Morris, Nichols, Arsht & Tunnell LLP
MONTH-IN-BRIEF (Jun 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.