Market practices and consumer protection" of the Economic Law Code, which aim to protect consumers when companies offer their goods and services, will also apply to the offering of investment instruments within the meaning of the Prospectus Act.
These include provisions relating to comparative advertisements, distance contracting, contracts entered into outside of points of sale, and unfair terms in contracts.
Walking a tightrope
Qualification of real estate as investment instruments involves numerous obligations imposed by financial law, of which investors are often unaware or insufficiently aware. Non-compliance with these provisions could, as the case may be, lead to criminal sanctions, administrative fines, and even nullity of the subscription to the investment instruments.
It is possible that this Communication may be an initial indication of increased vigilance on the part of the FSMA in connection with the offering of real estate investments.