When Does Selling Interests in an LLC Constitute the Sale of Securities?

When Does Selling Interests in an LLC Constitute the Sale of Securities?

We see many people try to avoid securities laws by saying they are doing “joint ventures” when, in reality, they are selling securities. Selling interests in a Manager-managed LLC with members contributing capital and a few key people managing the company would constitute the sale of “Investment Contracts,” which are securities. Selling interests in a Limited Partnership with the limited partners contributing capital and the general partner managing the company would also constitute the sale of Investment Contracts.

One way to avoid selling Investment Contracts is with a Member-managed LLC or General Partnership structure in which “all members are responsible for actively generating their own profit,” and all are responsible for management of the company, which could include opening and closing bank accounts, contractually binding the company, etc.

A Member-managed LLC might be feasible with 3-4 members who know each other very well and have identical objectives, but when larger groups are involved, it rarely happens. What actually happens is that a few members actively manage the deal while the rest are not actively involved in management. In that case, it doesn’t matter if the company is Member-managed, because certain members will attest that they didn’t participate in management and therefore will likely be deemed passive investors. If the deal is ever scrutinized by a securities regulator (or one of the investors’ attorneys), it will likely be deemed to have been the sale of securities without following an exemption (which requires proper disclosures and SEC/state securities notice filings).

In our experience any more than 5 people in a Member-managed LLC is a recipe for disaster as they can’t agree on how things will be done (too many cooks spoil the supper…), so it creates dissension, stress, and in the worst cases, litigation.

To learn more about all things related to real estate law check out our real estate law library!

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About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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