Arizona House Bill 2303 signed into law by Governor Doug Ducey contains a significant change to Arizona’s securities laws. The new law allows the issuance of LLC membership interests to as many as ten LLC “organizers” to be exempt from Arizona securities laws.
Arizona Revised Statutes Section 44-1844.A was amended to read (new language is in bold red text):
“sections 44‑1841 and 44‑1842, section 44‑1843.02, subsections B and C and sections 44‑3321 and 44‑3325 do not apply to any of the following classes of transactions: . . .
10. The issuance and delivery of securities of a corporation, limited liability company or limited partnership to the original incorporators, organizers or general partners, not exceeding ten in number, where the securities are not acquired by the incorporators, organizers or general partners for the purpose of sale to others and are not directly or indirectly sold to a third party within twenty-four months unless an incorporator, organizer or general partner experiences a bona fide change of financial circumstances within such time period, providing original incorporators, organizers or general partners are notified of their right pursuant to title 10 or 29 to review the financial books and records of the corporation, limited liability company or limited partnership at reasonable times.”
The term “organizer” is not defined in any Arizona statutes. The Arizona Corporation Commission’s hard copy form Articles of Organization contains the following statements in Section 9 of the document:
“ORGANIZERS and SIGNATURE – the individual or pre-existing entity submitting this document is the Organizer – list the name of the Organizer below. If the Organizer is an individual, that individual must sign below. If the Organizer is a pre-existing entity, provide the signature of the individual acting for that entity, then print the individual’s name.”
Without any statutory reference that supports the statements, the first paragraph of the ACC’s instructions for its hard copy Articles of Organization states:
“One or more persons can form an Arizona LLC by signing and filing Articles of Organization with the Arizona Corporation Commission. . . . These persons are called “organizers.” “Person” includes individuals and entities.”
Significance of the New Law
This change in Arizona law is very important for every Arizona LLC that will issue membership interests that the securities regulators would designate as a security. If you think an LLC must issue stock to investors before it is considered issuing a security you are wrong.
If the promoters of the LLC say to an investor give me your money for an X% membership interest in our LLC and the LLC will make a profit for you the LLC is issuing a security to the investor. This is an example of an “investment contract,” which is a type of security under federal and state securities laws.
When securities laws apply to the issuance of membership interests in an LLC the LLC must comply with federal and applicable state securities laws or the promoters and the LLC become guarantors of the investors’ investments. Promoters who cause an LLC to issue membership interests that are securities the issuance of which does not comply with applicable securities laws will have substantial liability to the investors and to the securities regulators.
To learn more about securities laws and how they can affect LLCs read the article my son and I wrote called “California LLCs & Securities Laws.” Although the article is about California LLCs, many of the concepts apply to Arizona LLCs.
If your to be formed Arizona LLC will be issuing membership interests to people or entities that are investing substantial amounts of money to purchase their membership interests, you must have EVERY INVESTOR (without exception, but no more than ten) sign the Articles of Organization as an organizer so the LLC can claim the exemptions provided from Arizona securities laws by Section 44-1844.A.10.
If you need your LLC to be able to use the ten exemptions provided in Arizona Revised Statutes Section 44-1844.A.10 hire us to form your LLC. Our Articles of Organization for LLCs that want to take advantage of Section Section 44-1844.A.10 contain special Section 44-1844.A.10 language.
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