When does forming a multimember LLC count as a security transaction

[Eli C.]

I am looking at forming a multi-member LLC with some other investors. I would be the managing partner. My concern is that this may be considered a securities transaction.

- There would be less then 35 members. Probably close to 20
- Members share/ownership of the LLC and thus the property would be a percent based on initial investment. So someone investing 5% of the purchase price of the property would be a 5% owner of the LLC.
- I have some real estate experience, most of them don't have any
- we all have graduate degrees (does this go toward qualifying as "sophisticated investors"?)

We have council and they will go over everything before anything official is established, but I would hope to learn from the wisdom here and pay less to council for looking at this longer then required.

[Chris Martin]

Eli, it is perfectly fine for people to form a company. What you describe is not a "securities transaction", it is an entity formation.

As you know, people create a company (e.g an LLC) and define the company roles and rules through an operating agreement (OA). The owners of the company, the members, create a membership interest using whatever membership rules the OA spells out. The membership interest is personal property. If your OA (and state) allows, you can even assign your interest in the LLC to someone else. Note I am talking about my state, and you'll want to make sure there are similar laws in your state.