Many sponsors assume that if they form a joint venture and call their partners co-owners, they can avoid securities laws. Unfortunately, regulators do not care what you call the deal. They care about how it actually works. When multiple passive partners rely on a manager to generate returns, the deal almost always crosses the line into a securities offering, even if everyone insists it is just a joint venture.
This issue comes up frequently when a manager forms a manager-managed LLC with several money partners and plans to receive a promote and management fees. The structure itself is perfectly viable. The legal risk comes from ignoring that those passive interests are investment contracts under federal and state securities laws.
What Triggers Securities Treatment
Whether an arrangement is a security is determined by economic reality. If the partners are relying primarily on the manager’s efforts to source opportunities, operate the business, and produce profits, their interests are investment contracts under the Securities Act of 1933. That classification does not change simply because the parties agree to call each other co-venturers or members.
Here are the factors regulators focus on:
- The use of a manager-managed LLC with one active sponsor and multiple passive money partners
- A promote structure that rewards the manager for performance
- Management fees paid to the sponsor
- Investors who are not actively involved in day-to-day decision-making
- The manager’s control over the venture’s strategy and operations
Any of these points can be enough to trigger securities treatment. When all of them are present, it is almost certain.
What Compliance Requires
Once the structure is recognized for what it is—a securities offering—the sponsor must comply with federal and state securities laws. That means choosing an exemption, drafting compliant offering documents, and ensuring that no one is being compensated improperly for helping raise capital.
- A Rule 506(b) or Rule 506(c) exemption is typically the best fit.
- You must provide full and fair disclosure of all material facts, including fees, conflicts, and risks.
- This disclosure belongs in a private placement memorandum, subscription agreement, and a securities-compliant operating agreement.
- Anyone assisting with capital raising must be a licensed broker-dealer or operate within a narrow exemption.
- No one can be paid transaction-based compensation tied to capital raised unless properly licensed.
Ignoring these requirements can lead to allegations of selling unregistered securities, civil rescission demands, and state enforcement actions. These are not theoretical risks. They are real, and they are avoidable.
Why the LLC Structure is Not the Problem
Forming a manager-managed LLC is a well-established way to structure a multi-partner deal. There is nothing inherently problematic about receiving a promote or management fees. Those features are common in securities offerings and widely accepted.
The key is to handle the structure transparently, treat it as the securities transaction it is, and document it properly.
The Bottom Line
When there are seven partners and most of them are passive, the deal is not a traditional joint venture. It is a securities offering. Once you recognize that, the path forward becomes clear: select a compliant exemption, prepare securities-grade offering documents, and ensure all capital-raising activity is handled lawfully.
Frequently Asked Questions
What makes a joint venture interest a security?
If the participants rely on a manager or sponsor to generate returns, regulators classify their interests as investment contracts. That remains true even if the documents call the relationship a joint venture or partnership.
Does a promote automatically turn a JV into a securities offering?
A promote does not automatically create a securities offering, but it is a strong indicator that the manager is being compensated based on performance. Combined with passive investors and manager control, it almost always supports a finding that securities laws apply.
Can a multi-partner LLC avoid securities laws if everyone signs a JV agreement?
No. Regulators look to economic reality, not the labels in your documents. If the investors are passive and depend on the manager’s efforts, the arrangement is a securities offering regardless of the agreement’s title.
Is it legal for a member to receive a percentage for raising capital?
Only if that person is a registered broker-dealer or registered representative. Members cannot be compensated based on capital raised unless licensed or covered by a narrow exemption.
What documents are required for a compliant securities offering?
Common documents include a private placement memorandum, subscription agreement, investor questionnaire, and a securities-compliant operating agreement disclosing all fees, risks, and conflicts.
Can a manager-managed LLC still be used once securities laws apply?
Yes. The LLC is not the issue. Sponsors routinely use manager-managed LLCs in syndicated and fund structures. The key is to treat the structure as a securities offering and comply fully with federal and state law.
Is Rule 506(b) or Rule 506(c) better for this type of deal?
Either can work. Rule 506(b) allows up to 35 non-accredited but sophisticated investors but prohibits general solicitation. Rule 506(c) allows advertising but requires verification of accredited investor status. The decision depends on your investor base and marketing strategy.
What are the risks of treating a securities offering as a joint venture?
Sponsors risk claims for selling unregistered securities, investor rescission demands, civil penalties, and state enforcement actions. These risks often surface years later when a deal underperforms or investor relationships sour.
Does the number of partners matter?
Yes. The more partners involved and the more passive they are, the stronger the case that the arrangement is a securities offering. With seven partners, regulators are almost certain to view the interests as securities.
Can a deal be restructured to avoid securities laws?
Sometimes. If all parties have active, meaningful duties and shared control—not just nominal roles—the deal may qualify as a true joint venture. But most multi-partner deals with promotes and passive investors will require securities compliance.
