When most people think of securities, they mean corporate stock.  However, a limited liability company interest may also be a security for purposes of both federal and state securities laws.  If it is a “security,” it may be subject to registration requirements under federal securities law and qualification requirements under California securities law.

Section 25019 of the California Corporate Securities Law of 1968 defines “security.”  That section reads in part as follows:

“ ‘Security’ means any … interest in a limited liability company …, except a membership interest in a limited liability company in which the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company; provided 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, shall not establish, without more, that all members are actively engaged in the management of the limited liability company…”

Under this definition, a membership interest in an LLC is a security for California law purposes unless all of the members are actively engaged in management.  Thus, interests in a manager-managed LLC where not all members are managers are “securities” under California law.  Interests in a member-managed LLC may be “securities” under California law if all members are not in fact actively involved in the management of the LLC.  While this article does not address federal securities law, note that an LLC interest may be a security under California law even if it is not a security under federal law.

An LLC interest offered or sold in California that meets the definition of a “security” under the California Corporate Securities Law must be “qualified” unless an exemption is available.  Exemption may require a filing with the California Department of Corporations.

If you have any questions, please contact L. Michael Telleen at mtelleen@carr-mcclellan.com or at (650) 342-9600.