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U.S. Securities and Exchange Commission

Securities Act of 1933 - Section 2(a)(1)

No Action, Interpretive and/or Exemptive Letter:

March 29, 2004

Response of the Office of Chief Counsel
Division of Corporation Finance

Re: WA Golf Company, L.L.C.
     Liberty National Golf Club ("Liberty")
     Incoming Letter dated March 29, 2004

Based upon the facts presented, the Division will not recommend enforcement action to the Commission if Liberty, in reliance upon your opinion of counsel that registration is not required, offers and sells the Club Memberships, as such term is defined in your letter, without registration under the Securities Act of 1933.

Your request for confidential treatment pursuant to Rule 81(b) of the Commission's Regulation Concerning Information and Requests [17 C.F.R. 200.81(b)], has been granted until the earlier of (a) 120 days from the date of this response; or (b) the date that any information in your letter or this response is made publicly available by any parties associated with Liberty National Golf Club.

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 questions presented.

Sincerely yours,

Andrew J. Brady
Special Counsel


Incoming Letter:

March 29, 2004

Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Liberty National Golf Club
     Securities Act of 1933, 2(a)(1)

Dear Sir or Madam:

WA Golf Company, L.L.C., a Delaware limited liability company that currently proposes to do business as Liberty National Golf Club (the "Club"), has been formed for the purpose of constructing, owning and operating certain recreational facilities for the primary use and benefit of its members and their guests. The Club proposes to offer Club Memberships (as defined below) for sale without registration under the Securities Act of 1933, as amended (the "Securities Act").

On behalf of the Club and based on information provided to us by the Club, we are requesting, pursuant to Release No. 33-5127 (January 25, 1971), as supplemented by Release No. 33-6269 (December 5, 1980), the advice of the Division of Corporation Finance (the "Division") of the Securities and Exchange Commission (the "Commission") that it will not recommend any enforcement action to the Commission if the Club offers, sells and delivers Club Memberships, in the manner and under the circumstances described below, without registration of such Club Memberships under the Securities Act.

Background Facts

In Jersey City, New Jersey, on the western shore of New York Bay, the Club will, as part of a planned mixed-use development (the "Liberty National Development"), construct an eighteen-hole golf course, golf practice facilities, clubhouse and related facilities (the "Club Facilities"). It is anticipated that the eighteen-hole golf course and golf practice facilities will be completed and open for play in 2006 and that the clubhouse will be completed and open for use in 2007. The Club reserves the right to add additional facilities, in its sole discretion.

The Club intends to sell a distinct class of up to thirty-five (35) equity memberships (the "Founder Memberships") to accredited investors pursuant to an offering under Regulation D of the Securities Act. Once certain minimum sales thresholds are reached, the proceeds from the sale of the Founder Memberships will be available for use in the construction of the Club Facilities and, unlike the proceeds from the sale of Club Memberships that are the subject of this letter, will be "at risk." Founder Members will have certain privileges to use the Club Facilities. The offer and sale of Founder Memberships are not the subject of this letter.

In addition to the Founder Memberships, the Club proposes to sell two classifications of non-equity membership known as "Golf Memberships" and "Corporate Golf Memberships" (collectively, the "Club Memberships"). The term "Club Memberships" does not include the Founder Memberships or any other classifications of memberships that the Club may offer from time to time in the future. A person who obtains a Golf Membership is sometimes referred to herein as a "Golf Member" and an entity that obtains a Corporate Golf Membership is sometimes referred to herein as a "Corporate Golf Member" (the Golf Members and Corporate Golf Members are referred to herein collectively as the "Club Members" or "Members"). Subject to certain limited exceptions, the total golf-privileged memberships (including the Founder Memberships) of the Club will not exceed three hundred ten (310).

Each Club Membership constitutes a non-exclusive license for a Club Member and such Member's family members and guests to use the Club Facilities in accordance with the Club's rules and regulations and upon the payment of the dues, fees, minimums (if any) and other charges established by the Club from time to time (the "Club Fees"). Memberships at the Club are being offered exclusively for the purpose of permitting persons obtaining membership privileges at the Club to obtain the recreational use of the facilities provided at the Club. Membership at the Club is non-equity and non-participatory. A Club Membership does not imply any right or privilege to participate in or to administer business policies of the Club or maintenance of the Club Facilities and is not an investment in the Club or the Club Facilities. The Club will pay all operating deficits and retain all operating surpluses, and Club Members will neither be subject to assessments in the event of an operating deficit nor eligible for payments of any amounts in the event of surplus. Club Members are not entitled to receive any income, dividends or other distributions from the operation of the Club. Club Members are also not subject to assessments for the costs of constructing the Club Facilities or for any capital improvements to the Club Facilities. The Club (or a separate entity) will manage and operate the Club Facilities, and will have the exclusive authority to establish Membership Deposits (as described below), Club Fees, rules and regulations, and control the management and affairs of the Club Facilities. Club Members will have no voting privileges and will not be permitted to become involved in the management or operation of the Club (with the exception of an advisory board that will not have the power to bind the Club in any way).

A prospective member desiring a Club Membership must deliver to the Club a fully completed and signed Application for Membership Privileges, Membership Agreement and the required portion (described below) of the Membership Deposit. Unless otherwise determined by the Club, each applicant must be sponsored by two existing members of the Club. The Club (or its Membership Committee) shall evaluate the Applications for Membership Privileges. The Club, in its sole discretion, retains the right to accept or reject any or all applications. An applicant approved for membership shall be notified in writing that the Application for Membership Privileges has been acted upon favorably. In the event an Application for Membership Privileges is not acted upon favorably, the applicant shall be so notified in writing and the Club shall return to the applicant one hundred percent (100%) of the portion of the Membership Deposit previously paid to the Club, without interest, within fourteen (14) days.

In order to obtain a Club Membership, Club Members will be required to pay a Membership Deposit to the Club. It is anticipated that the Membership Deposit for Golf Members will initially be $500,000 and the Membership Deposit for Corporate Golf Members will initially be $750,000, though the Club may increase or decrease such amounts from time to time in its sole discretion. Club Members will not be able to influence the amount of the Membership Deposit. Initially, the Membership Deposits will be payable in installments as follows:

  • Five percent (5%) of the required Membership Deposit (disregarding $100,000 of the Membership Deposit, in the case of Golf Members, and $200,000 of the Membership Deposit, in the case of Corporate Golf Members, for purposes of such calculation) shall be paid (subject to refund as set forth above) upon submission of an Application for Membership and Membership Agreement to the Club;
     
  • Forty-five percent (45%) of the required Membership Deposit (disregarding $100,000 of the Membership Deposit, in the case of Golf Members, and $200,000 of the Membership Deposit, in the case of Corporate Golf Members, for purposes of such calculation) shall be paid within fifteen (15) days after the date of written notice from the Club informing the Members of the occurrence of the earlier of: (i) the initial issuance of one hundred twenty-five (125) Club Memberships or (ii) actual construction of the eighteen-hole golf course having commenced;
     
  • Thirty percent (30%) of the required Membership Deposit (disregarding $100,000 of the Membership Deposit, in the case of Golf Members, and $200,000 of the Membership Deposit, in the case of Corporate Golf Members, for purposes of such calculation) shall be paid within fifteen (15) days after the date of written notice from the Club informing the Members that the eighteen-hole golf course is open for play;
     
  • Twenty percent (20%) of the required Membership Deposit (disregarding $100,000 of the Membership Deposit, in the case of Golf Members, and $200,000 of the Membership Deposit, in the case of Corporate Golf Members, for purposes of such calculation) shall be paid within fifteen (15) days after the date of written notice from the Club informing the Members that the clubhouse is open for use (the "Clubhouse Payment"); and
     
  • $100,000, in the case of a Golf Member, or $200,000, in the case of a Corporate Golf Member, shall be paid within one (1) year after the due date of the Clubhouse Payment.
     

As a general rule, the family members of a Club Member may only use the Club Facilities upon payment of the then-applicable guest fees charged by the Club. However, a Club Member may add family privileges ("Family Privileges") to such Member's Club Membership upon payment by the Member of an additional Membership Deposit of $100,000 (subject to change from time to time in the Club's sole discretion), with eighty percent (80%) of such amount due within fifteen (15) days after the date of written notice from the Club informing the Members that the eighteen-hole golf course is open for play and the remaining twenty percent (20%) due within fifteen (15) days after the date of written notice from the Club informing the Members that the clubhouse is open for use. A Club Membership with Family Privileges will entitle the spouse of the applicable Golf Member or Corporate Golf Membership designee, as well as any unmarried children of such Golf Member or designee under the age of twenty-six (26) who live with such Club Member or designee or attend school on a full-time basis, to use the Club Facilities without the payment of any guest fee. It is anticipated that Family Privileges will require the payment of additional dues and family members may have limited rights to preferred tee times during peak periods. Family members eligible to exercise Family Privileges shall not be counted against the cap on the number of golf-privileged memberships at the Club. Any references in this letter to the Membership Deposit paid by a Member shall be deemed to include any additional Membership Deposit paid in respect of Family Privileges.

If a Member fails to pay a Membership Deposit installment when due, the Club may terminate the Membership of such Member and the Club shall be entitled to retain any previous installments paid by such Member. In no event shall a Member be entitled to a refund of amounts previously paid to the Club if such Member is in default under its obligations to pay any portion of the Membership Deposit.

Until the eighteen-hole golf course has reached substantial completion and is open for play, the Club will provide assurance either of completion or that the Membership Deposits paid by Club Members will be refunded in the event of non-completion. The Club will do this by placing all Membership Deposits in an escrow account with an independent third-party financial institution until (i) the eighteen-hole golf course has reached substantial completion and is open for play, (ii) the Club posts a letter of credit, bond or similar security with a third party in the amount of the cost of completing the construction and opening of the eighteen-hole golf course and such third party agrees to complete those facilities on behalf of the Club Members should the Club fail to do so, or (iii) the Club posts a letter of credit, bond or similar security with a third party in an amount equal to the amount of Membership Deposits to be released from the escrow account so that one hundred percent (100%) of such Membership Deposits released from the escrow account shall be returned to the Club Members in the event that the Club fails to complete the construction and opening of the eighteen-hole golf course.

The Club will return to each Club Member one hundred percent (100%) of the Membership Deposit paid by such Club Member, without interest (less any outstanding Club Fees owed to the Club at that time), thirty (30) years after the date of the Club's approval of the Club Member's application for Club Membership. In addition, the Club reserves the right to terminate the membership program or to terminate any or all Club Memberships with or without cause at any time. In the event of such a termination without cause, the Club would return 100% of the Membership Deposit, without interest, paid by the affected Member(s).

Club Memberships will not be transferable in the open market. Upon the death of a Golf Member, the Golf Membership may pass to the Member's surviving spouse without additional payment or, if that Member has no surviving spouse, through the Club to an adult child of the Member upon the approval of the Club and the payment of a fee in the amount of the difference between the Membership Deposit paid by the deceased Member and the then applicable Membership Deposit being charged by the Club at the time of the Member's death. During the lifetime of a Golf Member, such Member may transfer through the Club his or her Golf Membership only to (i) an adult child of such Member upon (a) the approval of the Club, (B) the payment of a fee in the amount of the difference between the Membership Deposit paid by the Member and the then applicable Membership Deposit being charged by the Club at the time of such transfer and (C) delivery by the Member to the Club of an affidavit attesting that the Member received no consideration for the transfer of the Golf Membership, or (ii) the Club by means of resignation. A Corporate Golf Member shall designate one person (an officer, director, partner, owner or employee of the Corporate Golf Member) as the designee of the Corporate Golf Membership privileges. Corporate Golf Members may change the designee upon approval of the Club and payment of a non-refundable fee.

If a Club Member wishes to resign from the Club, such resignation will become effective only upon written notice to the Club and payment of the Membership Deposit and all Club Fees due to the Club in full. Once the resignation becomes effective, the resigned Club Membership will be placed on the applicable resigned membership list (there will be one list for resigned Golf Memberships and a separate list for resigned Corporate Golf Memberships) in the order of resignation on a first-come, first-served basis. Resigned Members who have been placed on a resigned membership list must continue to pay the required Club Fees until the resigned Club Membership has been reissued by the Club. Once placed on the appropriate resigned membership list, the resigned Member shall not be permitted to rescind the resignation of membership privileges without the prior approval of the Club in its sole discretion and the resigned Club Membership must be reissued by the Club at the time the membership has rotated to the top of the resigned membership list as described below. The Club will reissue a Club Member's resigned Club Membership only if there is an approved applicant to assume the resigned Member's particular classification of Club Membership.

As long as the Club is offering Golf Memberships for initial issuance, then every fourth Golf Membership issued shall be the resigned Golf Membership on the resigned membership list maintained by the Club for resigned Golf Memberships that has rotated to the top of such resigned membership list, provided a resigned Golf Membership is on such resigned membership list at that time. The other three Golf Memberships issued shall be issued from the Club's unissued Golf Memberships. During the time the Club is not offering Golf Memberships for initial issuance, then every Golf Membership issued shall be the resigned Golf Membership on the resigned membership list maintained by the Club for resigned Golf Memberships that has rotated to the top of such resigned membership list.

As long as the Club is offering Corporate Golf Memberships for initial issuance, then every fourth Corporate Golf Membership issued shall be the resigned Corporate Golf Membership on the resigned membership list maintained by the Club for resigned Corporate Golf Memberships which has rotated to the top of such resigned membership list, provided a resigned Corporate Golf Membership is on such resigned membership list at that time. The other three Corporate Golf Memberships issued shall be issued from the Club's unissued Corporate Golf Memberships. During the time the Club is not offering Corporate Golf Memberships for initial issuance, then every Corporate Golf Membership issued shall be the resigned Corporate Golf Membership on the resigned membership list maintained by the Club for resigned Corporate Golf Memberships which has rotated to the top of such resigned membership list.

A resigning Golf Member or Corporate Golf Member that owns a residence at the Liberty National Development will have the opportunity for a thirty-day period immediately following the closing of the sale of their residence at the Liberty National Development to request that the Club reissue the resigned Member's Club Membership to the purchaser of their residence. Members will have this opportunity even if all of the Club Memberships have not yet been issued, there are resigned Club Memberships on the resigned membership list or there are persons on the Club Membership reservation list desiring to obtain a Club Membership. In order for the subsequent purchaser of the residence to obtain a Club Membership, the resigned Member must have paid to the Club such Member's Membership Deposit and all Club Fees in full by the time of application by the purchaser, the purchaser must be approved for membership and the purchaser must pay the Membership Deposit charged by the Club at that time for such Club Membership.

A resigned Member may elect to receive, upon re-issuance of such Member's Club Membership, a transfer payment (a "Transfer Payment") equal to a certain pre-determined percentage (not to exceed one hundred percent (100%)) of the Membership Deposit previously paid by that Member. The amount of Transfer Payment to which a Member may be entitled upon a resignation from the Club will be determined by the Club in its sole discretion and will be set forth in the Membership Agreement signed by such Member at the time of joining the Club. Initially, the Transfer Payment shall be equal to the lesser of (i) one hundred percent (100%) of the Membership Deposit paid by the resigned Member to the Club, without interest, or (ii) one hundred percent (100%) percent of the Membership Deposit charged by the Club for the resigned Member's classification of membership at the time the resigned Member's membership is reissued by the Club to a new Member. In no event shall the Transfer Payment ever be more than the actual Membership Deposit previously paid to the Club by the Member. The difference, if any, between the Membership Deposit paid to the Club by the new Member and the Transfer Payment paid to the resigned Member shall be retained by the Club. Any resigned Member electing to receive a Transfer Payment will not be entitled to receive a refund of such Member's Membership Deposit upon expiration of the applicable thirty-year period.

In the event that an aggregate of one hundred twenty-five (125) Golf Memberships and Corporate Golf Memberships have not been issued and the Club has not commenced the actual construction of the eighteen-hole golf course within eighteen (18) months after the issuance of the first Club Membership, then the membership program and all memberships at the Club shall automatically be terminated. Upon such termination, one hundred percent (100%) of the portion of the Membership Deposit previously paid to the Club shall be returned to the affected Members, without interest.

All prospective members will be informed that Club Memberships should not be viewed or acquired as an investment and that they should not expect to derive any economic profits from such Club Memberships. Except for the limited transfer provisions described above, Club Memberships cannot be transferred, assigned, hypothecated, sold, conveyed, encumbered, pledged or disposed of in any way.

Legal Analysis

It is our opinion, for the reasons set forth below, that the Club Memberships, 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 Securities Act, and therefore would not be required to be registered in compliance with Section 5 and Section 12, respectively, thereof.

Section 2(a)(1) of the Securities Act (15 U.S.C. 77b(a)(1)) provides that, unless the context otherwise requires:

The 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, preorganization 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 a "security," we have nonetheless considered whether the Club Memberships may be regarded as the equivalent of "stock" or another form of "securities."

We believe that the Club Memberships to be offered and sold by the Club should not be treated as the equivalent of "stock" for the purpose of applying Section 2(a)(1) of the Securities 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. In Landreth Timber Company v. Landreth, 471 U.S. 681 (1985), the Court identified 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 (1975)).

The Club Memberships bear no resemblance to stock as characterized by the Tcherepnin and Landreth Courts. The Club Memberships do not provide for the payment of dividends, but instead provide only for the use of the Club Facilities. The Club Memberships may not be pledged or hypothecated, but may only be transferred (i) to a deceased Member's surviving spouse, (ii) to a Member's or a deceased Member's adult child upon approval by the Club or (iii) back to the Club. The Club Memberships do not entitle a Member to any voting rights or any equity or ownership interest in the Club or the Club Facilities, and Members are not permitted to participate in the management or operation of the Club or the Club Facilities (with the exception of an advisory board that will not have the power to bind the Club in any way). A Member will be entitled to receive upon the resignation and subsequent reissuance of such Member's Club Membership no more than the Membership Deposit that the Member previously paid for such Club Membership. A Member may not share in any appreciation in the value of such Member's Club Membership.

We also believe that the Club Memberships do not constitute a "note," "bond," "debenture," or other "evidence of indebtedness" as such terms are used in Section 2(a)(1) of the Securities Act, since they will bear a strong resemblance to those instruments traditionally excluded from the registration requirements of the Securities Act.

In Reves v. Ernst & Young, 494 U.S. 56 (1990), the Supreme Court held that the term "note" as used in Section 2(a)(1) of the Securities Act "should not be interpreted to mean literally 'any note,' but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts." 494 U.S. at 58. In so doing, the Court adopted the "family resemblance test."

Under the "family resemblance test," a note with a term of more than nine months is not a security if the issuer can demonstrate, by applying the four factors enumerated by the Court, (1) that the note bears a strong family resemblance to one of the categories of notes traditionally excluded from the definition of a security, or (2) that, by examination of the same factors, another category should be added to the list. Reves, 494 U.S. at 67. These categories broadly include notes delivered in consumer financing, notes secured by a mortgage on a home, notes secured by a lien on a small business or its assets, character loans to bank customers, short-term notes secured by an assignment of accounts receivable, and notes formalizing open-accounts. See Id. at 65.

The four factors enumerated by the Reves Court include:

  1. The Motivations of the Seller and Buyer. If the seller's purpose is to raise money for general business use or to finance substantial investments and the buyer is interested primarily in profit to be generated by the note, the instrument is likely a "security." If, however, the note is to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller's cash-flow difficulties, or is to advance some other commercial or consumer purpose, the note is less sensibly described as a "security." Id. at 66.
     
  2. The Plan of Distribution. If there is "common trading for speculation or investment" in the note, and if the note is offered and sold to a broad segment of the public, the note is likely a "security." Id. If, however, the note is sold to a limited group of persons and there are substantial restrictions on the transferability of the note, the note is less likely to constitute a "security."
     
  3. The Reasonable Expectations of the Investing Public. If the public reasonably perceives the notes as investment securities, then the notes are likely to be considered to be "securities." Id. at 66-67.
     
  4. The Need for Protection. If there is some factor that significantly reduces the risk of the instrument, such as the existence of another regulatory scheme or collateralization, then the instrument is less likely to be considered a "security." Id.
     

Applying the "family resemblance" test to the Club Memberships, we submit (a) that the motive of the Club (seller) is to sell consumer-related memberships in a prestigious, up-scale golf club facility, and the motive of the Member (buyer) is to obtain a recreational opportunity and to use the Club Facilities and not to earn a profit (there is no opportunity to earn a profit); (b) there will be no common trading of the Club Memberships sold (they are substantially non-transferable), and the Club Memberships are not being offered to a broad segment of the public; (c) there are no reasonable expectations of economic profit or gain either by the payment of any interest or income on the Club Membership (there is none) or by the sale or resignation of the Club Membership (sale is prohibited and no resigning Club Member will be able to receive more than the amount initially paid for such Member's Club Membership); and (d) the Club will place Membership Deposits in an escrow account with an independent third-party financial institution until either (i) the eighteen-hole golf course is open for play, (ii) the Club posts a letter of credit, bond or similar security with a third party in the amount of the cost of achieving substantial construction and opening for play of the eighteen-hole golf course and such third party agrees to complete those facilities on behalf of the Members should the Club fail to do so, or (iii) the Club posts a letter of credit, bond or similar security with a third party in an amount equal to the amount of Membership Deposits to be released from the escrow account so that 100% of such Membership Deposits shall be returned to the Members in the event that the Club fails to achieve substantial construction of the eighteen-hole golf course and open the eighteen-hole golf course for play. Under this analysis, the Club Memberships should not be considered to be "securities" under Reves.

Because the Club Memberships do not fall plainly within the usual concept or definition of "stock," "note," "bond," "debenture," or other "evidence of indebtedness" as set forth in Section 2(a)(1) of the Securities Act, consideration must be given to whether the Club 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 Securities Act. In Landreth, 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 otherwise is 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 Company, 328 U.S. 293 (1946). In evaluating the economic realities of a transaction, "[t]he test is whether the scheme involves an investment of money in a common enterprise 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 Club Memberships to be offered and sold by the Club, a Club 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 Securities Act. Although the persons who acquire Club 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 Club, the persons to whom such Club Memberships will be offered will be informed not to expect and will not have any reasonable expectation of deriving "profits" from the ownership of a Club Membership. The membership materials will contain the following legend:

"MEMBERSHIPS AT LIBERTY NATIONAL GOLF CLUB ARE BEING OFFERED EXCLUSIVELY FOR THE PURPOSE OF PERMITTING PERSONS OBTAINING MEMBERSHIP PRIVILEGES AT THE CLUB TO OBTAIN THE RECREATIONAL USE OF THE FACILITIES PROVIDED AT LIBERTY NATIONAL GOLF CLUB. MEMBERS OBTAIN A NON-EXCLUSIVE REVOCABLE LICENSE TO USE THE FACILITIES PROVIDED AT LIBERTY NATIONAL GOLF CLUB IN ACCORDANCE WITH THE CLASSIFICATION OF MEMBERSHIP SELECTED BY THE MEMBER. IN NO EVENT WILL A RESIGNED MEMBER BE REPAID MORE THAN THE ACTUAL MEMBERSHIP DEPOSIT HE/SHE PREVIOUSLY PAID TO THE CLUB FOR MEMBERSHIP. THEREFORE, MEMBERSHIP PRIVILEGES SHOULD NOT BE VIEWED OR OBTAINED AS AN INVESTMENT AND NO PERSON OBTAINING MEMBERSHIP PRIVILEGES AT LIBERTY NATIONAL GOLF CLUB SHOULD EXPECT TO DERIVE ANY ECONOMIC BENEFITS OR PROFITS FROM MEMBERSHIP AT THE CLUB."

In Forman, 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 well), 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, ib Id. - the securities laws do not apply. See also Joiner, supra.

Forman, 421 U.S. at 852-53.

In the present situation, Club Memberships will be obtained purely for the purpose of using the Club Facilities without any reasonable expectation of profit. Members will not be entitled to share in any income generated by the operation of the Club and the Club will not pay any income, dividends or other distributions to the Members from the operation of the Club. The Club will make no distribution of any kind to any Members except in three specific instances, each of which we believe to be insubstantial. First, thirty (30) years after the date of application for Club Membership by a Member, the Club will return the full Membership Deposit previously paid by such Member, without interest. Second, the Club may terminate the membership program or terminate any or all Club Memberships. If the Club terminates the membership program or any particular Club Membership without cause, the Club would return the full Membership Deposit previously paid by the Member, without interest. Third, the Club may make a Transfer Payment to resigning Members upon re-issuance of the resigned Club Membership, which in no event shall be greater than the amount of the Membership Deposit previously paid by the Member. We submit that the return of only the Membership Deposit without interest in each case represents a loss, not profit. We believe that these facts could not create in the mind of any reasonable purchaser an "expectation of profit in the sense found necessary in Howey." Forman, 421 U.S. at 856-57. Rather, the expectation of purchasers is to enjoy the use of the Club Facilities.

All prospective Members will be informed of the substantial limitations upon the transferability of the Club Memberships and the lack of an opportunity to profit therefrom and will be informed of the unsuitability of such Club Memberships as investments and advised that they should not acquire Club Memberships as an investment. Accordingly, purchasers of Club Memberships will not be promised, and reasonable purchasers should not expect, any "profits" from such Club Memberships.

Finally, in Reves, the Supreme Court suggested that the risk capital test for determining the existence of a security, as first articulated in Silver Hills Country Club v. Sobieski, 55 Cal.2d 811, 361 P.2d 906 (Cal. 1961), is an "approach that is virtually identical to the Howey test." Reves, 494 U.S. at 64. The Reves Court cited Underhill v. Royal, 769 F.2d 1426, 1431 (9th Cir. 1981) as the source of the risk capital test "identical to the Howey test." Reves, 494 U.S. at 64. Underhill, in turn, cited California Bank v. THC Financial Corporation, 557 F.2d 1351, 1358 (9th Cir. 1977), which in turn cited Silver Hills. Thus, the Silver Hills analysis is the same risk capital test that the Reves Court found "virtually identical" to the Howey test.

Nonetheless, to the extent that the risk capital test for determining the existence of a security may influence the Division's evaluation of this request, we believe that the Club Memberships would not be deemed to be securities under such test. In Silver Hills, the developer used the proceeds from the sale of memberships as the primary means of financing the construction of the facilities. The Court in Silver Hills noted that the sale of memberships by the promoters was motivated by their need to organize and finance the club and stated that "Petitioners are soliciting the risk capital with which to develop a business for profit . . . . Only because [the purchaser of a membership] risks his capital along with other purchasers can there be any chance that the benefits of club membership will materialize." Purchasers of memberships in the Silver Hills Country Club were exposed to the risk that the club facilities would never be completed. In the instant case, no such risk exists. The Club is not dependent upon the proceeds from the sale of Club Memberships to construct the Club Facilities. The Club has available to it a combination of debt and equity financing sufficient to construct and achieve substantial completion of all of the Club Facilities and therefore has the ability to construct and achieve substantial completion of such Club Facilities independent of receipt of the proceeds from the sale of Club Memberships. In addition, Membership Deposits are payable in installments, with $100,000, in the case of Golf Memberships, or $200,000, in the case of Corporate Golf Memberships, not being due until a year after all of the Club Facilities have opened for use, thirty percent of the balance of the required Membership Deposit not being due until fifteen (15) days after the date of written notice from the Club informing the Club Members that the eighteen-hole golf course is open for play and twenty percent of the balance of the required Membership Deposit not being due until fifteen (15) days after the date of written notice from the Club informing the Club Members that the clubhouse is open for use. Accordingly, more than fifty percent (50%) of the required Membership Deposit will not have to be paid until after the golf course is open for play. Moreover, the portion of the Membership Deposit that is payable prior to the time the golf course is open for play will be deposited in a separate escrow account with an independent third-party financial institution until (i) the eighteen-hole golf course has reached substantial completion and is open for play, (ii) the Club posts a letter of credit, bond or similar security with a third party in the amount of the cost of completing the construction and opening of the eighteen-hole golf course and such third party agrees to complete those facilities on behalf of the Club Members should the Club fail to do so, or (iii) the Club posts a letter of credit, bond or similar security with a third party in an amount equal to the amount of Membership Deposits to be released from the escrow account so that 100% of such Membership Deposits released from the escrow account shall be returned to the Club Members in the event that the Club fails to complete the construction and opening of the eighteen-hole golf course. As a result, the Club is not seeking capital from members (other than Founder Members) that will be risked before the benefits of membership in the Club materialize.

In sum, the combination of (i) the installment payment structure for the Membership Deposits, (ii) the escrow arrangement and (iii) the fact that the Club is not dependent upon the proceeds from the sale of Club Memberships to construct the Club Facilities means that, in contrast to Silver Hills, the purchaser of a Club Membership will not be at risk that the Club Facilities will not be completed. The Division has previously issued no-action letters where non-equity memberships were being offered without registration under facts similar to those described herein. See, e.g., Hayfield Country Club (June 25, 1998); Big Island Country Club, L.P. (March 30, 1998); The Mar-a-Lago Club, Inc. (November 23, 1993); Bent Creek Country Club (September 23, 1993); Lake Forest Country Club, Inc. (August 3, 1992); Ivy Hills Country Club (May 23, 1991); The Dominion Club, Incorporated (August 20, 1990); Grasslands Golf and Country Club, Inc. (April 13, 1990).

Conclusion

In view of the foregoing, we respectfully request your confirmation that the Division will not recommend any enforcement action to the Commission if the Club Memberships are offered and sold in the manner described herein without registration under the Securities Act.

The Club plans to commence offering Club Memberships promptly upon receipt of a response from the Division, in the event the Division grants this request. 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 (617) 951-7823.

In compliance with the Commission's procedures, seven (7) copies of this letter are submitted herewith, along with an additional file copy. Please acknowledge receipt of this letter by stamping the file copy and returning it to the undersigned in the enclosed self-addressed envelope.

Please call if you have any questions or need any additional information. Thank you for your assistance.

Sincerely,

Ryan D. Darrah


http://www.sec.gov/divisions/corpfin/cf-noaction/liberty032904.htm


Modified: 08/27/2004