Legal Question in Business Law in California

The short answer is "yes", but the guidelines that you follow depend on the particulars of your structure (i.e., how much are you seeking to raise?, how are you getting your investors, are you seeking investors across multiple states?). You definitely need counsel to set this up properly.

As the other attorney mentions, the devil is in the details. Besides saying the answer is most likely yes, this is not the type of question that can be answered without a full review of all facts and circumstances. Consult with a good business or franchise attorney in your area for specific advice.

Mr. Franchise - Kevin B. Murphy, B.S., M.B.A., J.D.

Franchise Attorney

Franchise Foundations APC

Yes, membership interests in an LLC are clearly securities.

Securities lawyers have an old saying: "There are three kinds of securities offerings - registered, exempt, and illegal."

Federal and state securities laws provide several registration formats as well as several sets of rules under which an issuer of securities can claim an exemption from the registration requirements. Newly-formed businesses will find it difficult and expensive to register their securities, so they nearly always choose the exemption route.

Regulation D is one of several Federal exemption pathways, and it subdivides into three separate rules which the issuer must choose between: Rules 504, 505 and 506. Each of these has a built-in set of limitations affecting, typically, the maximim dollar amount that can be raised, the number of investors that may be solicited, whether advertising is permitted, and whether investors must be "qualified."

It is also necessary to comply with state securities laws - so-called "blue sky laws" - in each state where the securities will be offered. To simplify the process (somewhat) for a multi-state offering, we now have the "SCOR" interstate registration format, often used in conjunction with the Federal D/504 exemption. SCOR was invented by the organization of state securities regulators and stands for "Small Corporate Offering Registration." I believe it can be used for LLC offerings as well.

Some states, including California, will conduct a so-called merit review of Reg.D/504/SCOR and other offerings, and will reject them if the regulators feel the offering is too risky or the documentation is not up to state criteria. California is likely to reject registrations from startups or early-stage companies that don't have audited financial statements,

Your LLC would also have to prepare and furnish a disclosure document to each prospective investor. Typically, this would be a private placement memorandum. I have read dozens in my career, and written a few - and this is not a trivial exercise.