An Israeli company has been investing in real estate ventures for years through the establishment of limited partnerships (about 250 different ventures) for each venture and by marketing participation units in such partnerships. Several investors demanded the cancellation of the agreements and repayment of the investment funds contending that the units were marketed without a prospectus.
The Court held that the company's activities required it to publish a prospectus. A public offering of securities requires a prospectus. The purpose of securities law is to enable corporations to raise capital from the public, which is important to the capital market but is also characterized by power gaps resulting mainly from knowledge gaps between corporations and investors. Thus, the publication of a prospectus allows the investing public to make rational decisions, prevents information gaps and, in fact, its publication reduces the fear of fraud and deception along with strengthening the public investors confidence in the capital market. In order to determine whether it is a public offering of securities one need examine whether the application of the securities rules will advance the purpose of the law in protecting passive investors while encouraging investment. The criteria for examining whether it is a security are not a closed list. Inter alia, it will be examined whether this is a passive investment which entire purpose is to carry profits by another entity, the existence of ongoing reporting throughout the life of the investment, and the lack of alternative regulation used for supervision. Because investors had no interest in the assets themselves, rather they were looking for profits while risking their money through passive investment, the investment should be seen as an investment in securities and not just in a real estate asset, thus requiring the publication of a prospectus.