Scope of the Real Estate Brokerage Act and Securities Trading Act in the Sale of Real Estate Companies

Circular/Guidance

The circular applies to:

Securities firms No. 4
Real estate brokerage firms No. 3
Lawyers with real estate brokerage No. 3
Housing cooperatives No. 3

[Editorial note 20.04.2010: References to legal and regulatory provisions in the circular have been amended in accordance with the Real Estate Brokerage Act and Regulation effective from 1 January 2008.]

In the Financial Supervisory Authority's Circular 24/2003, the Authority assumed that both real estate brokerage firms and securities firms with a concession to receive, intermediate, and execute orders could act as intermediaries in the sale of shares in real estate companies where the transaction primarily aims at the transfer of real estate. Based on an interpretative statement from the Ministry of Finance, the Financial Supervisory Authority believes that this starting point should be modified for "transactions whose primary purpose is financial."

This circular replaces Circular 24/2003.

1. Requirements for a real estate brokerage license when intermediating company shares

Pursuant to Section 1-2, second paragraph, item 4 of the Real Estate Brokerage Act, the following is also considered real estate brokerage:

"the trading of shares in companies, cf. the Companies Act Section 1-2, first paragraph, letter a, or shares in limited liability companies or public limited companies that are not listed on a stock exchange, if the trading primarily aims at the transfer of real estate or rights as mentioned in items 1 to 3."

The provision is intended to capture actual real estate trading conducted in the form of company shares, cf. Government Bill No. 59 (88-89), page 35.

The Financial Supervisory Authority has previously assumed that the trading of shares in companies that have no other significant assets than real estate and that do not conduct business other than owning real estate is covered by the definition of real estate brokerage.

In a decision of 12 October 2005 (case 04/2955), which concerned the intermediation of company shares through so-called syndication, the Ministry of Finance assumed that the Real Estate Brokerage Act does not apply to "transactions whose primary purpose is financial."

In the Ministry's decision, it is assumed that the delimitation of the scope of application of the Real Estate Brokerage Act is based on a concrete and discretionary assessment where the decisive factor is the transaction's actual purpose.
The sale of small company shares to many buyers indicates that the transaction is of a financial nature, where the central purpose for the buyer is to achieve satisfactory returns and not to acquire any form of control over the property itself.

Whether the transaction's primary purpose is financial in this context will depend on how central the property itself is to the transaction. Factors in this assessment may include:

the number of buyers/investors offered the opportunity to buy shares or shares in the company,

the number of properties the company owns (if the company owns a number of properties, this is a factor indicating that the characteristics of the individual property are less central, and that the transaction therefore falls outside the Real Estate Brokerage Act),

whether the buyers of the company shares need the protection provided by the Real Estate Brokerage Act, including the broker's duty to investigate and provide information under the Real Estate Brokerage Act regarding the property itself. In assessing whether the buyer has such a need, it is particularly relevant to consider whether the investor intends to use the property for residential, commercial, or other purposes. In addition, it is relevant whether the buyer has a low level of professionalism and needs the person providing the intermediation service to have professional knowledge regarding the trading of real estate.

It will normally not be real estate brokerage where the intermediation involves that the company shares are offered and can be sold to a larger and not pre-defined number of mutually independent investors, and where the investors as a group do not intend to use the property itself, but exclusively have a financial purpose with the purchase, cf. above. With mutually independent investors in this context, it is meant that the group of investors does not have other common interests or connections among themselves beforehand than what follows from the fact that they invest in the same company.

Assistance in the trading of company shares, including shares in general partnerships (KS), limited partnerships (ANS), and limited liability companies, which primarily aims at the transfer of real estate, such that the trading is considered real estate brokerage, cf. the criteria outlined above, can only be offered by real estate brokerage firms according to the rules in the Real Estate Brokerage Act Section 2-1, or by a lawyer pursuant to the Real Estate Brokerage Act Section 1-2, second paragraph, item 2.

Although securities firms can in principle assist as intermediaries in the trading of company shares, it is significant in this type of intermediary business that the intermediary has knowledge of the trading of real estate, and that the parties have protection under the provisions of the Real Estate Brokerage Act. In such cases, the Financial Supervisory Authority considers that securities firms cannot assist in the trading of company shares, unless the firm also has a real estate brokerage license.

The Financial Supervisory Authority assumes as a starting point that business that requires a concession under the Real Estate Brokerage Act does not naturally relate to the exercise of investment service business, cf. the Securities Trading Act (vphl.) Section 8-3. For securities firms applying for a license to conduct real estate brokerage, a dispensation from the prohibition against conducting other business activities may be granted – under specific conditions – if the real estate brokerage in the concrete case has a connection to the firm's investment service business.

2. Assistance in syndication

2.1 Trading of shares
Investment services in connection with financial instruments can only be provided by firms that have permission for this, cf. Securities Trading Act Section 7-1, first paragraph. It is therefore assumed that assistance in the trading of shares in real estate companies that are not considered real estate brokerage cannot be performed by anyone other than securities firms.

2.2 Trading of shares in general partnerships and limited partnerships

Shares in general partnerships and limited partnerships are not considered financial instruments, and assistance in the trading of such shares is not subject to a concession requirement under the Securities Trading Act.

The Financial Supervisory Authority assumes that assistance in the placement and trading of shares in the general partner company of a limited partnership together with shares in the limited partnership, where the share portion does not exceed the minimum limit according to the Companies Act Section 3-1, third paragraph (10 percent), is considered ancillary business and is not subject to a concession requirement under the Securities Trading Act.

Unless the trading of the shares primarily aims at the transfer of real estate, intermediary business will in principle not fall under either the Real Estate Brokerage Act or the Securities Trading Act.

The consequence of the trading not being considered real estate brokerage is that a real estate brokerage firm can only engage in such intermediation if a dispensation is granted under the Real Estate Brokerage Act Section 2-6. The Financial Supervisory Authority will normally grant such dispensation when it comes to commercial real estate projects under specific conditions related to the duty to provide information to the parties.

The Financial Supervisory Authority assumes that securities firms' assistance in syndication in the form of shares in limited partnerships, general partnerships, or similar "has a natural connection" to the exercise of investment service business, cf. Securities Trading Act Section 8-3, first paragraph. The Financial Supervisory Authority draws attention to the fact that Securities Trading Act Section 9-2 on "good business practice" also applies to securities firms that intermediate/facilitate the sale of shares that are not financial instruments.

The Financial Supervisory Authority expects that relevant firms will within a reasonable time adapt their business operations in accordance with the changed legal understanding described.

Eirik Bunæs

Eystein Kleven