Approximately half of all states are Closed States. Whether a particular state will be a Closed State for a project depends on several factors, such as where the project is located, whether the project is registered under ILSFDA, and the type of product being offered (e.g., undeveloped lots, completed homes, condominium units).
In Closed States, no marketing, solicitation or sale of an interest in a project may occur unless the project complies with the state’s land sales laws. Most Closed States take the position that advertising in the state,4sending email or placing telephone calls into the state, or mailing marketing materials or information into the state – even in response to an unsolicited request for information – will subject the person or entity conducting such activities to the applicable state land sales laws.
A common situation developers face is where a prospective purchaser from a Closed State calls or emails the developer requesting information about the project. Unless the developer has complied with the land sales laws of the Closed State from which the call or email came, no information regarding the project may be provided to the prospective purchaser. While a potential sale may be lost, it is important that each member of the developer’s sales team understands the risks and knows how to respond. Educating sales personnel and providing them with preapproved responses for such scenarios can help prevent inadvertent violations of land sales laws.
Another common scenario arises when a developer maintains a website for a project through which consumers may correspond directly with the developer. Many websites include a “Contact Us” link through which prospective purchasers request that information about the project be mailed to them. Again, requests from a person in a Closed State may not be responded to with information about the project unless the project complies with that state’s land sales law. A developer can help protect itself by adding a filter to the website that provides an automatic response to requests received from a Closed State informing the consumer that due to his or her state’s land sales laws, the developer is not permitted to provide information about the project.
Developers who fail to comply with state land sales laws risk civil and criminal penalties, as well as revocation or rescission of sales contracts by purchasers. Therefore, it is important for developers and their sales teams to understand what activities trigger a state’s land sales laws in order to avoid inadvertent violations that could prove very costly in the long run. With proper planning and training, an interstate land sales compliance program can be created to help developers avoid such risks.
A number of states provide an exemption from land sales laws for projects of a certain size. Most states that offer this type of an exemption limit its application to small projects, typically with no more than 10 to 25 lots or units. A few states provide an exemption for larger projects. New Jersey, for example, provides an exemption for projects with less than 100 lots.
As with ILSFDA, when counting the total number of lots or units to determine whether an exemption based on project size is available, it is important to understand which lots or units to count. This typically depends on the statutory definition of “subdivision.” Under ILSFDA, “subdivision” is defined as any land divided or proposed to be divided into lots (or units), whether contiguous or not, for the purpose of sale or lease as part of a common promotional plan.6In turn, ILSFDA defines “common promotional plan” as a plan undertaken by a single developer (or group of developers acting in concert) to offer lots for sale or lease where such land is contiguous or is known, designated or advertised as a common unit or by a common name.7A number of Closed States have adopted similar definitions for the terms “subdivision” and “common promotional plan.” Under these definitions, what constitutes a subdivision can extend beyond what is typically considered a single project. Thus, if a developer maintains a website that contains links to multiple projects, use of that single website may be deemed a common promotional plan, in which case the total number of lots and units in all of the projects combined would be counted for purposes of determining whether a particular project qualifies for an exemption based upon the number of lots or units offered.