Regulatory Update (2026): While the foundational mechanics of selling LLC interests remain accurate, the regulatory landscape has evolved. Under federal law, courts treat LLC membership interests as “securities” only if they qualify as an “investment contract” under the Supreme Court’s Howey test: a) An investment of money; b) In a common enterprise; c) With profits derived solely from the efforts of others. Recent federal decisions emphasize that this remains a highly fact-specific inquiry. Crucially, the “efforts of others” element is generally not satisfied if the investor has a reasonable expectation of significant control at the time of investment (even if they choose not to exercise it later).

Need to structure a compliant transfer? Small changes in your operating agreement can inadvertently cross the line into securities law. Contact Rosten Law directly to review your specific transaction.

Selling interests in LLCs: what you were afraid to ask about the securities laws

You have a small company and formed the business as a limited liability company. You think that securities laws are only for large companies. But If you think that the Securities and Exchange Commission (SEC) is not interested in selling some membership interests in your LLC, you may want to think again – and read this article.

You have to be worried about federal securities laws if you are selling securities. Under federal statutory definitions—specifically the Securities Act of 1933 and the Securities Exchange Act of 1934—the term “security” explicitly includes an “investment contract.” Because LLC membership interests are not automatically categorized as securities, the central legal question is whether a particular membership interest satisfies the legal criteria of an investment contract. The sale of certain limited liability company interests may fall within the ambit of a federal securities transaction. This article addresses the question of whether ownership interests in a LLC are subject to federal securities laws. In the next article, we will discuss what are the implications of treating the sale of ownership interests in a LLC as a securities transaction. Then you need to think about who you can sell those LLC interests to and who can represent your company in finding investors.

Related articles:

Selling LLC Interests: Finding Exemptions from Securities Laws

Selling a Small Business: Not as Easy as you Thought

What are limited liability interests?

You have a limited liability company and the company issues some sort of indicia of ownership that may be called ownership interests or membership interests or some sort of combination of those words depending on the jurisdiction in which the LLC was formed. Some courts have referred to ownership in a LLC as a hybrid between a corporation and a partnership.

In general, members receive two different sets of rights. One is the right to receive distributions, which is what you would get if you were getting stock in a corporation. The second is what is known as non-economic rights, such as the right to participate in the deliberations of the company. Depending on the operating agreement for the LLC, some of the owners may be getting economic rights but not non-economic rights, similar to a limited partnership. The major question is whether rights as represented by interests in a limited liability company are securities under federal law.

The Securities and Exchange Commission regulates “securities”

So you have this bundle of rights and now you want to know whether it is a security. The Securities Act of 1933, Section 2(a) provides this definition of a security: “The term ‘security’ means any note, stock…transferable share, investment contract…”  One court gave this definitive rule: “LLCs are particularly difficult to categorize under the securities laws.”

The courts have looked at various rights in a company to determine whether the right is a security to determine whether the ownership interest in a LLC is an investment contract. You probably first want to know what an investment contract is. In a case from 1946, the Supreme Court defined “investment contract” as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).

This definition has been refined into a three-element test named the “Howey test”. Under the Howey test, it must be established that the contract or transaction at issue was: (1) an investment, (2) in a common enterprise, and (3) with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

If you are selling stock in a corporation, the securities laws by definition apply to you.  A share of stock is a security. But what about a membership interest in a limited liability company, which is somewhat like a share of stock in that it represents an ownership interest in the business. It is not a share of stock, but it may be part of what the securities laws call an “investment contract,” which is a security. How does the Howey test apply to ownership interests in an LLC?

Figuring out whether ownership interests in a LLC are an investment contract

The courts have not had an easy time grappling with whether a particular LLC transaction comes within the investment contract definition. One court candidly admitted that it is “exceedingly difficult to declare that LLCs, whatever their form, either possess or lack the economic characteristics associated with investment contracts.” When faced with this prickly issue, courts conduct a case-by-case inquiry into the “economic realities” of the transaction rather than relying on formal titles.Importantly, federal courts conduct an objective inquiry into what purchasers were “led to expect” at the time of the transaction. This analysis is not limited to the text of the operating agreement; it extends heavily to promotional materials, offering documents, and how the interest was marketed to potential buyers.

The courts may start the discussion with whether the LLC is manager-managed or member-managed, but that only is the beginning of the discussion. Under federal jurisprudence, the third prong of the Howey test is not met if, at the time of investment, the investor has a reasonable expectation of significant investor control. No single factor is dispositive. The controlling legal question is whether profits are expected to come from the essential managerial efforts of others, balanced against the investor’s structural rights and practical ability to exercise them.

Related article: Manager-Managed and Member-Managed LLCs: What’s the Difference?

Case-by-case determination of the nature of LLC interests

Because federal courts emphasize the commercial and economic realities over categorical labels, predictability remains a challenge for small businesses. A member-managed designation on paper will not prevent a transaction from falling under SEC jurisdiction if marketing materials led the buyer to expect a entirely passive return generated by the founders’ unique expertise.

Securities laws may apply to purchase and sale of LLCs

Securities laws may apply to your purchase or sale of membership interests in a limited liability company. If you are either a purchaser or a seller, it makes sense to seek the services of a lawyer who can help guide you through the maze of federal securities laws for LLCs. In our next article, we will discuss how, even if you have a securities transaction, you may be able to meet the requirements of one of the exemptions from registration.

UPDATED: May 19, 2026

Tags