Limited Liability Company

When a private placement issuer is organized as a limited liability company (LLC) rather than a corporation, what does a "membership interest" typically represent?

1. A.An equity-like ownership interest in the LLC, governed by the operating agreement rather than corporate bylaws, analogous in economic function to stock in a corporation.Correct. A membership interest is the LLC equivalent of corporate stock, governed by the operating agreement.
2. B.A fixed-income debt claim entitling the holder to scheduled interest payments regardless of the LLC's performance.Wrong. That describes a debt instrument, not a membership interest.
3. C.A right to use the issuer's physical facilities without any financial stake in the entity.Wrong. This is unrelated to the economic and governance function of a membership interest.
4. D.A short-term loan that automatically converts to LLC equity after a stated holding period.Wrong. That describes a convertible note feature, not what a membership interest itself represents.

Why: A membership interest is an equity-like ownership interest in the LLC, governed by the operating agreement rather than corporate bylaws, and it functions economically much like stock in a corporation. It is not a fixed-income claim, a facilities-use right, or a short-term loan that later converts.

In a Rule 506(b) offering, a limited liability company formed three weeks earlier for the express purpose of investing in this offering subscribes. It has six members, four of whom are accredited investors and two of whom are not. How does the LLC affect the purchaser count?

1. A.Each beneficial owner who is not accredited counts separately, adding two counted purchasers.Correct. The look-through applies, and the accredited exclusion in Rule 501(e)(1) removes the other four.
2. B.An entity is always counted as a single purchaser, so the LLC adds one to the count.Wrong. That default is displaced for an entity organised specifically to acquire the securities offered.
3. C.All six members count separately, adding six to the purchaser count.Wrong. It applies the look-through but forgets that accredited investors are excluded from the count.
4. D.The LLC is accredited because most of its members are, so it adds nothing at all.Wrong. The all-equity-owners test requires every owner to be accredited, and two of these six are not.

Why: Rule 501(e)(2) counts a corporation, partnership or other entity as one purchaser as a general matter, but strips that treatment from an entity organised for the specific purpose of acquiring the securities offered unless the entity is accredited under Rule 501(a)(8). That paragraph requires all of the entity's equity owners to be accredited investors, not most of them. This LLC fails the test, so the rule looks through to its beneficial owners. The Rule 501(e)(1) exclusions still apply to those owners, and accredited investors are excluded, so only the two non-accredited members are counted. Had all six members been accredited, the LLC would have been accredited and would have counted as one purchaser, then dropped out of the count entirely.