506(b) exemption for an LLC (small deal)

[Account Closed]

Hi BP,

I'm in the process of raising some equity for a commercial deal and I've been reading about securities law. 

I'm still getting my operating agreement together, but the general structure will be an LLC of which I will be the managing member/ sponsor, receive an asset management fee/ acquisition fee, and a promote based on the performance of the asset.

I'm trying to determine whether I need to file a 506(b) exemption. 

My understanding of the "Howey Test" is that for an investment to be considered a security it has to meet the following criteria:

• It is an investment of money
• There is an expectation of profits from the investment
• The investment of money is in a common enterprise
• Any profit comes from the efforts of a promoter or third party

It's that last point that I'm struggling with. The operating agreement for the LLC between myself and my investors will look a lot like a GP/ LP relationship. I won't have majority ownership of the LLC, but will have control... and will be doing "most" of the work.

Under what circumstances would I not have to file a 506(b) exemption? It seems if my partners did some work on behalf of the LLC we'd be in the clear... is holding quarterly meetings with partners and having them vote on resolutions good enough? How material does their involvement have to be?

In addition to staying compliant, I'm also concerned about cost. I've read filing the exemption can be $10,000 and since this would be my first commercial deal (I'm planning on raising a couple hundred thousand dollars) the expense of filing is definitely a non-trivial sum...


Any perspective would be greatly appreciated!

Patrick 

[Amy Wan]

Thanks @Alina Trigub.

What you're doing sounds like a classic syndication, so you would need to comply with securities regulations. I always get questions where people ask stuff like "hey, if we meet once in a while to vote on paint and drink wine, is that enough to be an active investors?" While there is no bright line on what makes an active or passive investor (in order to differentiate between a securities offering versus a JV), someone who is active is first and foremost a business partner and is actively contributing a unique skill. They have veto power on decision-making and help drive the train--investors already have the right to meet every so often and vote on things.

Happy to chat off-line if you'd like.