Are LLC Membership Interests “Securities”?

AdobeStock_279822215-300x200You might be surprised to learn that an ownership interest in an LLC can be governed by securities law. There are certain circumstances in which an ownership interest is a security subject to federal and state securities laws. Even if an exception applies, you still might be required to file an exemption notice with the government. Be sure to consult with a Silicon Valley business lawyer about which securities regulations apply before buying or selling any ownership interest in an LLC.

What is a Security?

A security is a negotiable financial interest with monetary value. Equity securities represent an ownership interest in a business entity (whether it is a corporation, partnership, trust, or LLC). Debt securities are financial instruments that represent money owed, along with repayment terms such as interest and due dates. A debt security can be either secured by collateral or unsecured. If it is secured, it may be subject to various securities regulations.

When is an LLC Interest a Security?

An LLC can be managed either by its owners (the “members”) or by hired managers. In a manager-managed LLC, some or all owners are not involved in the daily operations of the business. Because of this, they are considered securities under California law. All ownership interests in a manager-managed LLC are considered securities – even if some members actually are involved in the daily management of the business.

If an LLC interest involves secured debt, this, too can be considered a security (regardless of whether the members are actively involved in the daily management of the business). Be sure to get an attorney’s opinion about LLC ownership interests that have debt secured by stock or other collateral.

When is an LLC Interest not a Security?

If the business is a member-managed LLC, and all of the members are actually participating in the daily business operations, then the ownership interests are not considered securities. No exemption is required, and no notices must be filed.  But it is important to be sure you qualify for this status. If you assume that no filings are required when they actually are, your business could incur significant penalties and fines. If the SEC determines this was an intentional act of fraud, individual members could even be charged with crimes. All of these unpleasant consequences can be avoided by having an experienced business lawyer review your operating structure, determine your obligations under state and federal securities law, and properly draft and execute any purchase agreements (as well as any state filings that are required for securities compliance).

The Right Silicon Valley Lawyers For LLC and Securities Legal Matters

Securities law is a complex web of state and federal regulations. Even the simplest mistake can cost a business serious financial losses. Owners can even face criminal penalties. An experienced San Jose corporate attorney can help your business stay compliant with all applicable securities regulations before, during, and after the sale of LLC ownership interests. At Structure Law Group, our experienced Silicon Valley business lawyers know how to address legal ownership issues, securities regulation compliance, and other matters. Call (408) 441-7500 or visit our website to schedule a consultation.

 

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