Chapter 2 - § 2.5 • LIMITED LIABILITY COMPANIES

• Jurisdiction: Colorado

§ 2.5 • LIMITED LIABILITY COMPANIES

Interests in limited liability companies are not listed in the list of "securities" in either 1933 Act § 2(a)(1) or 1934 Act § 3(a)(10). They are also not described as "securities" in many state laws. Under federal law, and where states have not expressly included LLCs in the statutory definition, issuers and their advisers must apply the "investment contract" analysis to determine whether LLC interests are securities subject to the registration requirement.

Under this analysis, where LLCs are member-managed, courts will likely apply the general partnership analysis — where the members have the knowledge and the ability to exercise their control over the activities of an LLC, a security will likely not be found to exist. Where, however, the members in a member-managed LLC lack either the knowledge or the contractual ability to control the LLC, a security will likely be found to exist. The Fourth Circuit conducted this analysis in Robinson v. Glynn,⁵⁰ when it concluded that the plaintiff-purchaser's securities claims should be dismissed. The court noted that Robinson had management powers under the operating agreement and he was an executive at the company and a "savvy and experienced businessman" — and thus could not be characterized as a "passive investor," even though he did not have extensive industry-specific experience.

It is likely that, except in rare cases, interests in a manager-managed LLC will be found to be a security subject to federal and state regulation, although as noted below, in People v. Riggle, at least one court did not distinguish between member-managed and manager-managed LLCs in applying the investment contract analysis to LLCs.

In People v. Riggle,⁵¹ the court ruled that the question of whether interests in a manager-managed Nevada LLC were "securities" for the purposes of Colorado law would be determined using the federal tests developed for characterizing general partnership interests. The court appeared to concede that where members have the right by a majority vote to remove the manager and assume management functions themselves, the court should apply a presumption that securities are not involved in the same manner as for a general partnership. The court then directed that various other factors be considered:

1) Whether the number of members necessary to remove the manager would make his removal impractical.
2) Whether the number of members would make management impractical.
3) Whether the

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