One area that is often confusing to business owners is “Securities Law.” Securities law is a complex minefield that terrifies even the most seasoned lawyers. Unfortunately, as a small business owner, it is your responsibility to make sure you’re complying with all the securities laws, both federal and state, that may apply to your business. This can make this a very critical aspect for every business owner.
One of the major misconceptions to most business owners is that only corporate stock qualifies as a security. Most don’t realize that LLC ownership interests might also be considered securities. To help guide you through the process of thinking about this in more detail, I have put together some questions and answers for you. Here’s what you need to know about whether your LLC interests might be securities, which could result in onerous federal and state securities law implications.
Is it a security?
To put it simply, a security arises from a transaction in which someone invests money in a company with the expectation of receiving profits from the efforts of someone else. In other words, if someone is buying shares of a company primarily as an investment vehicle, and that investor is not going to be participating in the day-to-day operations of the business, the shares would likely qualify as a security. All securities must be registered with the U.S. Securities and Exchange Commission (SEC) and appropriate state agency, unless they fall into an exemption. But even if they are exempt, you may still have to file documentation showing that you’re exempt.
For instance, in Idaho, shares of an LLC in which any member is not continuously and actively involved in the management would qualify as securities. This would usually happen if the LLC is manager-managed and at least one member does not participate in the day-to-day operations of the business. Therefore, if you have an LLC where there are certain members who have bought in as investors, but any one of them will not manage the company on a day-to-day basis, your LLC ownership shares may qualify as securities. Likewise, even if all members intended to participate, but at least one does not participate on a continuous basis, your shares may be considered securities.
Alternatively, if all of the LLC owners are also managing the day-to-day operations, your membership interests would not likely be considered securities, alieving you of the obligation for any additional filings.
Is it exempt?
If your LLC interests qualify as securities, you are required to register your securities with the SEC and the appropriate state agency. However, most small businesses are exempt from having to register.
In Idaho, for example, you may sell your securities without registration under the Small Company Offering Registration Form (Form U-7).
Most small businesses will not be required to file an exemption notice with the SEC. However, it’s always best to check with your business lawyer about whether any notice or registration is required for your business, and in your particular state.
Do you need to register?
If your LLC interests count as securities, and those securities don’t qualify for an exemption, you will have to register your securities with the SEC and appropriate state agency. Registration of a security is an involved process subject to a complex web of securities laws. You will need the assistance of a skilled securities lawyer to make sure you’re in full compliance.
Conclusion
Even if your business entity is an LLC, your membership interests may be considered securities, potentially requiring state and federal filings. This is where members can get themselves in trouble if they don’t fully understand whether or not their LLC is considered a security by the SEC. As always, make sure to check your local, state, and federal laws to ensure you comply. If you need any assistance determining what steps you need to take, give us a call and we would be happy to give you some more clarification on this so you can determine whether or not you need to take further action.
