As businesses increasingly embrace partnerships, limited partnerships, and limited liability companies ("LLCs") as the business organizations of choice, an entity's principals, as well as its investors, must be aware of the securities law issues affecting such pass-through entities. It is not uncommon for these entities to be organized with scant, if any, attention being paid to the securities laws. However, particularly if the deal does not meet the expectations of the investors, the principals, and sometimes their advisors, could be charged with a number of securities law violations, including those arising under the Securities Act of 1933, as amended1 (the "1933 Act"), the Securities Exchange Act of 1934, as amended2 (the "1934 Act"), and the securities or "blue sky" laws of one or more states.
Therefore, both before and after organizing a business venture as a partnership or limited liability company, it is critical that a thoughtful analysis of the applicability of the securities laws be made and the entity structured and its interests sold to avoid violations of any applicable securities laws. The balance of this outline addresses common securities law issues found in the offer and sale of interests in general partnerships, limited partnerships, and limited liability companies.
II. IS THE INTEREST A SECURITY?
A. General Background. Federal and state securities laws apply only if the partnership or limited liability company interest constitutes a "security" for purposes of the relevant statute, and thus any analysis of securities law compliance begins with the question: Is the partnership/limited liability company interest a security? Generally, "security" is similarly defined in the 1933 Act, the 1934 Act, and state "blue sky" statutes. The 1933 Act definition of "security" is as follows: