Copyright (c) 1995 Emory University School of Law
Emory Law Journal
COMMENT: SHOULD INTERESTS IN LIMITED LIABILITY COMPANIES BE DEEMED SECURITIES?: THE RESURGENCE OF ECONOMIC REALITY IN INVESTMENT CONTRACT ANALYSIS
44 Emory L.J. 1591
ROBERT R. JOSEPH *
Use of the limited liability company (LLC) form of business organization has exploded over the last few years. 1 By combining the ability to achieve pass-through tax status, 2 limited liability for all members, 3 and increased flexibility in financial structuring and governance procedures, LLCs seem to offer the best alternative for many closely held enterprises. However, due to a lack of case law dealing with this new form of business entity, a great deal of uncertainty remains as to how LLCs will fit into established areas of business law.
An important area of concern for business planners considering the LLC form, and one which federal courts have not addressed adequately, 4 is whether federal and state securities laws will apply to membership interests in LLCs. 5 If the securities laws do not apply, the LLC form will gain another important advantage over other business forms that must comply with securities regulations. Thus, LLCs will become even more attractive to promoters and business planners in choosing what form a business will take.
Application of the securities laws, on the other hand, would decrease the attractiveness of LLCs in a number of ways. First, unless exempt, interests in LLCs would have to be registered under the Securities Act of 1933 before being sold. 6 Registration greatly increases the costs of raising capital by requiring the business to disclose extensive information to all potential investors. Second, if interests in LLCs are securities, the antifraud provisions of the securities laws ...
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