## Is an LLC Considered an Investment Company?
Limited liability companies (LLCs) are often used for investment purposes, but they are not automatically classified as investment companies under United States securities law. The classification of an LLC as an investment company depends on several factors, including its primary purpose, the nature of its assets, and the extent to which it is engaged in investment activities.
**Definition of an Investment Company**
Under the Investment Company Act of 1940 (the “Investment Company Act”), an investment company is defined as any issuer that is engaged in the business of investing, reinvesting, owning, holding, or trading in securities, and that is not a bank, insurance company, or registered investment adviser.
**Primary Purpose Test**
The primary purpose test is the most important factor in determining whether an LLC is an investment company. The LLC’s primary purpose is determined by considering the following factors:
* The stated purpose of the LLC in its formation documents
* The activities of the LLC
* The sources of the LLC’s income
* The investment objectives of the LLC
* The marketing materials used to promote the LLC
**Nature of Assets Test**
The nature of assets test is also important in determining whether an LLC is an investment company. The LLC will be considered an investment company if more than 50% of its assets are “investment securities.” Investment securities include:
* Stocks
* Bonds
* Mutual funds
* ETFs
* Options
* Futures
**Investment Activities Test**
The investment activities test considers the extent to which the LLC is engaged in investment activities. The LLC will be considered an investment company if it is primarily engaged in the following activities:
* Buying and selling securities
* Investing in other investment companies
* Providing investment advice
* Managing investment portfolios
**Exceptions to the Investment Company Definition**
There are several exceptions to the definition of an investment company, including:
* LLCs that are privately held and do not offer their securities to the public
* LLCs that are formed solely for the purpose of holding real estate or other non-investment assets
* LLCs that are formed solely for the purpose of conducting a specific business activity, such as operating a restaurant or retail store
**Consequences of Being Classified as an Investment Company**
LLCs that are classified as investment companies are subject to the registration and reporting requirements of the Investment Company Act. These requirements include:
* Registering with the Securities and Exchange Commission (SEC)
* Filing annual and quarterly reports
* Disclosing certain information to investors
* Complying with certain investment restrictions
**Avoiding Investment Company Status**
LLCs that do not want to be classified as investment companies should take steps to avoid meeting the definition of an investment company. These steps include:
* Limiting the percentage of the LLC’s assets that are invested in investment securities
* Limiting the LLC’s investment activities
* Making sure that the LLC’s primary purpose is not to invest in securities
**Conclusion**
The classification of an LLC as an investment company is a complex issue that depends on several factors. LLCs that are not sure whether they are considered investment companies should consult with an experienced securities lawyer.
**Additional Resources**
* [SEC: Investment Company Fact Sheet](https://www.sec.gov/investor/pubs/invcofact.htm)
* [SEC: Frequently Asked Questions About the Investment Company Act](https://www.sec.gov/divisions/investment/ica-faqs)
* [American Bar Association: LLCs and the Investment Company Act](https://www.americanbar.org/groups/business_law/publications/blt/2014/04/14_fischer-davis-et-al/)