How can a small LLC accept money and share profits with investors, without violating SEC guidelines?

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How can a small LLC accept money and share profits with investors, without violating SEC guidelines?

My partner and I have a small LLC, and we have investors who are trying to give us money. It’s limited to 2 people giving us $7,000 – $10,000 each. In return, we would like to offer these investors a percentage of the quarterly profits when the company is doing business. We want to accept the money, but we were informed that this may be considered a “security” by the SEC, and we could be in violation of their guidelines.

Asked on November 21, 2010 under Business Law, Florida

Answers:

M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

The definition of the word "security" is not as cut and dry as one may think.  In fact, the definition was expanded in the year 2000 (an expansion that modified the old rule from about 1933 and 1934) to include other "types" of securities.  What you may be offering could be known as a "security future" or an "equity security" so it may in fact be subject to certain issuance guidelines.  If you want to be sure then I would either contact a securities attorney for consultation or see if the SEC will give you a ruling before you do the transaction here. Having a ruling from them is the best defense against a future claim of a violation.  It is better than hindsight.  Good luck.


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