You are selling a security, whatever you call it

You can call it a membership interest. You can call it a partnership. You can write “joint venture” across the top of the document and have every investor sign a page that says they are active co-venturers. None of it decides whether you have sold a security. A federal test decides that, the label you chose is not part of the test, and the test was built specifically to see through labels.

The test comes from a 1946 Supreme Court case, SEC v. W.J. Howey Co., and it has four parts. An arrangement is an investment contract, and therefore a security, when there is an investment of money, in a common enterprise, with an expectation of profit, derived from the efforts of others. Confirm the current articulation against Howey and its progeny before relying on the exact wording, but those four elements are the frame every court starts from.

Passivity is not a detail of your deal. It is the thing that makes your deal a security.

Look closely at the fourth element, because it is the one syndication runs straight into. “Derived from the efforts of others” means the investor is counting on someone else, the sponsor, to make the money. That is the entire premise of a passive real estate raise. The limited partners wire money and then do nothing. They do not pick the property, run the renovation, sign the loan, or decide when to sell. They cannot, by design. The whole product you are selling is the promise that they do not have to.

This is where sponsors talk themselves into trouble. The instinct, when someone worries about securities law, is to make the investors look more active. Give them a vote. Call them managers. Paper it as a joint venture of equals. The problem is that the governance structure passive investors actually want is the one that makes the security analysis clearer, not murkier. Investors in a syndication want limited liability and no operational burden. They want to be passive. The more faithfully you give them what they are paying for, the more plainly the interest is a security.

The joint-venture argument, the idea that a real JV of active participants is not a security, is real but narrow, and it does not fit a normal syndication. It turns on whether each participant has genuine, meaningful control over the enterprise, the kind of power that lets them protect their own investment through their own effort. A general partner in a general partnership can sometimes clear that bar. Ten doctors who wired $100,000 each and get a quarterly report cannot. Handing passive investors a token vote on major decisions does not convert them into active co-venturers; it just adds a governance clause to a security.

The structuring consequence is blunt. You cannot draft your way out of securities law by rearranging the labels, because the trigger is the economic reality of passivity, and passivity is the product. A manager-managed LLC selling interests to non-managing members is selling securities. A limited partnership selling LP interests is selling securities. A “50/50 joint venture” where one side runs everything and the other side just funds it is selling securities to the side that just funds it, JV caption and all. Accept that the interest is a security, and spend your effort on the next question, which is which exemption lets you sell it. That question has answers. The question of whether you can avoid securities law entirely does not.