RE Investor LLCs incorrectly trated as a security

by George
(North Carolina)

I have heard that RE agents have set up LLCs for a multi-buyer Commercial property only to find that it was to be treated as a security sale. How come?

Response:

I am a little unclear on the question.

Were the real estate agents placing the commercial property in an LLC and then selling off portions of the LLC interests to the public?

Depending on how this is structured, it could be considered a sale of securities, in which case there are certain disclosures required under state and federal laws.

When you say "it was treated as a security sale", who was treating it as such...a state securities regulator, the SEC, or the IRS?

On the other hand, if the real estate agents have formed an LLC for the purpose of conducting their business as realtors, and are not selling their LLC interests to the public, there is no reason for securities treatment.