New York Security Agreement regarding Member Interests in Limited Liability Company
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FAQ
A membership interest represents an investor's (called a "member") ownership stake in an LLC. A person who holds a membership interest has a profit and voting interest in the LLC (although these may be amended by contract). Ownership in an LLC can be expressed by percentage ownership interest or membership units.
In California, shares of an LLC in which any member is not continuously actively involved in the management of the LLC would qualify as securities.
Security: An LLC, however, can elect to have its membership interests classified as securities under Article 8 of the UCC. Generally, the organizational documents must expressly state that the membership interests are to be treated as securities.
Limited liability companies (LLCs) do not have stock, nor can they issue it. Despite this fact, LLCs may have advantages over corporations, depending on your particular business needs and goals.
Under Division 8 of the California Commercial Code, an interest in an LLC is NOT a security unless: it is dealt in or traded on securities exchanges or in securities markets, its terms expressly provide that it is a security governed by this division, or. it is an investment company security.
In most cases, an LLC interest is a general intangible. Once the lender has made that determination, issues of perfection and priority of the security interest can be addressed under the UCC Article 9 perfection rules.
As a result, lenders desiring to secure their loans with an equity pledge (typically either in the borrower itself or its subsidiaries) are increasingly taking pledges of LLC membership interests as part of their collateral.
All ownership interests in a manager-managed LLC are considered securities even if some members actually are involved in the daily management of the business.
Under this definition, a membership interest in an LLC is a security for California law purposes unless all of the members are actively engaged in management. Thus, interests in a manager-managed LLC where not all members are managers are securities under California law.
But because interests in these kinds of entities are not listed within the definition of a security under the Securities Act, a partnership or LLC interest will only be considered a security if it constitutes an investment contract.