Unlike the Securities Act of 1933, California's Corporate Securities Law of 1968 includes interests in limited liability companies in the list of securities:
"“Security” means any . . . interest in a limited liability company and any class or series of those interests (including any fractional or other interest in that interest), 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 . . .".
Cal. Corp. Code § 25019. As a result, interests in manager-managed and many member-managed LLCs are subject to the CSL. Yet, these same interests may not be "securities".
Under Division 8 of the California Commercial Code, an interest in an LLC is NOT a security unless:
- it is dealt in or traded on securities exchanges or in securities markets,
- its terms expressly provide that it is a security governed by this division, or
- it is an investment company security.
Cal. Comm. Code § 8103(c). Under this definition, interests in many manager-managed LLCs are not "securities" even though they are "securities" under the CSl.
Thus, the answer to the question "Is an LLC interest a 'security'?" may well be "yes" and "no".