You are the CEO of L\'Malle LLC, a nonpublic company that builds and manages sho

Question

You are the CEO of L'Malle LLC, a nonpublic company that builds and manages shopping malls. L'Malle plans to raise $4,400,000 for construction of L'Malle's newest shopping center complex, Grande L'Malle Geneva. In an effort to avoid the application of the Securities Act of 1933, L'Malle's CFO has proposed that L'Malle issue 22 Profit Participation Plans (PPPs) to two insurance companies, four mutual funds, and 16 individual investors. Under the PPPs, each owner will contribute $200,000 cash to finance the construction of Grande L'Malle Geneva (GLG) and receive 3 percent of the profits generated by GLG. L'Malle will be the exclusive manager of GLG, making all decisions regarding its construction and operation, for which L'Malle will receive a fee equal to 34 percent of GLG's profits.

Are the PPPs securities under the Securities Act of 1933?

Explanation / Answer

A security defined by Securities Act 1933 (amended upto 2012) is as follows

The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

The following are exempted securities under Securities Act 1933

The Profit Participation plans described in the question does not form part of any of the above exemptions and qualify as a profit sharing plan within the definition of a security under Securities Act 1933.

Hence the PPPs should be treated as securities under Securities Act 1933.

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