The risks of investing in unregulated real estate ventures

“The unusual warning issued by the Israel Securities Authority about the risks of unregulated investments also signals that manipulative actors are trying to enter real estate and exploit market uncertainty, the absence of savings options offering reasonable interest and the financing difficulties facing real estate projects. Investors should be cautious and carefully consider investments in real estate ventures lacking external supervision, and closely examine their business models, even when enticing advertisements promise high, unrealistic returns,” says attorney Uri Shiloh, a partner at E. Shiloh & Co.
“Recent low interest rates have led to numerous advertisements for real estate investment funds and assorted ventures promising fixed, high returns through agricultural land, overseas apartment complexes, factories and land in developing countries, financing of TAMA 38 projects and more. Their substantial online exposure attracts many investors who lack experience in assessing a venture's business model and whether it is supervised at all. The absurd situation is that, despite numerous reports of enormous losses suffered by unsuspecting investors, reckless investment through unsupervised entities continues,” says attorney Shiloh.
Unfortunately, we do indeed periodically hear of such ventures collapsing, leaving many investors without their invested money, let alone the promised return, and pursuing those in whom they mistakenly placed their trust.
A few days ago, the Securities Authority issued a warning about funds and ventures “that have not published a prospectus authorized by the Authority, or investments through entities not licensed by the Authority.” It emphasized these risks: (a) the activity may be unlawful , (b) financial instability, (c) inadequate disclosure, (d) absence of corporate-governance rules, (e) absence of controls and risk-reduction mechanisms, (f) fraud and deception of the public, and (g) use of ventures for criminal and/or other unlawful purposes. The obligation to publish a prospectus enables professional regulatory supervision and ensures that the publisher meets its lawful disclosure obligations to the public. It also enables controls to prevent fraud, such as pyramid schemes, and oversight of professional mechanisms designed to prevent unreasonable risks to the fund or venture and to investors, whether from unprofessional handling of money or use of investment funds for unlawful activities.
The warning apparently follows the affair in which the Authority intervened in the “Or” Fund in recent months and intensified investigations into several other funds. According to reports, the “Or” Fund raised tens of millions of shekels for TAMA 38 projects, promising high returns of 8% a year or 23% over two years. The Authority ordered it to stop raising money, and investors were left with around one-third of their initial investment when it emerged that the fund had not conducted any genuine business activity to generate the return.
It is important to clarify, says attorney Uri Shiloh of E. Shiloh & Co., that the Authority's warning is a “statement of the obvious.” High returns mean high risk, and a fund with limited transparency and no external supervision or controls carries greater risk than one subject to oversight aimed, among other things, at transparency and reducing the likelihood of fraud or extreme financial leverage. A prudent investor must understand the fund's business activities and the protective control mechanisms, either independently or by consulting experienced specialists. Promises and exotic imagery must not be allowed to dazzle them. As media reports suggest, detailed checks of this kind, which are not overly complicated, can save investments from being lost and avoid considerable headaches in trying to locate money after it disappears.

Link to Tax Ruling 6326/12
Link to the Authority's publication>>>