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Are LLC Interests Securities in California?

Does California consider membership interests in a limited liability company to be securities?  There are two correct answers to this question – yes and no. As I discussed a few years back, the California Corporate Securities Law preceded even the idea of limited liability companies.  When California’s first LLC law (the Beverly-Killea Act) was adopted, Section 25019 of the Corporations Code was amended to provide that a security included an interest in a limited liability company and any class or series of those interests (including any fractional or other interest in that interest).

So, the answer must be yes?  Sometimes it will be, but the legislature included a significant exception – a membership interest isn’t a security if  “the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company.”  I’ve always considered this to be an odd exception because it depends upon actions that must occur after the membership interest is offered and sold.  Thus, the statute, provides that evidence that members vote or have the right to vote, or the right to information concerning the business and affairs of the limited liability company, or the right to participate in management, does not establish, without more, that all members are actively engaged in the management of the limited liability company.  Therefore, the answer will be no if the person claiming the exemption can make the requisite proof.

But the CSL isn’t the only law that is concerned with whether a membership interest is a security.  Section 8103(c) of the Commercial Code provides that an interest in a limited liability company is not a security unless: (i) it is dealt in or traded on securities exchanges or in securities markets; (ii) its terms expressly provide that it is a security governed by Division 8 of the Commercial Code; or (iii) or it is an investment company security.

Even Harvard Magazine Joins That Which Should Be Asunder

 Recently, I wrote about how easy it is to add the conjunction “and” to the “Securities Exchange Act of 1934”.  See To Conjoin Or Not To Conjoin – California Sometimes Gets It Wrong.  It seems that Harvard Magazine is not immune from this error.  In this article about Harvard Law Professor Cass R. Sunstein, I noticed the following:

Some regulated critical parts of the economy, like the National Labor Relations Act and the Securities and Exchange Act.

It should be noted that the article is about, not by, Professor Sunstein.

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