Current Month (June 2026)
To Be or Not to Be a Security, That Is the Question
By William E. H. Quick, Outside Inside Counsel, LLC
Whether a limited liability company (“LLC”) membership interest is a “security” under federal law is a question that is far more nuanced than many investors, attorneys, and business owners appreciate. At its core, the inquiry turns on a single pivotal issue: Does the membership interest constitute an investment contract?
Neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 expressly references LLC membership interests. However, both statutes include “investment contract” within their definitions of a security. Accordingly, when courts are confronted with the question of whether an LLC membership interest is a security, they will frame the analysis around whether an investment contract exists.
The foundational framework for this analysis comes from the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. Under Howey, an investment contract exists where there is an investment of money in a common enterprise, with an expectation of profits derived from the efforts of a promoter or third party. While Howey originally required that profits come solely from the efforts of others, later decisions—including United Housing Foundation, Inc. v. Forman—refined this standard to ask whether profits are reasonably expected to flow from the entrepreneurial or managerial efforts of others. This refinement is not merely semantic; it meaningfully broadens the range of arrangements that may qualify as securities.
The challenge in applying this test to LLC interests lies in the structural flexibility that defines the LLC form. Unlike corporations or limited partnerships, where ownership, management, and operational structures are rigidly established by statute, LLCs are governed by principles of contract law embodied through operating agreements. Although LLC statutes provide certain default rules, LLCs may allocate authority, rights, and obligations among members and managers in virtually limitless combinations. An LLC may be entirely member-managed, with investors playing an active role in operations, or it may vest near-total control in designated managers, leaving members with little meaningful influence. As a result, courts consistently hold that the classification of an LLC membership interest as a security must be determined on a case-by-case, facts-and-circumstances basis.
Central to the inquiry is whether investors possess a genuine ability to control the profitability of their investment—either through personal effort or through voting power. Access to information, contractual powers, and expected contributions of time and effort are the three most significant factors in making this assessment. Critically, the analysis is objective and measured at the time of member interest purchase—not based on how much control investors ultimately exercise after the fact.
Ultimately, the greater the meaningful control afforded to LLC members, the less likely the interest is to be deemed a security. However, where members are dependent on others for their investment returns, federal securities laws—and their attendant obligations and requirements—will likely apply.
