Presentation to the Idaho State Bar Business & Corporate Section, January 12, 2011

1. Is My LLC Interest A Security?
Wendy Couture
Presented to the
Idaho State Bar Business & Corporate Section
January 12, 2011

2. Is My LLC
Interest A
Security…
under
under Idaho
federal law?
law?
Securities Act of 1933;
Securities Exchange Idaho’s Uniform
Act of 1934. Securities Act (2004).

3. Why do we care?
• If it‘s a ―security,‖ it can‘t be offered or sold unless it is
either registered or exempt (or preempted) from
registration.
Securities Act 5(a); Idaho Code 30-14-301.
• If it‘s a ―security,‖ it is subject to securities fraud
provisions.
Securities Exchange Act 10(b); Idaho Code 30-14-501.

4. Is My LLC
Interest A
Security…
under
under Idaho
federal law?
law?
Securities Act of 1933;
Securities Exchange Idaho’s Uniform
Act of 1934. Securities Act (2004).

5. Federal Statutory Definitions of “Security”
’33 Act 2(a)(1) ’34 Act 3(a)(10)
―When used in this ―When used in this Act,
Act, unless the context unless the context otherwise
otherwise requires—[t]he requires—[t]he term
term ‗security‘ means any ‗security‘ means any note,
note, stock, . . . investment
contract . . .‖
= stock, . . . investment contract
. . .‖
SEC v. Edwards, 540 U.S. 389 (2004) – these two definitions
are ―essentially identical in meaning‖

6. Federal Statutory Definitions of “Security”
’33 Act 2(a)(1) ’34 Act 3(a)(10)
―When used in this Act, ―When used in this Act,
unless the context unless the context otherwise
otherwise requires—[t]he requires—[t]he term
term ‗security‘ means any ‗security‘ means any note,
contract . . .‖
contract
investment
note, stock, . . . investment
= stock, . . . investment contract
. . .‖
investment contract
?

7. Howey test for “investment contract‖
S.E.C. v. Howey Co., 328 U.S. 293 (1946).
• investment of money
• in a “common enterprise”
• with an “expectation of profits”
• “solely on the efforts of others”

8. Howey test for “investment contract‖
• investment of money
- includes an investment of goods and services. Int’l Bhd. of
Teamsters v. Daniel, 439 U.S. 551, 560 n.12 (1979).
• in a “common enterprise”
• with an “expectation of profits”
• “solely on the efforts of others”

9. Howey test for “investment contract‖
• investment of money
- includes an investment of goods and services. Int’l Bhd. of
Teamsters v. Daniel, 439 U.S. 551, 560 n.12 (1979).
• in a “common enterprise”
- either horizontal commonality (where the investors‘ fortunes are
interwoven) or vertical commonality (where there is a direct
correlation between the success or failure of the promoter‘s efforts
and the success or failure of the investment). SEC v. Eurobond
Exch., Ltd., 13 F.3d 1334, 1339 (9th Cir. 1993).
• with an “expectation of profits”
• “solely on the efforts of others”

10. Howey test for “investment contract‖
• investment of money
- includes an investment of goods and services. Int’l Bhd. of
Teamsters v. Daniel, 439 U.S. 551, 560 n.12 (1979).
• in a “common enterprise”
- either horizontal commonality (where the investors‘ fortunes are
interwoven) or vertical commonality (where there is a direct
correlation between the success or failure of the promoter‘s efforts
and the success or failure of the investment). SEC v. Eurobond
Exch., Ltd., 13 F.3d 1334, 1339 (9th Cir. 1993).
• with an “expectation of profits”
- ―capital appreciation‖ and ―participation in earnings‖ are examples,
but a fixed rate of return also counts. SEC v. Edwards, 540 U.S. 389
(2004).
• “solely on the efforts of others”

11. Howey test for “investment contract‖
• investment of money
- includes an investment of goods and services. Int’l Bhd. of Teamsters v.
Daniel, 439 U.S. 551, 560 n.12 (1979).
• in a “common enterprise”
- either horizontal commonality (where the investors‘ fortunes are
interwoven) or vertical commonality (where there is a direct correlation
between the success or failure of the promoter‘s efforts and the success or
failure of the investment). SEC v. Eurobond Exch., Ltd., 13 F.3d 1334,
1339 (9th Cir. 1993).
• with an “expectation of profits”
- ―capital appreciation‖ and ―participation in earnings‖ are examples, but a
fixed rate of return also counts. SEC v. Edwards, 540 U.S. 389 (2004).
• “solely on the efforts of others”
- satisfied if ―the efforts made by those other than the investor are
undeniably the significant ones, those managerial efforts which affect the
failure or success of the enterprise.‖ SEC v. Glenn W. Turner Enter., Inc.,
474 F.2d 476, 482 (9th Cir. 1973).

12. Howey test for “investment contract‖
• investment of money
- includes an investment of goods and services. Int’l Bhd. of Teamsters v.
Daniel, 439 U.S. 551, 560 n.12 (1979).
• in a “common enterprise”
- either horizontal commonality (where the investors‘ fortunes are
interwoven) or vertical commonality (where there is a direct correlation
between the success or failure of the promoter‘s efforts and the success or
failure of the investment). SEC v. Eurobond Exch., Ltd., 13 F.3d 1334,
1339 (9th Cir. 1993).
• with an “expectation of profits”
- ―capital appreciation‖ and ―participation in earnings‖ are examples, but a
fixed rate of return also counts. SEC v. Edwards, 540 U.S. 389 (2004).
• “solely on the efforts of others”
- satisfied if ―the efforts made by those other than the investor are
* undeniably the significant ones, those managerial efforts which affect the
failure or success of the enterprise.‖ SEC v. Glenn W. Turner Enter., Inc.,
474 F.2d 476, 482 (9th Cir. 1973).

13. • “solely on the efforts of others”- satisfied if ―the efforts made by
those other than the investor are undeniably the significant ones, those managerial
efforts which affect the failure or success of the enterprise.‖ SEC v. Glenn W.
Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir. 1973).
General Partnership Interests Limited Partnership Interests

14. • “solely on the efforts of others”- satisfied if ―the efforts made by
those other than the investor are undeniably the significant ones, those managerial
efforts which affect the failure or success of the enterprise.‖ SEC v. Glenn W.
Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir. 1973).
General Partnership Interests Limited Partnership Interests
Presumptively not securities. Generally are securities.

15. How to Overcome the Presumption that General
Partnership Interests Are Not Securities
Three Non-Exclusive Ways (from 5th Circuit‘s Williamson test):
• An agreement among the parties leaves so little power in the hands of the
partner or venturer that the arrangement in fact distributes power as would a
limited partnership.
• The partner or venturer is so inexperienced and unknowledgeable in business
affairs that he is incapable of intelligently exercising his partnership or venture
powers.
• The partner or venture is so dependent on some unique entrepreneurial or
management ability of the promoter or manager that he cannot replace the
manager of the enterprise or otherwise exercise meaningful partnership or
venture powers.

16. • “solely on the efforts of others”- satisfied if ―the efforts made by
those other than the investor are undeniably the significant ones, those managerial
efforts which affect the failure or success of the enterprise.‖ SEC v. Glenn W.
Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir. 1973).
General Partnership Interests Limited Partnership Interests
Presumptively not securities. Generally are securities.
Somewhat analogous to Somewhat analogous to
member-managed LLCs. manager-managed LLCs.

17. Factors Considered By Courts in Deciding Whether an
LLC Interest is a Security
Weigh in favor of Weigh against status
status as a security as a security
• management agreement turned all • members had right to manage
principal management functions over to (Keith, 48 F. Supp. 2d 325)
another (Nutek, 977 P.2d 826) • members had right to vote in
• manager had sole power to authorize proportion to holdings (Keith)
distributions (Shirley, 2010 WL 272185) • members had right to participate in
•manager was a 2/3 owner and a a detailed cash flow distribution
membership meeting couldn’t be called structure (Keith)
without his consent (Nutek) • members had right to call meetings
• large # of geographically dispersed of members (Keith)
investors diluted power to such an extent • member was sole owner and thus
that prevented members from exercising power wasn’t diluted (Great Lakes, 96 F.
effective control (Nutek) Supp. 2d 376)
•manager had veto power over change in • members had power to remove
manager (Shirley) manager with or without cause (Great
• operating agreement had no provision for Lakes)
removal of manager for cause (Shirley)

18. Is My LLC
Interest A
Security…
under
under Idaho
federal law?
law?
Securities Act of 1933;
Securities Exchange Idaho’s Uniform
Act of 1934. Securities Act (2004).

19. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . . investment contract; . . .‖ Idaho
Code § 30-14-102(28).

20. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).

21. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).
―‗Security‘ includes as an ‗investment contract‘ an investment
in a common enterprise with the expectation of profits to be
derived primarily from the efforts of a person other than the
issuer. ‗Common enterprise‘ means an enterprise in which the
fortunes of the investor are interwoven with those of either the
person offering the investment, a third party, or other
investors.‖ Idaho Code § 30-14-102(28)(d).

22. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).
―‗Security‘ includes as an ‗investment contract‘ an investment
in a common enterprise with the expectation of profits to be
derived primarily from the efforts of a person other than the
primaril
issuer. ‗Common enterprise‘ means an enterprise in which the
fortunes of the investor are interwoven with those of either the
person offering the investment, a third party, or other
person offering the investment,
investors.‖ Idaho Code § 30-14-102(28)(d).

23. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).
―‗Security‘ includes as an ‗investment contract,‘ among other
contracts, an interest in a limited partnership and a limited liability
company and an investment in a viatical settlement, life settlement
or senior settlement or similar agreement.‖ Idaho Code § 30-14-
102(28)(e).

24. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).
―‗Security includes as an ‗investment contract,‘ among other
―‗Security‘ includes as an ‗investment contract,‘
contracts, an interest in a limited partnership and a limited liability
an interest I
company and an investment in a viatical settlement, life settlement
or senior settlement or similar agreement.‖ Idaho Code § 30-14-
102(28)(e).

25. ―‗Security includes as an ‗investment contract,‘ among other
―‗Security‘ includes as an ‗investment contract,‘
contracts, an interest in a limited partnership and a limited liability
an interest I
company and an investment in a viatical settlement, life settlement
or senior settlement or similar agreement.‖ Idaho Code § 30-14-
102(28)(e).
Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
Interpretation Two: An LLC Interest is An Investment Contract
(and Thus A Security) Under Idaho Law If It Satisfies the Howey
Test.

26. Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
Investment Contracts
Interests Satisfying the 4-part Howey Test All LLC Interests

27. Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
• Straightforward reading of statute

28. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).
―‗Security includes as an ‗investment contract,‘ among other
―‗Security‘ includes as an ‗investment contract,‘
contracts, an interest in a limited partnership and a limited liability
an interest I
company and an investment in a viatical settlement, life settlement
or senior settlement or similar agreement.‖ Idaho Code § 30-14-
102(28)(e).

29. Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
• Straightforward reading of statute
• Oklahoma revised this provision when adopting the Uniform Securities
Act.
―an interest in . . . a third party managed limited liability company‖
71 Okla. St. Ann. 1-102(32)(e).

30. Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
• Straightforward reading of statute
• Oklahoma revised this provision when adopting the Uniform Securities
Act.
―an interest in . . . a third party managed limited liability company‖
71 Okla. St. Ann. 1-102(32)(e).
• Comparable case
In re Trade Partners, Inc. Investors Litig., 2008 WL 3992168, at *4
(W.D. Mich. Aug. 22, 2008) (not reported) (applying Oklahoma law).

31. Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
• Straightforward reading of statute
• Oklahoma revised this provision when adopting the Uniform Securities
Act.
―an interest in . . . a third party managed limited liability company‖
71 Okla. St. Ann. 1-102(32)(e).
• Comparable case
In re Trade Partners, Inc. Investors Litig., 2008 WL 3992168, at *4
(W.D. Mich. Aug. 22, 2008) (not reported) (applying Oklahoma law).
• Idaho Department of Finance Response to Request for No Action
Letter Dated March 26, 2006 (―Under 30-14-102(28)(e) ‗security‘
includes as an ‗investment contract,‘ among other contracts, an
interest in a limited partnership and a limited liability company. It
appears that XXXXX meets the above criteria as well.‖).

32. Interpretation One: An LLC Interest is Always An Investment
Contract (and Thus A Security) Under Idaho Law.
• Straightforward reading of statute
• Oklahoma revised this provision when adopting the Uniform Securities
Act.
―an interest in . . . a third party managed limited liability company‖
71 Okla. St. Ann. 1-102(32)(e).
• Comparable case
In re Trade Partners, Inc. Investors Litig., 2008 WL 3992168, at *4
(W.D. Mich. Aug. 22, 2008) (not reported) (applying Oklahoma law).
• Idaho Department of Finance Response to Request for No Action
Letter Dated March 26, 2006 (―Under 30-14-102(28)(e) ‗security‘
includes as an ‗investment contract,‘ among other contracts, an
interest in a limited partnership and a limited liability company. It
appears that XXXXX meets the above criteria as well.‖).
• Policy - clarity

33. Interpretation Two: An LLC Interest is An Investment Contract
(and Thus A Security) Under Idaho Law If It Satisfies the Howey
Test.
Investment Contracts
Interests Satisfying the 4-part Howey Test All LLC Interests

34. Interpretation Two: An LLC Interest is An Investment Contract
(and Thus A Security) Under Idaho Law If It Satisfies the Howey
Test.
•Nuanced reading of statute

35. Idaho Statutory Definition of “Security”
―‗Security‘ means a note; stock; . . .investment contract . . .‖ Idaho
investment contract;
Code § 30-14-102(28).
―‗Security includes as an ‗investment contract,‘ among other
―‗Security‘ includes as an ‗investment contract,‘
contracts, an interest in a limited partnership and a limited liability
an interest I
company and an investment in a viatical settlement, life settlement
or senior settlement or similar agreement.‖ Idaho Code § 30-14-
102(28)(e).

36. Interpretation Two: An LLC Interest is An Investment Contract
(and Thus A Security) Under Idaho Law If It Satisfies the Howey
Test.
• Nuanced reading of statute
• Commentary to the Uniform Securities Act (source of this provision)
―Section 102(28)(E) is consistent with state and federal laws which
have recognized interests in limited liability companies and limited
partnerships in some circumstances as securities, when consistent with
the court decisions interpreting the investment contract concept.‖
Uniform Law Comments cmt. 28 (2002) (emphasis added).

37. Interpretation Two: An LLC Interest is An Investment Contract
(and Thus A Security) Under Idaho Law If It Satisfies the Howey
Test.
• Nuanced reading of statute
• Commentary to the Uniform Securities Act (source of this provision)
―Section 102(28)(E) is consistent with state and federal laws which
have recognized interests in limited liability companies and limited
partnerships in some circumstances as securities, when consistent with
the court decisions interpreting the investment contract concept.‖
Uniform Law Comments cmt. 28 (2002) (emphasis added).
• Uniformity Principle
-one of the policies for the state administrator to consider when acting
under the Uniform Securities Act is ―[m]aximizing uniformity in
federal and state regulatory standards.‖ Idaho Code 30-14-608.
-―Uniformity of regulation among the states and coordination with the
Securities and Exchange Commission is a principal objective of this
Act.‖ Uniform Law Comment 1 (2002).

38. Interpretation Two: An LLC Interest is An Investment Contract
(and Thus A Security) Under Idaho Law If It Satisfies the Howey
Test.
• Nuanced reading of statute
• Commentary to the Uniform Securities Act (source of this provision)
―Section 102(28)(E) is consistent with state and federal laws which
have recognized interests in limited liability companies and limited
partnerships in some circumstances as securities, when consistent with
the court decisions interpreting the investment contract concept.‖
Uniform Law Comments cmt. 28 (2002) (emphasis added).
• Uniformity Principle
-one of the policies for the state administrator to consider when acting
under the Uniform Securities Act is ―[m]aximizing uniformity in
federal and state regulatory standards.‖ Idaho Code 30-14-608.
-―Uniformity of regulation among the states and coordination with the
Securities and Exchange Commission is a principal objective of this
Act.‖ Uniform Law Comment 1 (2002).
• Policy – prevent interference with dual regulatory balance, prevent over-
regulation

39. Is My LLC
Interest A
Security…
under
under Idaho
federal law?
law?
Securities Act of 1933;
Securities Exchange Idaho’s Uniform
Act of 1934. Securities Act (2004).

40. Thank you!
I welcome your comments at
wgcouture@uidaho.edu