Yesterday's post concerned U.S. District Court Judge Cynthia Ann Bashant's recent ruling that a plaintiff had failed to plead adequately the existence of a security. D.R. Mason Constr. Co. v. GBOD, LLC, 2018 U.S. Dist. LEXIS 41236. Professor Fershee has followed up on the post in the Business Law Prof Blog: Some Courts Actually Get It: LLCs are Not Corporations.
Judge Bashant's ruling concerned the federal securities laws. The law in California is different. Section 25019 of the California Corporations Code defines "security" to include any "interest in a limited liability company and any class or series of those interests (including any fractional or other interest in that interest)". Thus, there is no need to apply the "investment contract" analysis adopted by Judge Bashant. California does except a membership interest in an LLC in which the person claiming the exception can prove that all of the members are actively engaged in the management of the limited liability company.
I have always found this exception to be a bit of a puzzle. Because it requires proof of what the members actually do, it is impossible to know with certainty at the outset whether a membership interest is, or is not, a security. Suppose, for example, that the members of a member-managed LLC fully fully intend to be actively engaged in the management of the LLC, but one falls sick and cannot participate. Will this subsequent event result in the membership interests becoming a security ex post facto?
