commercial law attorney san diegoMost business owners and investors refer to corporate stock when discussing “securities”. However, other types of ownership interests, other than stocks, fall under the definitions of securities pursuant to California law, including a membership interest in a limited liability company (“LLC”). However, not all LLC membership interests are included in these definitions, in which case registration of the interest is not required in California. Therefore, it is important to understand if and when your LLC’s interests are subject to registration requirements.

California Corporate Securities Law

The California Corporate Securities Law, § 25019a “security,” in relevant part, as follows:

“‘Security’means any note; stock; treasury stock; membershipin an incorporated or unincorporated association; bond; debenture;evidence of indebtedness; certificate of interest or participation inany profit-sharing agreement; collateral trust certificate;preorganization certificate or subscription; transferable share;investment contract; vertical settlement contract or a fractionalizedor pooled interest therein; life settlement contract or afractionalized or pooled interest therein; voting trust certificate;certificate of deposit for a security; 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…” [Emphasis Added].

A plain reading of this Section of the statute makes it clear that an LLC membership interest is indeed a security, making it subject to registration with the state, unless ALL of the members of the LLC are actively engaged in the management of the LLC. Therefore, where an LLC is manager-managed and not member-managed, or where some, but not all, of its members manage the company, registration of its securities is mandatory.

California Commercial Code

In additional to the Corporate Securities Law, the California Commercial Code also governs whether a membership interest in an LLC is treated as a security. Section 8103(c) of the Commercial Code provides:

“An interest in a partnership or limited liability company isnot a security unless it is dealt in or traded on securitiesexchanges or in securities markets, its terms expressly provide thatit is a security governed by this division, or it is an investmentcompany security. However, an interest in a partnership or limitedliability company is a financial asset if it is held in a securitiesaccount.”

Most LLC’s which operate as a small or family-owned business will not be required to register their membership interests as a security. However, it is important to consider both the Corporate Securities Law and the Commercial Code when determining whether your LLC is subject to registration with the state of California in order to avoid potential penalties and/or legal action by investors.

California Securities Exemption Pursuant to Corporations Code §25102(f)

If the membership interests in an LLC are subject to registration in California because they fall within the definition of a “security” under the Corporate Securities Law, most will qualify for an exemption from federal registration because the interests are not issued through a public offering. In addition, such an issuance will typically qualify for a securities exemption in California under Corporations Code §25102(f). This Section of the Corporations Code provides:

“Any offer or sale of any security in a transaction (other thanan offer or sale to a pension or profit-sharing trust of the issuer)that meets each of the following criteria:

(1) Sales of the security are not made to more than 35 persons,including persons not in this state.

(2) All purchasers either have a preexisting personal or businessrelationship with the offeror or any of its partners, officers,directors or controlling persons, or managers (as appointed orelected by the members) if the offeror is a limited liabilitycompany, or by reason of their business or financial experience orthe business or financial experience of their professional adviserswho are unaffiliated with and who are not compensated by the issueror any affiliate or selling agent of the issuer, directly orindirectly, could be reasonably assumed to have the capacity toprotect their own interests in connection with the transaction.

(3) Each purchaser represents that the purchaser is purchasing forthe purchaser’s own account (or a trust account if the purchaser isa trustee) and not with a view to or for sale in connection with anydistribution of the security.

(4) The offer and sale of the security is not accomplished by thepublication of any advertisement. The number of purchasers referredto above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limitedliability company, and any other purchaser who the commissionerdesignates by rule. For purposes of this section, a husband and wife(together with any custodian or trustee acting for the account oftheir minor children) are counted as one person and a partnership,corporation, or other organization that was not specifically formedfor the purpose of purchasing the security offered in reliance uponthis exemption, is counted as one person. The commissioner shall byrule require the issuer to file a notice of transactions under thissubdivision…”


Our business law attorneys will provide more information on this California exemption in future articles. For purposes of this writing, it is important to note that while this exemption will apply to most LLC’s, it does not relieve an LLC from the requirement to register their securities. Rather, a Limited Offering Exemption Notice (“LOEN”) must be filed with the California Department of Corporations within 15 days of the issuance of such securities in order to avoid potential penalties from being assessed by the state.


The business and commercial law attorneys at Gehres Law Library advise and represent clients on a vast array of laws affecting businesses in California. If you are a business owner, contemplating a new business idea, or have questions about a California company, contact us today for your complimentary evaluation, or feel free to browse our website.