Excerpts from “When does a deal involve securities regulation? Part 3: Partnerships and Limited Liability Companies” link at bottom

“….In this post, we’ll explore when an interest in a limited liability company (“LLC”) or a partnership constitutes an investment contract, and consequently, a security.”

“…When the Securities Act of 1933 was written, there was no such thing as an LLC or a limited partnership.  The only type of partnership-like entity available was a general partnership, which featured unlimited joint and several liability for the partners.  As a result, it was very rare that someone would invest in a partnership in a passive role.  Therefore, partnership interests were left out of the definition of a “security” under the Securities Act.

Now, with the advent of limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies, there are a myriad of choices available that allow an investor to invest in a partnership and enjoy limited liability. …”

“…a general partnership interest in a partnership or a managing member interest in an LLC are generally not securities, because the control that the general partner or managing member has over the company causes the general partner or managing member’s interest to fail to meet the final prong of the investment contract definition (that is, profit arising primarily from the efforts of people other than the investor).  Likewise, members in a member-managed LLC are usually not deemed to be holders of securities if they have the ability to participate in management….”

“…In securities law, substance often trumps form.  Thus under Williamson v. Tucker, 645 F.2d 404 (5th Cir 1981), the Court of Appeals for the Fifth Circuit held that a general partnership interest could be a security if the investor was dependent on the promoter and could not exercise meaningful control.  Examples of such a situation are (i) where the managing partner cannot be replaced or is very difficult to replace, (ii) where the investors are inexperienced in business affairs and cannot exercise their abilities to participate in management, or (iii) where the promoter has unique managerial abilities which cause de facto reliance on the promoter….”

“….Footnotes

[1] It is possible that a limited partnership interest or a non-managing member interest in an LLC could be outside the definition of an investment contract if the economic realities indicate that the limited partner has significant and legal control of partnership management.  See Steinhardt Group v. Citicorp, 126 F.3d 144 (3rd Cir. 1997)….”

http://www.strictlybusinesslawblog.com/tag/limited-liability-partnership/