LLC, Securities Law
Three California people purchased units in an LLC that was formed and operated its business in Iowa. The other units were purchased by Iowa residents. The four members that formed the LLC were the managing members and they, incidently, were Real Estate Brokers that owned a company separate from the LLC. We were told of possible 40% returns, but were provided no disclosures. Instead the company was managed with negligence, perhaps gross negligence, and everyone, thus far, has lost apprx. 25% of the value of their shares.
It is our understanding that the units could be considered units and that selling them to out-of-state, non-members could be considered the sale of securities. Did the managing members sell out-of-state securities, and thus violate federal law? If so, what might the penalities be for these actions?
Re: LLC, Securities Law
The units of the LLC were almost certainly securities. The sales to California residents would almost certainly bring the issuance and sale under federal law. What is less certain is that a law was broken. Probably, I'd say, but failure of an issuer of securities to achieve its stated goals is not, without more, a violation of the law.
Going over the whole deal with a fine-tooth comb is very likely going to reveal some violations of the Iowa or federal securities laws, possibly even criminal violations, but there are so many possibilities it's hard to predict. Lack of disclosures is a major problem area for securities law violation, but management negligence suggests other types of liability. Mismanaging a company is less likely to violate securities laws as it is to violate management's fiduciary duties of care and loyalty.
If the investors have lost a lot of money, I'd suggest finding an Iowa securities attorney who can investigate both the company itself and its compliance with Iowa and federal laws.
