Legal Question in Securities Law in New York

Obligation to Disclose Financials?

I am a rsident of NYS. I loaned a NY State-based LLC $25,000

under an Investor's Agreement that was secured by a personal

guarantee from the LLC's 'majority member' and recorded as a

liability against the LLC's land. I am but one (1) of over 140

investors that loaned money to the LLCunder similar

circumstances. What obligation fto conduct financial disclosure, if

any, does the LLC have to the investors? We, as investors, have

received no financial statements, proxy statements,

or any other communication from the LLC regarding the financial

situation that the LLC finds itself in. Have any laws been violated

(i.e. Failure to Disclose Financial Documents)

by the officer(s) of the LLC in seeking the private investment funds

from private invesors? This LLC has raised over $1.5 million in

this manner over the past 2 years. My fear is that the LLC is

having financial difficulty, and they continue to seek private

investors to keep their operation moving forward. In my opinion,

without a 'proxy statement' from the LLC, the private investors are

being taken advantage of.


Asked on 2/20/04, 2:54 pm

2 Answers from Attorneys
William Pinzler william M. Pinzler

Re: Obligation to Disclose Financials?

Generally shareholders have an absolute right to inspect the books of a company in which it owns shares upon proper notice to the corporation. In addition you should consult the operating agreement as to what the obligations are of the oficers of the LLC have to the shareholders regarding the dissemination of financial reports.

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Answered on 2/20/04, 2:59 pm
John Friedman Law Office of John K. Friedman

Re: Obligation to Disclose Financials?

LLCs don't have shareholders -- they have members. Members own "interests" in the LLC which equate to a percentage ownership. Lenders, however, regardless of the context, are neither members or shareholders by default. You must examine the note under which you lent the funds. The note will provide you with a summary of your rights outside the NYS LLC Law. You then need to consult the NYS LLC Law to determine if your rights are expanded/contracted by those statutes and relevant caselaw.

From the facts as you provided them, another wrinkle is that given the number of lenders, certain state "blue sky" laws may be implicated as may some federal laws and those of other states (if some of the other lenders are from out of state).

In sum, your situation is complicated to some degree. You should consult an attorney familiar with NYS securities and LLC laws, allow him or her to review all the documents you have and to research the company. Then you will be able to get a true assessment of your situation, your rights, obligations, rememdies, etc.

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Answered on 2/23/04, 9:32 am


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