Company Name: Las Sendas Golf Club, Inc.
Public Availability Date: March 2, 2004
Securities Act of 1933 - Section 2(a)(1)
Response of the Office of Chief Counsel
Division of Corporation Finance
Re: Las Sendas Golf Club, Inc. (the "Club")
Incoming letter dated February 6, 2004
Based on the facts presented, the Division will not recommend
enforcement action to the Commission if the Club, in reliance upon your
opinion as counsel that registration is not required, offers and sells
the described Club memberships without registration under the Securities
Act of 1933.
Because this position is based on the representations made to the
Division in your letter, it should be noted that any different facts or
conditions might require different conclusions. Moreover, this letter
merely expresses the Division's position on enforcement action and does
not purport to express any legal conclusions on the question presented.
Sincerely,
Cecilia D. Blye
Special Counsel
Incoming Letter:
February 6, 2004
Jennings, Strouss & Salmon, P.L.C.
Attorneys at Law
The Collier Center, 11th Floor
201 East Washington Street
Phoenix, Arizona 85004-2385
Telephone: 602.262.5911
www.jsslaw.com
Robyn Nordin Stowell
Direct Dial: 602.262.5884
Direct Fax: 602.495.2788
rstowell@jsslaw.com
Securities and Exchange Commission
Office of Chief Counsel
Division of Corporate Finance
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Attention: Cecelia Blye
Re: Las Sendas Golf Club, Inc.
Dear Ladies and Gentlemen:
The purpose of this letter is to amend and restate the facts and
analysis contained in our letters dated October 15, 2003 and January 16,
2004, in which we requested, pursuant to Release No. 33-5127 (January
25, 1971) as supplemented by Release No. 33-6253 (October 28, 1980), on
behalf of Las Sendas Golf Club, Inc. (the "Club") that the
Division of Corporate Finance (the "Division") of the Securities
and Exchange Commission (the "Commission") provide advice that it
will not recommend any enforcement action to the Commission if the Club
offers for sale and sells memberships in the manner and under the
circumstances described below without registration under the Securities
Act of 1933, as amended (the "Act" ).
Statement of Facts
The Club and Eagle Crest Golf Club Limited Partnership, an Arizona
limited partnership (the "Seller") have provided to us the
information set forth below and have authorized us to provide such
information to you on their behalf.
Formation
The Club was formed as an Arizona non-profit corporation for the sole
purpose of acquiring and owning a private golf and social club for the
use and benefit of its members (the "Members") and their guests.
The Club intends to offer and sell memberships in order to raise the
funds necessary to acquire certain recreational facilities from the
Seller.
The Seller owns an existing golf course and clubhouse (the
"Existing Facilities") located within a residential community known
as "Las Sendas" located in Mesa, Arizona (the "Community"). The
Seller has developed plans for an expansion of the existing Clubhouse
(the "Clubhouse Expansion") which it intends to construct after
the sale of certain Memberships as described below (the Existing
Facilities and the Clubhouse Expansion are the "Club Facilities").
The Community consists of approximately 3,500 residential lots ("Residential
Lots"). Various residential builders have sold or will sell to
homeowners the Residential Lots improved with homes (the "Las Sendas
Homes").
The Seller will enter into an option agreement with the Club (the
"Option Agreement") pursuant to which the Club has the option (the
"Option") to purchase the Club Facilities from the Seller subject
to certain terms and conditions described below. The Option may be
exercised and the purchase of the Club Facilities consummated (the
"Closing") subject to the terms of the Option Agreement.
The Club has not been formed to operate, nor will it be operated, for
pecuniary gain or profit. The Club's Articles of Incorporation (the
"Articles") provide that there will be no payment of income,
dividends or other distributions of profit to any of the Club's members,
trustees or officers, and as such they will have no interest in or title
to any of the profits or assets of the Club. The Articles provide that
in the event of dissolution of the Club, all of the property and assets
of the Club (if any) remaining after payment of debts and liabilities
and any expenses of liquidation, will be distributed as permitted by
Arizona law or a court having jurisdiction among the equity holders of
the Club.
Membership
The Club will offer two general classes of equity membership: Estate
Memberships, with golf and social privileges for the Members' families
("Estate Equity Memberships") and Corporate Memberships with golf
and social privileges for four employees of the Member ("Corporate
Memberships") (collectively, the "Equity Memberships"). Only
Equity Memberships will be proprietary memberships, which will entitle
the holder thereof (the "Equity Member") to vote and which will
include an equity ownership interest in the Club. Each Equity Member
shall receive a numbered membership certificate.
In addition to the Equity Memberships, the Club may issue certain
"non-proprietary" memberships, such as social memberships, in its
discretion. The holders of these non-proprietary memberships shall not
be entitled to vote and they shall not be entitled to any equity or
ownership interest in the Club. Non-proprietary members will not receive
membership certificates but will be designated on the books of the Club.
A total of 450 Equity Memberships will be available, but the number
of Corporate Memberships outstanding at any time shall not exceed 25.
The Club, in its discretion, may add additional Equity Memberships after
the Club has exercised the Option. In addition, up to five (5) honorary
memberships ("Honorary Memberships") may be transferred to
individuals designated by the Seller prior to the Option being
exercised.
The Club will offer and sell the Equity Memberships on its own
account for an amount ("Membership Contribution") that it deems
appropriate from time to time. The Membership Contribution charged may
be increased or decreased by the Club either prior to or after it
exercises the Option (described below).
Use of the Club Facilities by the Equity Members and non-proprietary
members will be subject to the rules and regulations of the Club, which
will be adopted by the Board of Directors of the Club (the "Board")
from time to time. Equity Memberships will entitle the holders thereof,
the Estate Members' spouses and children under the age of 21, and the
Equity Members' guests, access to all the Club Facilities upon payment
of all required dues and fees. Prior to Closing, the Seller will allow
limited public play, which will be reduced over time as the number of
Members increases.
Application for membership in the Club shall be by invitation only
and subject to the approval of the membership committee (the
"Membership Committee") and the Board. After the Closing, the Club
will have the option to add additional sub-categories of memberships
within the Equity Memberships (such as junior memberships) and may offer
payment terms on a schedule different from the initial Membership
Contribution schedule offered by the Club.
Option Agreement
The Seller will enter into the Option Agreement with the Club
pursuant to which the Club has the Option to purchase the Club
Facilities from the Seller and the Seller will build the Clubhouse
Expansion, all subject to certain terms and conditions described below.
The purchase price payable by the Club for the Existing Facilities will
be $13 million (the "Club Purchase Price"), and for the Clubhouse
Expansion will be $4.3 million ("Clubhouse Expansion Price") for
a total price of $17.3 million (the "Purchase Price"). The Club
will also pay the Seller the cost of supplies and inventory on hand at
Closing. Certain marketing expenses and sales commissions and
administrative expenses related to the sale of the memberships will also
be paid by the Club. The Option may be exercised, the purchase of the
Club Facilities consummated and the Closing occur, subject to the terms
of the Option Agreement.
As partial consideration for granting the Option, the Club will pay
the Seller as a non-refundable payment (the "Option Payments"),
substantially all of the Membership Contributions received prior to the
Closing Date as such contributions are received; the amount of the
then-required Membership Contribution will be determined by the Club
(via the Seller-controlled Board), from time to time until the Closing.
The Option Payments shall be credited in full to the Purchase Price at
Closing.
Exercise of Option
Under the terms of the proposed Option Agreement, the Club will have
two opportunities to exercise its Option. The Option may be exercised,
and the purchase transaction closed, by the Club after obtaining the
affirmative vote of 75% of the Equity Member votes eligible to be voted
at the time:
- within 120 days following the date that the Seller gives
appropriate notice that a certificate of occupancy is issued for the
Clubhouse Expansion (the "Early Triggering Event"); or
- within 120 days following the date the Seller gives appropriate
notice of the later to occur of a certificate of occupancy being
issued for the Clubhouse Expansion being issued and the Purchase
Price being paid in full (the "Final Triggering Event").
If the Club declines to exercise the Option at the Early Triggering
Event, the Club will continue to have the right to exercise the Option
at the Final Triggering Event. As a result of the Option Payments, the
Purchase Price may be paid in full prior to Closing; however, the Club
may be obligated for a line of credit to pay for certain goods and
inventory on hand at the Closing (such as liquor) pursuant to the Option
Agreement.
If the Clubhouse Expansion has not been paid in full via Option
Payments prior to the Early Triggering Event, then the Members will be
advised via the notification and voting process relative to the Early
Triggering Event that, if the Club exercises the Option at that time,
the Club will assume the obligations for the Clubhouse Expansion Loan
and the Loan will encumber the Club Facilities. In that scenario, it is
expected that unissued Equity Memberships would remain with the Club for
issuance after Closing. Full disclosure of the financial particulars
related to the Clubhouse Loan will be disclosed to the Equity Members
before they vote on the Option. In that scenario, the Equity Members
would take control of the Club Facilities and the Seller would
relinquish all its control of the Club and the Club Facilities.
In the event that the Equity Members vote not to exercise the Option
in connection with the Final Triggering Event, then the Option Agreement
and each Equity Membership in the Club shall promptly terminate and no
Member shall have any further right to use the Club Facilities or to
receive a refund of any Membership Contribution or interest previously
paid or have any further right or obligation thereunder, and all
Membership Contributions previously paid by Members and delivered to the
Seller as an Option Payment shall be retained by the Seller.
Termination of Option
In the event that the Club has sold fewer than 200 Equity Memberships
on or before September 30, 2007, then the Seller will have the right to
terminate this Agreement by giving ninety (90) days advance notice of
the same to the Advisory Board of Governors (if one has been appointed
or elected, as described below) and to each of the Equity Members of the
Club and repaying to each of those Equity Members prior to the
expiration of such ninety (90) day period the full amount of each
respective Member's Membership Contribution without interest. Upon the
expiration of such ninety (90) day period, all right, title and interest
in and to the Club Facilities shall remain vested in the Seller, free
and clear of any claim or right of any Equity Members, Non-Equity Member
or other party that obtained an interest in the Club or the Club
Facilities pursuant to the Membership Documents. The Seller's allowing
the Club Members access to the Club Facilities at no charge or at
charges substantially below public rates is consideration for the
Seller's right to terminate the option and return the Membership
Contributions in full without interest.
Clubhouse Expansion
Pursuant to the Option Agreement, the Clubhouse Expansion will begin
as soon as 325 Equity Memberships have been sold. The Seller will obtain
a construction loan for the Clubhouse Expansion (the "Clubhouse Loan"),
which will be secured by a first lien on some or all of the Club
Facilities. The Seller is not dependent on the Club exercising the
Option for proceeds to complete the Clubhouse Expansion. However, the
Option Agreement provides for the Club to forward substantially all of
the Membership Contributions in the form of Option Payments as part of
its purchase of the Club Facilities and, therefore, the Seller may use
Membership Contributions to repay the Clubhouse Loan. As described
below, the Club will have the opportunity to, but will not be required
to, exercise the Option before the Clubhouse Loan is repaid in full and,
in that scenario only, would take title subject to the balance of that
loan.
The Club will pay to the Seller for all months prior to the Closing,
the amount of monthly dues received from the Equity Members. The Seller
will use those dues, together with income from limited public play,
towards the operating expenses of the Club Facilities prior to the
Closing.
The Clubhouse Expansion will not begin until the Option Payments
equal the Club Purchase Price of $13 million. The Clubhouse Expansion is
expected to cost $4.3 million. Because commencement of construction
could be as much as four years away, no financing commitment can be
obtained at this time. When construction begins, the Seller will have an
unencumbered golf course available as collateral for financing the
Clubhouse Extension, if necessary. The Club is not required to exercise
the Option until the Clubhouse Expansion is completed and the Clubhouse
Loan is paid in full. Until Closing, cash shortfalls are guaranteed by
NSM (as described below) (with some rights to demand reimbursement from
the Seller). Further (except following 9/11 when the tourist revenues
were down for two seasons), the golf operations have covered the
expenses, including debt coverage when applicable, at all times over the
years NSM has been the company's general partner. During those two
seasons, shortfalls were covered by a capital call on the Seller's
limited partners and by a line of credit that has since been paid off.
To date, this season (the third season after 9/11), the Golf Facilities
operations have again covered operating expenses and are anticipated to
do so for the year. Thus, the necessary elements to support construction
funding are already in place, and avenues for debt coverage will include
operations (dues and other revenues), NSM's cash flow guaranty, and the
Seller's own resources. Before commencing construction of the Clubhouse
Expansion, Seller will secure the Clubhouse Loan.
Beginning immediately when the Option Payments have paid the Club
Purchase Price ($13 million), the remaining Membership Contributions
will be deposited in an Escrow Account established with the local branch
of a bank or title company, to be held for the Club's benefit until the
Seller has obtained financing for the entire Clubhouse Expansion. The
Seller will not commence construction of the Clubhouse Expansion until
this financing is secured. Once this financing is secured, the portion
of the escrowed Membership Contributions that constitute Option Payments
will be delivered to the Seller and the Club will resume making Option
Payments until the Clubhouse Expansion Price is paid.
Management of Club Facilities
Until the Closing, the Seller will hold title to, manage and operate
the Club Facilities. An affiliate of Seller, National Sports Management,
Inc., an Arizona corporation ("NSM"), will act as manager, and
will be responsible for any cash deficits resulting from the operations
of the Club. NSM will receive an annual fee for such managerial duties.
Further, the Option Agreement is between the Club and Seller and,
therefore, Seller is primarily responsible for any funding obligations.
Thus, the unlikely event that there is an operating deficit, Seller
would also be obligated to fulfill such deficit. At no time will the
Equity Members be subject to a capital call or be obligated for any
operating deficits incurred prior to Closing.
Transfer/Surrender/Reissue of Membership
Memberships will not be transferable in the open market. Transfers
may only be made to the family members of the Member, subject to the
approval of the Board. During a Member's lifetime, a Member may cause
the Club, subject to the approval of the Board, to transfer his or her
membership to any one of his or her children or grandchildren upon
payment to the Club of an amount established by the Club from time to
time, which will initially be equal to five percent (5%) of the
Membership Contribution charged by the Club for the same class of
membership at the time of the transfer (the "Family Transfer Fee");
provided that a Member may transfer his or her membership to his or her
spouse without payment of a Family Transfer Fee.
Upon the death of an Equity Member, such deceased Member's surviving
spouse, if any, shall have the right to have the Equity Membership
transferred to him or her by the Club without payment of the Family
Transfer Fee, or to a designated child or grandchild of such deceased
Equity Member to whom such membership will be transferred subject to the
approval of the Board and payment of the Family Transfer Fee. If there
is no surviving spouse, such Equity Membership shall pass to a child or
other individual as the Equity Member may appoint in his will, subject
to the approval of the Board and payment of the Family Transfer Fee.
Finally, such intra-family transfers are further restricted because
the Member may not receive consideration from his or her family member
transferee for such Membership transfer. Prior to a transferred
inter-family Membership becoming effective on the Club's books, each
transferor will be required to provide to the Club an affidavit
attesting that the transferor received no consideration for the transfer
of Membership. While a family member, other than a spouse, will be
required to pay the Club a Family Transfer Fee, that payment would not
constitute consideration to the Member.
An Equity Member may surrender his or her membership at any time.
Upon surrender, the surrendering Member will be placed on a list for a
payment based upon the Membership Contribution amount then in effect.
Such payment will be made only after: (i) all Equity Memberships have
been issued by the Club (or, prior to that time, only one in four Equity
Memberships sold by the Club will be repurchased from existing Members),
(ii) an individual is willing to acquire from the Club the surrendering
member's membership, (iii) that individual has paid to the Club the
required Membership Contribution then in effect and (iv) the Club has
accepted that individual as an Equity Member. If these conditions are
met, upon the surrender of his or her Equity Membership, a Member will
receive an amount equal to 80% the amount of the Membership Contribution
then charged for the surrendering Equity Member's class of membership.
The remaining 20% will be retained by the Club as an administration fee
("Administration Fee"). Therefore, it is only in the case of a
qualifying surrender after the current price of a Membership has
increased substantially that a Member could possible realize any gain on
the surrender of a Membership.
The Administration Fee may be increased by the Club from time to
time. The possibility that the Club will refund an Equity Membership for
a sum greater than that originally paid for it will not be emphasized in
any offering materials or presentations, and all prospective purchasers
will be informed that the Equity Membership should not be viewed as or
acquired for investment purposes and that such prospective purchasers
should not expect to derive any economic profit from such membership.
Equity Memberships may not be pledged or hypothecated (other than
purchase money loans) and may only be transferred through the Club as
described.
Until the initial sale of all Equity Memberships, a surrendering
Equity Membership shall be placed on a waiting list to be reissued (the
"Sales Waiting List"). After the sale of all Equity Memberships,
surrendered memberships shall be reissued on the first surrendered,
first reissued basis. The Club may (at the sole discretion of the
Board), but shall not be required to, refund an Equity Membership prior
to another individual's willingness to acquire such Equity Member's
membership. The Club will also maintain a "Purchaser Waiting List"
for those wishing to acquire an Equity Membership, if Equity Memberships
are not then available.
An Equity Member who owns a Las Sendas Home in the Community may
arrange for the Club to reissue the membership to the purchaser of such
Las Sendas Home if that purchaser has been approved for membership in
the Club, even if all Equity Memberships have not been issued, and even
if there are memberships available on the Sales Waiting List or
purchasers listed on the Purchaser Waiting List.
Administration
The Board will be responsible for administration of the Club and will
have the sole authority to accept members and establish Membership
Contribution amounts, fees and dues, and to make assessments, establish
rules and regulations and, in general, control the affairs of the Club
in accordance with the Club's Articles and Bylaws. Until Closing,
Seller, in its sole and absolute discretion, will designate all persons
to serve on the Club's Board. This Seller-appointed Board will serve
until the Closing, at which time the Advisory Board of Governors elected
by the Equity Members will become the new members of the Board (or the
Equity Members will elect the new Board). Thereafter, the Board will be
elected by the Equity Members as provided in the Club's Bylaws.
Prior to the Closing and upon the sale of not more than 150 Equity
Memberships, the Seller shall appoint nine (9) Equity Members to an "Advisory
Board of Governors," which will advise the Seller-appointed Board
but will not have legal authority to bind the Club. Upon the sale of 250
Golf Equity Memberships, the Equity Members will elect the Advisory
Board of Governors. Thereafter, the Advisory Board of Governors will
continue to serve in an advisory capacity to the Seller-appointed Board.
At no time will the Advisory Board of Governors have authority to bind
the Club until after the Closing. However, the Advisory Board of
Governors that is elected by the Equity Members may vote to approve
certain actions by the Seller-appointed Board of Directors that requires
the Advisory Board of Governors' consent, as specifically set forth in
the Bylaws.
Discussion
It is our opinion, for the reasons set forth below, that the Equity
Memberships in the Club, if offered and sold by the Club in the manner
described above, would not be "securities" as that term is defined in
Section 2(a)(1) of the Act and therefore would not be required to be
registered in compliance with Section 5 thereof.
Section 2(a)(1) of the Act (15 U.S.C. Section 77(b)(1)) provides
that, unless the context otherwise requires:
[t]he term "security" means any note, stock, treasury
stock, bond; debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement,
collateral-trust certificate, reorganization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas, or other mineral rights, any put, call, straddle,
option, or privilege on any security, certificate of deposit, or group
of index of securities (including any interest therein or based on the
value thereof), or any put, call, straddle, option or privilege entered
into on a national securities exchange relating to foreign currency, or,
in general, any interest or instrument commonly known as a "security,"
or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.
Although membership interests in private recreational clubs are not
literally set forth in the foregoing definition of "securities," we have
nevertheless considered whether the Equity Memberships may be regarded
as the equivalent of "stock" or another form of "securities" in this
instance, because the Equity Memberships carry certain voting rights and
no other voting instruments will be issued by the Club.
We believe that the Equity Memberships to be offered and sold by the
Club clearly should not be treated as the equivalent of "stock" for the
purpose of applying Section 2(a)(1) of the Act. In Tcherepnin v.
Knight, 389 U.S. 332, 339 (1967), the Court identified the right to
receive "dividends contingent upon an apportionment of profits" as the
most common feature of stock, and in Landreth Timber Co. v. Landreth,
471 U.S. 681 (1985), the Court set forth several other characteristics
traditionally associated with stock: (i) negotiability, (ii) the ability
to be pledged or hypothecated, (iii) voting rights in proportion to the
number of shares owned, and (iv) the ability to appreciate in value. 471
U.S. at 686 (citing United Housing Foundation, Inc. v. Forman,
421 U.S. 837, 851.
The Equity Memberships bear little or no resemblance to stock as
characterized by the Tcherepnin and Landreth Courts. The Equity
Memberships do not have dividend or distribution of income rights and
may not be pledged or hypothecated except to secure purchase money
obligations. The Equity Memberships may only be transferred back to the
Club, and then only under certain limited circumstances. Although an
Equity Membership conceivably could increase in value, the ability of a
member to realize a "profit" upon any such appreciation is so restricted
and contingent that it will not be part of the Club's solicitation
effort and cannot reasonably form the basis of a profit motive to
acquire a membership.
Moreover, because the Club's obligation to refund the Membership
Contribution of an Equity Member is contingent, we believe that such
obligation coupled with the Equity Membership does not constitute a
"note", "bond" "debenture" or other "evidence of indebtedness" in the
sense that such terms are used in Section 2(a)(1) of the Act.
Since the Equity Memberships do not fall plainly within the usual
concept or definition of "stock", "note", "bond", "debenture" or
"evidence of indebtedness" as set forth in Section 2(a)(1) of the Act,
we have considered whether the Equity Memberships would otherwise be
deemed "securities" by reason of being "investment contracts" or
"instruments commonly known as securities" for purposes of Section
2(a)(1) of the Act. In Landreth, supra, 471 U.S. at 689, the
Court suggested that the proper test for determining whether a
particular instrument which is not clearly within the definition of
"stock" as set forth in Section 2(a)(1), or which is otherwise of an
unusual nature, is an "investment contract" or an "instrument commonly
known as a security", is the "economic realities" test set forth in
SEC v. W.J. Howey Co.,
328 U.S. 293 (1946). In evaluating the
economic realities of a transaction, the test is whether "the scheme
involves an investment of money with profits to come solely from the
efforts of others", Howey, 328 U.S. at 301. The Howey
test, as explained by the Court in Forman, 421, U.S. at 852, "embodies
the essential attributes that run through all of the Court's decisions
defining a security".
Applying the Howey test to the characteristics of the Equity
Memberships to be offered and sold by the Club, it is clear that such a
membership would not be an "investment contract" or other "instrument
commonly known as a security" as those terms are used in Section 2(a)(1)
of the Act. While the persons who acquire Equity Memberships will do so
in exchange for money, and the common enterprise requirement arguably
may be deemed to be met either through the horizontal commonality
existing in the dependent relationship among the members or the vertical
commonality represented by the dependency of such members upon the
actions of the Seller, the persons to whom such memberships will be
offered will be informed not to expect, and will not have any reasonable
expectation of deriving, "profits" from the ownership of an Equity
Membership.
In Forman, supra, the United States Supreme Court elaborated
on the "profits" aspect of the Howey test:
By profits, the Court has meant either capital appreciation resulting
from the development of the initial investment, as in Joiner, supra
(sale of oil leases conditioned on promoters' agreement to drill
exploratory wells), or a participation in earnings resulting from the
use of investors' funds, as in Tcherepnin v. Knight, supra
(dividends on the investment based on savings and loan association's
profits). In such cases the investor is "attracted solely by the
prospects of a return" on his investment. Howey, supra, at 300.
By contrast, when a purchaser is motivated by a desire to use or consume
the item purchased -- "to occupy the land or to develop it themselves,"
as the Howey Court put it, ibid -- the securities laws do not
apply. See also Joiner, supra, 421 U.S. at 852.
In the present situation, Equity Members of the Club will not be
entitled to share in any income generated by the operation of the Club,
nor will the Club pay to its members any dividends or make any
distributions of any kind, except upon liquidation. The Club itself will
be operated as a not-for-profit corporation under Arizona law. Some
possibility for realization of capital appreciation does exist, but we
believe that it is, as were the opportunities for income from the
leasing of commercial facilities in Forman, "far too speculative
and insubstantial" to create in the mind of any reasonable purchaser an
"expectation of profit in the sense found necessary in Howey."
Forman, supra, 421 U.S. at 856.
Equity Members will not be permitted to transfer their memberships
other than to the Club (or to immediate family via the Club) and members
should not expect any "profit" from their transfer. The Club will be
obligated to refund a portion of the Membership Contribution of a
surrendered Equity Membership only after a person acceptable to the Club
is willing to acquire the surrendered membership and has paid the
required Membership Contribution for membership. Until the initial
issuance of all of the Equity Memberships permitted to be issued in the
Club, the surrendered Equity Membership shall be placed on a waiting
list to be reissued (one surrendered Membership resold to every 3
unissued Memberships sold). The Club will maintain a waiting list of
eligible persons who desire to acquire an Equity Membership. Persons who
own a Las Sendas Home in the Community may at any time arrange for the
Club to repurchase their Equity Membership and issue the Equity
Membership to the purchaser of their home. The purchaser must be
approved for membership and pay the then current Membership
Contribution.
Upon the successor member's acquisition of a surrendered member's
Equity Membership and payment of the Membership Contribution in full,
the amount to be returned to the resigned member will be equal to 80% of
the Membership Contribution then charged by the Club for the resigned
member's class of Equity Membership with the remaining 20% equaling the
Administration Fee charged by the Club. Administration Fees may be
increased in the future by the Club as provided in the Bylaws. Thus, no
member could profit on the transfer of a membership, unless at the time
of such transfer the membership contribution has increased from the
Membership Contribution previously paid by the resigned member. There
can be no assurance that a member will ever receive a return of any part
of his Membership Contribution for membership let alone a profit, since
such return is dependent upon the Club's sale of additional Equity
Memberships and the availability of a subsequent purchaser for such
member's membership.
Prior to Closing, the Membership Contribution for a membership will
be fixed by the Club's Seller-controlled Board. After Closing, the
Membership Contribution for memberships will be fixed by the Club. In no
event will the Membership Contribution ever be determined through direct
negotiations between the resigning member and the successor member.
All members will be informed of these substantial limitations upon
both the transferability of the memberships and the opportunity to
profit therefrom and will be informed of the unsuitability of such
memberships as investments. Accordingly, purchasers of Equity
Memberships will not be promised, and reasonable purchasers should not
expect, any "profits" from such memberships. See Forman, supra,
and the following no-action letters involving the offer and sale of club
memberships, in all of which letters the Division took a no-action
position although a surrendering member might have realized a profit on
the transfer of his membership back to the club: Black Diamond Club,
Inc. (October 20, 1986); Jacaranda Country Club, Inc. (October 30,
1986); Spruce Creek Country Club, Inc. (March 7, 1986); The Martin Downs
Country Club, Inc. (December 20, 1985); Palm-Aire Country Club at
Sarasota, Inc. (September 17, 1985); The Haig Point Club, Inc. (August
30, 1985); Boca West Club, Inc. (February 26, 1985); La Salle Club
(October 11, 1984); Twin Herons Golf Club, Inc. (May 31, 1982) Boca Lago
Country Club, Inc. (October 14, 1981); Bear's Paw Country Club (July 25,
1980); and Woodmont Country Club (May 4, 1979). See also the letter
dated October 26, 1981 from Peter J. Romeo, then Chief Counsel, to
Curtis A. Prins, relating to a no-action request on behalf of Cypress
Run Golf Club.
Additionally, the Division has previously issued no-action letters
where memberships were being offered without registration under similar
circumstances. See Olde Beau Golf and Country Club, Inc. (June 11,
1991); Ballenrose Country Club, Inc. (September 28, 1989); Laurel Creek
Country Club, Inc. (November 3, 1989); The River Run Club, Inc. (August
11, 1988); Holly Hill Country Club, Inc. (March 29, 1988); Treyburn
Country Club, Inc. (November 13, 1987); River Oaks Club, Inc. (June 18,
1987); Naples Bay Yacht Club, Inc. (January 27, 1987); The Grand Harbor
Club, Inc. (December 30, 1986); Keswick Country Club, Inc. (December 12,
1986); The River Club at Grand Harbor, Inc. (September 18, 1986); and
Mira Vista Country Club (July 15, 1986).
Finally, to the extent that the risk capital test for determining the
existence of a security may influence the Division's evaluation of this
request, as such test was first articulated in Silver Hills Country
Club v Sobieski, 55 Cal.2d 811, 361 P.2d 906 (Cal. 1961), we believe
that the Equity Memberships would not be deemed to be securities under
such test. In the Silver Hills case, no facilities were in place
or even under construction and the developer planned to use the proceeds
from the sale of memberships as the start-up financing in connection
with the construction of the facilities.
Our situation is clearly distinguishable from Silver Hills, in that
the Seller is not dependent upon the proceeds from the sale of any
Equity Membership to fund the construction of the Club Facilities nor
maintain operations prior to the Closing. The golf course is already
open for play, as is the existing Clubhouse. While the Seller plans to
use the proceeds received from the Club from the sale of Equity
Memberships for general business purposes, including possibly the
repayment of indebtedness incurred to construct the Clubhouse Expansion,
the Seller does not need such funds to build the Clubhouse Expansion and
will secure all financing necessary to complete the Clubhouse Expansion.
Furthermore, the Membership Contributions that will provide Option
Payments towards the Clubhouse Expansion Price will be escrowed for the
Club's benefit, and construction will not begin until the Seller's
financing for the Clubhouse Expansion is secured. As such, it is not
soliciting risk capital with which to develop a business for profit, and
therefore the Silver Hills decision is inapposite. Furthermore, NSM is
funding all operating deficits through Closing, and the Club is not
obligated to exercise the Option until after the Clubhouse Expansion is
complete.
Conclusion
In view of the foregoing, we respectfully request your confirmation
that the Division will not recommend enforcement action to the
Commission if Equity Memberships in the Club are offered and sold in the
manner described herein without registration under the Act. The Club
plans to commence offering Equity Memberships in early 2004.
Accordingly, we appreciate your responding to our request as soon as
possible. If for any reason you conclude that you cannot respond
affirmatively to our request, we would appreciate the opportunity to
discuss the matter with you prior to the preparation of your response
and ask that you call the undersigned at the phone number above or Ms.
Romy Schlecht of our firm at 602-262-5830.
Very truly yours,
JENNINGS, STROUSS & SALMON, P.L.C.
By /s/ Robyn Nordin Stowell
RNS/mag
cc: T. Romy Schlecht, Esq.
http://www.sec.gov/divisions/corpfin/cf-noaction/lassendas030204.htm
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