Communication no. 0385340 of 28 April 2020

Sent to Lwy. ... and c.c. to Company...

Subject: Answer to the question concerning 'Request for a prior opinion on the correct classification of a real estate transaction relating to the purchase and sale of a real estate bare ownership'.

By letter of......, You, on behalf of the Company, submitted to Consob the following question, concerning ‘a real estate transaction relating to the purchase and sale of bare ownership’.

In particular, the Company intends to carry out the following operation:

1. the owner of a real estate may express an intention to sell the bare ownership.
2. if the Company is interested in the real estate in question, it submits a proposal for the purchase of bare ownership undertaking a commitment to purchase on its own or for a person to be appointed;
3. in the case of a purchase for person to be appointed, where the Company finds a person interested in the purchase of the bare ownership, it concludes a contract with that promissory purchaser as person to be appointed in the final deed. One or more of the following clauses would be included in that contract:

1. “Put clause”, which allows the purchaser to (re)sell the bare ownership to the Company, within a specified period of time and, as stated in the question, “for a price higher than the purchase price of bare ownership”;
2. “Call clause”, according to which the Company has the option ‘to [re]purchase from the purchaser the full ownership of the real estate... at a fixed price and within a fixed period’;
3.  “Alternative clause” (alternative to the described Put and Call clauses), according to which the Company “upon the death of the usufructuary shall acquire from the promissory purchaser, at that time become full owner, the full ownership of the property. As stated in the question, “in this case it will be certain that the real estate (the full ownership) will be sold in the future  at a price fixed in an amount that includes the price paid by the promissory purchaser for the purchase of the bare ownership, increased by an additional amount as remuneration for the capital usage by the promissory Purchaser in addition to a sum as remuneration for the custody service”.

In particular, the Company asked whether the inclusion in the contract with the promissory purchaser of one of the aforementioned clauses “Put Option”, “Option Call” and “Alternative Clause” “misrepresents that contract into an investment contract on a financial product, instead of remaining a contract for the sale of real estate bare ownership”.

In this regard, the following considerations are made.

In general terms, Article 1, para 1 letter u of Legislative Decree no. 58/1998 (‘Consolidated Law on Finance’) defines financial products as both the typified features of “financial instruments” and “every other form of investment of a financial nature”, outlining in the latter case a category capable of including ‘atypical’ forms of financial investment. Since, in the present case, the activity examined clearly does not concern a ‘financial instrument’, it must be assessed whether the contract which the Company intends to propose can be classified as ‘other form of investment of a financial nature’.

According to CONSOB’s consolidated approach, are considered as financial products sub specie of investment of a financial nature the investment proposals involving the following three elements at the same time: (i) an investment of capital; (ii) a promise/expectation of a return of a financial nature; (iii) the assumption of a risk connected to the investment of capital[1]. The category of financial products may include only financial products for money collection and not also those for disbursement (such as mortgage contracts, leasing, etc.) [2].

In the case of ‘financial product’, the investment must therefore be ‘financial in nature’. In that regard, in view of the need to contain the margins of uncertainty in the identification of the relevant cases - especially in the presence of atypical cases - Consob distinguished between ‘financial investment’ and ‘consumer investment’, pointing out that in the first case the investor confers his money on the basis of a promise/expectation of profit, namely, to increase the resources invested while, in the second case, the expenditure is essentially aimed at the enjoyment of the asset, namely, the transformation of its economic availability into real assets capable of immediately filling needs[3].

Therefore, in uncertain cases, in order to qualify the investment as a financial investment, for the purposes of bringing the investment offered under the concept of ‘financial product’[4], it is strictly necessary to identify the prevalence of the financial aspect, as a causal element of the proposed contract (i.e., internal element to the contract) over that the usage of the asset

The Court of Cassation (see judgment No 2736/2013) has also indicated that a contract is capable to be qualified as a “financial investment” when it presents a “financial consideration” that is when in the agreement’s structure itself (and not outside it) the following elements characterizing this form of investment are present and prevailing: the investment of capital, the expectation of a financial return and the risk related to the investment of capital.

Therefore, the elements needed to qualify an operation as a financial operation are to be found in the objective contractual agreements/mechanisms (they are, therefore, intrinsic elements of the transaction).

The contractual proposals for the immediate sale of tangible goods assume the characteristics of an offer of financial product when they explicitly include, promises of return, including through related agreements.

More specifically, an investment of a financial nature, possibly linked to the purchase of tangible assets, occurs where:

• the sale of the material asset is linked to the promise of a predetermined or predeterminable future remuneration on the basis of predefined parameters and in proportion to the price paid by the purchaser, or generated by an economic activity carried out by the proposer through the management of sums of money entrusted to him by investors;
• it is proposed in favor of the purchaser, who decides to dispose of the asset, a specific form of return different, linked and/or further to the value (real or presumed) of the asset purchased.

In the light of the above, the commitment by the investment proposer - or a related entity - to repurchase the asset at an “higher” price also through contractual agreements related to the ‘main’ contract constitutes the promise of a return of a financial nature, linked to the investment of the capital for the purchase of the asset, and suggests the financial nature of the overall contractual transaction and its classification in the category of financial products.

In that regard, the sale of the material asset and the agreements relating to its repurchase must be capable of being classified as parts of a unitary transaction, as is the present case.

All mentioned and considered, with specific reference to each of the contractual clauses, we note the following.

A. Put Clause

Although the signing of the sale agreement in which the Company would like to insert the Put clause determines the (complete) transfer of the bare ownership to the purchaser, the fact that the Company is contractually obliged, in accordance with the terms established, to repurchase the bare ownership at the simple request of the purchaser, induces to consider the financial consideration prevalent over usage consideration. It should be considered, in fact, that the commitment to buy back contractually assumed by the Company against the promissory purchaser is accompanied by the prospection of a return of a financial nature paid by the Company in the form of an increase in the purchase price at least from the fifth year.

While it is true that the obligation to buy back by the Company is activated (possibly) if the investor exercises his right to (re)sell, it is also true that this clause is an integral part of the contract and characterizes its nature, giving the party who gave its capital (the investor) the choice to obtain the repayment of the capital with the (financial) remuneration of the same.

Therefore, in the light of what has emerged, the inclusion of the Put clause within the contract would determine the prevalence of the financial consideration and would qualify the same as a ‘financial product’. This is because the exercise of the put option by the customer would trigger the Company’s obligation to buy back the asset at an increased price (from at least the 5th year) which would represent the return of a financial nature.

B. Call clause

The inclusion of the Call clause in the purchase agreement between the [Company] and the promissory purchaser would grant to the Company being an option to be exercised within 24 months “since it will aware of the cessation of usufruct ("i.e., from the moment it becomes aware of the consolidation of the property right in the hands of the purchaser).

The exercise of such option will oblige the original buyer to transfer the full ownership of the asset to the Company at a fixed price or alternatively - if the market value of the real estate is higher (of at least 10 %) than the price indicated in the contract, at the time of exercise of the purchase option  - the original purchaser may provide an irrevocable mandate to the Company to sell the property at the higher market price (the greater  amount will be divided between the parties).

This clause, in so far as it sets up the Company’s right to repurchase at a specific price to be indicated in the contract, could - in the case of promotional campaigns placing a particular emphasis on the income to be derived from the transaction - create in the customer an expectation on the repurchase by the Company at a price higher than the sale price.

C. Alternative Clause

In such case, the physiological conclusion of the contractual relationship is necessarily represented by the repurchase by the Company of the asset in the future (full ownership) at a price fixed in an amount that includes the price paid by the customer for the purchase of the bare property increased by an additional amount as remuneration for the investment of capital by the customer.

That clause, for the considerations set out above about the obligation to buy back, would qualify the contract in question as a form of investment of a financial nature.

* * *

Based on the foregoing considerations, overall, the structure of the transaction in question provides that (a) the customer uses his capital for the purchase of a real estate bare ownership (b) by virtue of that purchase, a predetermined or predeterminable return is promised on the basis of predefined parameters (c) with the consequent assumption of a risk related to the use of the entrusted capital.

On this last point, moreover, ‘since the ‘issuer risk’ is also included in the risk assumed by the investor through the investment, for the purposes of the configurability of a financial product, it is sufficient that there is uncertainty, not as to the amount of the benefit due or the time at which it will be paid, but rather on the capacity of the issuer to return the tantudem [benefit] with the promised increase’ (see  Court of Cassation judgment No 5911/18).

Therefore, the consideration of the contract in question is the production of a financial return for the use of capital conferred by the customer that receives the return. The customer, therefore, confers its money with an expectation of profit, i.e., an increase in the funds invested (the return is the remuneration on the paid-up capital).

In the light of the characteristics of the contract set out in the question, it is therefore deemed that the contract falling within the category of ‘financial products’ referred to in Article 1 para1 letter. u of the Consolidated Law on Finance, understood as ‘any other form of investment of a financial nature’.

Having regard to that, once the contract in question has been qualified as a financial product, it should be noted that the transaction in question shows the characteristics of the standardisation[5], given the uniformity of the overall contractual regulation submitted to the investors, and of the potential unity[6] given its profiled continuity in time and the uniqueness of the aims and modalities characterizing its concrete expression.

Therefore, the systematic provision of clauses de quibus in the contractual forms that were to be offered to the public of investors would constitute an offer to the public of financial products and would require the publication of the prospectus, in the absence of causes of exemption provided for in Article 100 of Consolidated Law on Finance and in Article 34-ter of Issuers’ Regulation (Consob Regulation no. 11971 of 14 May 1999).

In the light of all the above - deemed to exist the elements of standardisation and uniqueness of the offer - it is pointed out that, if the Company promotes in the future the conclusion of the contracts in question for a total consideration, calculated over a period of 12 months, not less than EUR 8,000,000 (see Article 34-ter, para 1, letter c, Issuers Regulation, adopted by Consob Resolution No 11971 of 14 May 1999), there would be all the elements constituting an offer to the public of financial products, with the obligation to publish the prospectus pursuant to Article 94 of Consolidated Law on Finance. For the calculation of that threshold, reference must be made to the amount initially offered and not to the total countervalue collected with the contracts signed. As a general rule, for the purposes of applying the rules on public offers, is taken of the fact that the offer is ‘in incertam personam’, addressed to the indistinct audience of potential investors and for a countervalues exceeding the said threshold or, in any event, for indeterminate countervalue at the time of the lunching of the offer, and it does not matter, for the purposes of triggering the above exemptions, that the value of the subscriptions collected is actually below the threshold as lower than the estimated value, even if the countervalue is initially indefinite. Therefore, to benefit from the above exemption hypothesis, the countervalue of the transaction must be below the above threshold and this must be evidence by Company documents or relevant documentation prepared by the offeror at the time of the launch of the offer.

Since the offer concerns a financial product, Consob determines, at the request of the issuer or the offeror, the contents of the above-mentioned prospectus, pursuant to Article 5 of the Issuers Regulation[7].

Finally, if the offer was made through distance communication techniques or through an off-site offer activity, it would require authorisation for the placement service or, possibly, the need for the proposer to make use of a financial intermediary authorised to carry out the latter service.

The GENERAL DIRECTOR
Mauro Nori