Modern Partnership Interests as Securities:The Effect of RUPA, RULPA, and LLPStatutes on Investment Contract Analysis

I. Introduction The evolution of business organization law in recent years is striking. Traditionally, lawyers could consistently rely on certain categorical norms. For example, a clear difference existed between general partnerships and limited partnerships.1 Partners in general partnerships faced unlimited personal liability for partnership obligations and were expected to participate in firm management.2 Alternatively, limited partnerships offered limited liability for those partners who had little desire to participate in firm management.3 Such stark formal differences made application of federal securities law4 to partnership interests relatively simple.5 Although federal securities law does not specifically mention partnership interests in the definition of a "security," courts and commentators agree that partnership interests should be analyzed as investment contracts, a term included in the definition of a "security."6 In SEC v. W. J. Howey Co.,7 the Supreme Court announced an investment contract test that required profits to be derived from the "efforts of others."8 Building on Howey's "efforts of others" test, lower federal courts developed presumptions that general partnership interests are not securities and that limited partnership interests are securities.9 These presumptions rely on traditional notions of the roles that general and limited partners play within their respective firms.10 Recent changes in partnership law have uprooted traditional notions of partnership, causing a blurring of the lines and a collision of categories so that traditional presumptions no longer provide sufficient analytical tools when deciding whether partnership interests are securities. General partnership law no longer guarantees general partners enough control over partnership affairs to protect their investment.11 Statutory norms no longer restrict limited partners to merely passive roles.12 Moreover, the development of limited liability partnerships (LLPs) effectively eliminates the traditional tradeoff between partnership control and limited liability.13 This Note considers whether changes to partnership law and the development of LLPs should alter the effect of federal securities law on partnership interests. In Part II, this Note discusses the traditional application of federal securities law on general and limited partnership interests. Part III provides a lengthy but necessary discussion of the changes in modern partnership law that make traditional form-based presumptions less reliable. Specifically, Part III discusses the increased freedom of contract available under the Revised Uniform Partnership Act (RUPA) and explains how this freedom enables partnerships to create strong centralized management and stripped general partners.14 In addition, Part III explains how the Revised Uniform Limited Partnership Act (RULPA) allows limited partners to exercise control without incurring personal liability. Part III concludes with a discussion of LLPs and compares LLPs to general partnerships. Part IV suggests that changes in modern partnership law remove the basis for presuming that partnership interests are or are not securities based solely on formal categories. Furthermore, Part IV proposes a test for determining whether an interest in a general partnership, a limited partnership, or an LLP is a security. Part V concludes that formal categories no longer reflect economic reality and that courts should disregard form-based distinctions when deciding whether partnership interests are securities. II. Federal Securities Law and the Definition of "Security" Congress intended the federal securities laws15 to ensure fair disclosure of financial information to potential investors.16 The federal securities laws apply to transactions involving "securities" as defined in the Securities Act of 1933 17 and the Securities Exchange Act of 1934. 18 According to the Supreme Court, the definitions of the term "security" in the two Acts are essentially the same. …