There are right around a billion reasons why you shouldn’t form and organize your own limited liability company. Today’s reason: securities laws.
First, some background. A limited liability company requires one or more members. N.D.C.C. § 10-32.1-27. A member is issued something called a “membership interest.” N.D.C.C. § 10-32.1-02(32). A membership interest is a security under the Securities Act of 1951. N.D.C.C. § 10-04-02(19).
Under the Securities Act of 1951, membership interests must be registered with the North Dakota Securities Commission unless it falls under an exemption. N.D.C.C. § 10-04-04. The list of exempt transactions is located in Section 10-04-06. Generally speaking, you will need to find a transaction exemption or risk violating Chapter 10-04. Securities exemptions are complex. Take a look if you don’t believe us.
The Securities Act of 1951 has very sharp teeth. First, a willful violation of Chapter 10-04 is a class B Felony. N.D.C.C. § 10-04-18(1). Second, the transaction may be voidable by the purchaser, at the purchaser’s election. N.D.C.C. § 10-04.17(1). This means the purchaser can effectively “undo” the transaction. Third, the purchaser can recover damages, taxable court costs, interest, and reasonable attorneys fees (less the value of the security). N.D.C.C. § 10-04.17(1). Attorneys’ fees in securities cases can be very high because of the complexity.
We often see member disputes that end up in litigation. It’s not uncommon for securities claims to be included. These risks can be mitigated by hiring a business attorney who is familiar with securities exemptions. You should not try to navigate securities exemptions — especially with a multi-member LLC — without an attorney.