Must Sellers of Fractional Yacht Owner­ship Shares Be Licensed Brokers?

I own an Internet marketing company based in California, and we are developing a new business to sell fractional ownership shares of large motoryachts through a new Web site. One of the boat owners we are working with is reluctant to enroll in our program because we are not licensed yacht brokers in California. I assumed that no license was required for this type of business, but now I’m not so sure. Can you help?

Yacht brokers in California are licensed by the Department of Boating and Waterways pursuant to the provisions of the California Yacht and Ship Brokers Act (Harbors and Navigation Code sec. 700 – 740). The act was, unfortunately, drafted before the creation of the Internet and before the recent popularity of fractional yacht ownership programs. This leads to some ambiguity when evaluating some of these issues.

Section 708(a) of the Yacht and Ship Brokers Act requires anyone who acts as a broker “within this state” to be licensed as a broker. The department has taken the position that a broker is acting within this state, and must therefore be licensed, if the broker maintains a place of business in California, or if a specific boat that they are involved with is located in California. A license is therefore required if the broker OR the boat is located in California, even if the advertising and negotiations are conducted exclusively over the Internet.

The marketing of a fractional ownership share is more complicated. Section 701(a)(1) of the act defines “broker” as “a person who … for compensation or in expectation of compensation … Sells or offers to sell, buys or offers to buy, solicits or obtains listings of, or negotiates the purchase, sale, or exchange of yachts, and who does not own those yachts.” A “yacht” is then defined in Section 701(c) as a vessel “16 feet or more in length and under 300 gross tons used for navigating in water and designed to be propelled by machinery or sail.”

The Yacht and Ship Brokers Act makes no reference anywhere to the sale or marketingof anything less than an entire boat. Similarly, the Department of Boating and Waterways has taken no formal position on the licensing of fractional share brokers. However, some regulators have commented that since the act was written before the advent of a growing fractional ownership industry, regulations should be adopted to address this ambiguity. For now, this will probably be handled on a case-by-case basis until the courts get involved.

Regardless of the yacht broker licensing issue, fractional share brokers should be concerned about another licensing issue. Most fractional programs are structured such that the boat is the sole asset of a closely held corporation or LLC, and shares of the boat are then acquired through the purchase of shares in the company. This could easily be characterized as the sale of a business opportunity rather than the sale of a boat.

California is one of 13 states that require a license for brokers of business opportunities. In California, Business and Professions Code Section 10131(a) requires business brokers to hold a real estate broker’s license. That section defines a real estate broker as “a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment … Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.”

With all due respect to the Depart­ment of Boating and Waterways, the California Department of Real Estate has a much larger budget, and the Depart­ment of Boating and Waterways budget for the investigation and enforcement of unlicensed activity is dwarfed by the Department of Real Estate budget for those activities.

At present, the fractional yacht ownership industry operates in a zone of ambiguity when considering regulatory and licensing issues, but this is sure to change in the near future. In the interim, concerned businesses should contact an attorney experienced in these issues.