Are LLC Membership Interests “Securities”?

In a recent and unexpected development in government guidelines, securities law can now apply to an ownership interest in an LLC. An ownership stake may occasionally qualify as a security covered by federal and state securities laws. You can still be required to give the government notice of exemption even if an exception applies. Before transferring any ownership interest in an LLC, consult with a business attorney about the applicable securities regulations.

Securities

A negotiable financial interest with financial worth is referred to as a security. A business entity’s ownership interest —whether it is a corporation, partnership, trust, or LLC— is represented by equity securities. Financial instruments known as debt securities are used to reflect debts and associated terms of repayment, including interest rates and deadlines. Debt security may be either unsecured or secured by collateral. If it is secured, it can be governed by different securities laws.

LLC Interest in Securities

An LLC may be run by its owners, or “members”, or by managers. The owners of an LLC overseen by a manager are not involved in the day-to-day management of the company. California Law, therefore, regards them as securities, even if some members are actually involved in the day-to-day management of the company. When an LLC stake is backed by secured debt, this can also be regarded as a security.

When an LLC Interest is Not a Security

The ownership interests are not regarded as securities if the company is a member-managed LLC and each member actively takes part in running the day-to-day operations. Both notices and exemptions are not necessary. However, you must confirm that you are eligible for this status. Your company could face hefty penalties and fines if you believe that filings are not necessary when they are. Individual members might even face criminal charges if the SEC finds evidence of fraud. By having a business lawyer examine your operating model, assess your obligations under state and federal securities legislation, and proper form and execute any acquisition agreements, you can prevent such negative outcomes.