Securities Exemptions San Diego

Federal and California Securities Exemptions Summary

Federal and California securities exemptions allow for the offer and sale of securities without federal registration with the Securities and Exchange Commission or qualification with the California Department of Business Oversight. Every offer or sale of an equity instrument, such as a share of stock in a corporation or s-corporation, LLC membership interest, or partnership interest should be carefully reviewed by an attorney to ascertain whether or not a security is present in the transaction and if this securities exemption will be required to avoid registration or qualification. Just as equity interests need to be examined to determine if a security is present, so do debt instruments such as bonds, debentures, convertible notes, and even promissory notes. These debt instruments are capable of being securities and thus securities exemptions will be required to avoid registration or qualification. The proper use of securities exemptions are important to:

  • Legally raise capital from investors;
  • Avoid criminal or civil liability for securities fraud; and
  • Attract investors by providing all legally required documentation.


Securities Exemption Questions?

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Michael J. Leonard helped us obtain our 501(c)(3), created our bylaws, and completed all of the necessary forms to establish a tax exempt status for our non-profit foundation. He was professional, quick, and great to work with. Mr. Leonard is also very connected in the community and has referred us to useful contacts.

Michel Sproles, Sproles Empowered Youth

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My experience working with San Diego Corporate Law has been nothing short of excellent. Michael Leonard is a tremendous asset, and provided us much needed assistance when forming our insurance agency. He assisted with the formation of our corporation, buy / sell agreement, company bylaws, minutes, and stock certificates. Michael is an utmost professional that I would refer to any friend or client.

Michael Fusco, Fusco & Orsini Insurance Services, Inc.

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Michael J. Leonard at San Diego Corporate Law has provided GWR valuable assistance and professional advice. As a San Diego based high tech equipment manufacturer, we appreciate that we never have to waste his or our time explaining the engineering or scientific details of our situation as his strong, hands on physics and engineering background is invaluable. We are well protected with Mike looking out for our interests.

Richard Reineman, GWR Instruments, Inc.

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In 2009 San Diego Corporate Law converted my Sole Propriety Engineering Company into a “S” Corporation. My experience was painless and Mr. Leonard has done an excellent job staying in contact and continues to be a great advisor. San Diego Corporate Law comes highly recommended.

Curtis Patterson, P.E., Patterson Engineering, Inc.

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Michael J. Leonard at San Diego Corporate Law is not your typical attorney experience. Michael puts his full attention into understanding your needs and provides the best solution to meet your goals. I highly recommend San Diego Corporate Law to any of my friends and associates.

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Working with San Diego Corporate Law made dealing with all the paper work of incorporating and setting up my business a dream! Michael is the ultimate professional and knows corporate law inside and out! San Diego Corporate Law is always available to answer questions, assist me with follow up items, and be my go-to and support team.

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Mr. Leonard is competent, dependable, and gets the work done on time and within budget. He is very responsible to his customers. We would recommend him to anyone that requires a true professional.

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I was recommended to Michael to help me set up a new corporation I was starting. The advice he gave me was great, and I eventually hired his services to create the agreements and contracts between myself and my business partner. Throughout the process he guided me and asked very detailed questions. I felt that he had my back and my best interest at heart. Looking back now, the contracts he wrote have saved me close to $40,000 in money that I would have otherwise had to pay. Thank you Michael. Everyone should follow your standards.

Jason Delfos, Marketing and Advertising Design Group, LLC

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We hired San Diego Corporate Law to help us establish our business in San Diego. In the initial stages of setting up our business and transitioning to California, we were frequently out of town. During this time, Michael answered questions promptly and thoroughly by phone and email. He went above and beyond to keep us on deadline for our aggressive schedule. I would not hesitate to recommend San Diego Corporate Law to another business owner.

Alicia Sorber-Gallegos, Two Men and a Truck

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Having no prior experience with business law, I approached Michael to help me set up an LLC for my new company and help me review my legal disclaimers. Michael was very straightforward, honest and helpful. He took the time to explain every detail and answer all of my questions. His work was very diligent and completed exactly by the deadline promised. Michael and San Diego Corporate Law hold my highest recommendation!

Anton Ivanov, Dreams Cash True

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Michael J. Leonard helped me configure my business entities into a solid investment vehicle. He is very professional, knowledgeable, easy to reach and timely. San Diego Corporate Law produced a unique and informative Private Placement Memorandum (PPM) for my business for less than half the cost other law firms were charging. I expect to use the PPM and San Diego Corporate Law for many years. I recommend Michael because of his efficient, hands on, practical approach to legal work in a time of dramatic changes with securities laws (JOBS Act).

John Copyak, Clean USA Power, Inc.

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San Diego Corporate Law helped me set up MGIV Inc and get established as an S-corp in 2013. I was a one man show and didn’t have a substantial amount of money to spend to get started. I was in the process of filing for a LLC through Legalzoom.com when something didn’t feel right. I picked up the phone and asked Michael if he was available to help. This was my first business so I knew nothing about filing for a corporation or legally establishing a business. Using his knowledge and expertise he coached me toward filing for an S-corp instead of an LLC. It saved the corporation $800 in 2013 and positioned it for success based on the MGIV Communication Consulting model. I find comfort knowing that my business is in good hands. Michael is a great resource and very personable so working with him is convenient and affordable! I recommend San Diego Corporate Law to anyone needing legal assistance with their business!

Michael Gordon IV, MGIV, Inc.

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When I needed to move my business from an office suite to a brick and mortar location, San Diego Corporate Law was instrumental in ensuring that the lease provisions were in my best interests. The specialized skills that Michael and his team possess, the fair and transparent fee structure, and their professional yet low pressure consultation process are the reasons why I will retain their services in the future.

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Michael J. Leonard at San Diego Corporate Law not only helped us establish our small business in San Diego, but he helped us to solidify our partnership to avoid any gray areas as we are a family-run business. Michael was easy to work with, knowledgeable, responsive, and professional, and we will continue to use him as our company lawyer moving forward.

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Andrey Kamogari, Kamo Housing

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San Diego Corporate Law has been a crucial partner for Little Black Diamond. Whether it’s routine incorporation paperwork or complex employment law, Michael is always very responsive and available to help handle our legal issues. He takes the time to understand your business and the unique issues that surround it in order to provide accurate and timely advice that considers the best interest of your business. San Diego Corporate Law is a true partner for any business.

Adam Rosenberg, Little Black Diamond, LLC

Federal and California Securities Exemptions San Diego Details

Federal Registration of Securities

Unless securities exemptions are available, all offers or sales of securities are required to be registered under the Federal Securities Act of 1933.

Federal Securities Exemptions

The following is not an exhaustive list of federal securities exemptions from under the Federal Securities Act of 1933, but includes the most commonly used federal securities exemptions.

Nonpublic Offering Securities Exemptions

Under § 4(2) of the Securities Act of 1933, as amended August 20, 1964, transactions by an issuer not involving any public offering are exempt from registration under the Securities Act of 1933. In order to qualify under § 4(2) of the Securities Act of 1933, the investors must:

  • Be a “sophisticated” investor or be able to bear the investment’s economic risk;
  • Have access to the type of information normally provided in a prospectus; and
  • Agree not to resell or distribute the securities to the public.

A sophisticated investor is one having the knowledge and experience necessary to evaluate the merits and risks of an investment.

Whether a transaction involves a public offering is a question of fact and necessitates consideration of all circumstances, including the relationship between the issuer and investors and the nature, scope, size, type, and manner of the offering.

The nonpublic offering exemption must be interpreted in the light of the statutory purpose of the Securities Act of 1933, which is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. S.E.C. v. Ralston Purina Co., 346 U.S. 119, 124, 125 (1953). The sale of securities to promoters who take the initiative in founding or organizing the business would come within the exemption. U.S. Securities and Exchange Commission Release No. 33-4552. The transaction tends to become public when the promoters begin to bring in a diverse group of uninformed friends, neighbors, and associates. Id. Public advertising is incompatible with a private offering, as are the use of a securities exchange for placement, sales to underwriters, and other circumstances.

Civil liability and criminal sanctions for fraud arising from the Securities Act of 1933 are applicable despite the availability of an exemption from registration.

Regulation D Securities Exemptions

Regulation D was enacted to provide a relatively uniform set of federal securities exemptions for coordination with Blue Sky laws. The limited offering exemption adopted by California is, in many ways, compatible with Regulation D.

Under Regulation D, a security is exempt from registration for limited, private offerings of securities when:

  • The offers and sales do not exceed $1,000,000.00 regardless of the number of investors;
  • The offers and sales do not exceed $5,000,000.00 and there are no more than 35 unaccredited investors; or
  • The offers and sales to no more than 35 “sophisticated” investors other than accredited investors.

For purposes of Regulation D, an accredited investor is a person who, at the time securities are sold to that investor, is:

  • A bank under § 3(a)(2) of the Securities Act of 1933;
  • An insurance company under § 2(13) of the Securities Act of 1933;
  • An investment company registered under the Investment Company Act of 1940;
  • A business development company under § 2(a)(48) Investment Company Act of 1940;
  • A small business development company under § 301 of the Small Business Investment Act of 1958;
  • An government employee benefit fund with assets over $5,000,000.00;
  • An employee benefit plan under the Employee Retirement Income Security Act of 1974;
  • A private business development company under § 202(a)(22) of the Investment Company Act of 1940;
  • A savings & loan or other institution under § 3(a)(5)(A) of the Securities Act of 1933;
  • A broker or dealer registered under § 15 of the Securities Exchange Act of 1934;
  • An exempt organization under § 501(c)(3) of the Internal Revenue Code with assets over $5,000,000.00;
  • A director, executive officer, general partner of an issuer or the issuer of securities;
  • An individual whose net worth exceeds $1,000,000.00;
  • An individual whose income exceeded $200,000.00 per year ($300,000.00 with spouse) in the last two years;
  • A trust with assets over $5,000,000.00 directed by a sophisticated person not formed for the purpose;
  • An entity owned by only accredited investors.

Under Regulation D, the issuer must disclose specified information, including financial information. 17 Code of Federal Regulations § 230.502(b). This disclosure requirement does not apply if the issue is less than $1,000,000.00 or if the offer and sale is made solely to accredited investors. 17 Code of Federal Regulations § 230.504; 17 Code of Federal Regulations § 502(b)(1). Disclosure information, when required, must be given to unaccredited investors a reasonable time before the sale. 17 Code of Federal Regulations § 230.505; 17 Code of Federal Regulations § 230.506. The information given to unaccredited investors must include any information given to accredited investors. 17 Code of Federal Regulations § 230.502(b)(2)(iv). The issuer must also provide each investor the opportunity to ask questions and receive answers about the offering and give investors time to verify the information given by the issuer. 17 Code of Federal Regulations § 230.502(b)(2)(v). Unless under Rule 504, no general solicitation or advertising may be used in the offer and sale under Regulation D. 17 Code of Federal Regulations § 230.504(b)(1). Securities issued under Rule 505 and/or 506 may not be resold without registration. However, under certain circumstances, issuances in accordance with Rule 504 need not be registered before they are resold. 17 Code of Federal Regulations § 230.502(d); 17 Code of Federal Regulations §230.504(b)(1). Issuers offering or selling under the exemptions available under Regulation D must file a notice with the Securities and Exchange Commission. 17 Code of Federal Regulations § 230.503.

Regulation A Securities Exemptions

Regulation A allows for exemption from registration of the Securities Act of 1933 if the issuer is not subject to §§ 13 or 15(d) of the Securities Exchange Act of 1934 if the total issuance will not exceed $5,000,000.00, including $1,500,000.00 in secondary sales less the offering price of all sales made within the last 12 months under Regulation A. 15 United States Code §§ 77a – 77aa; 17 Code of Federal Regulations § 251(b). An issuer may deliver disclosure documents or scripted broadcast advertisements to determine interest in securities, but may not make oral offers until Form 1-A has been filed with the Securities and Exchange Commission. 17 Code of Federal Regulations § 230.254(a); 17 Code of Federal Regulations § 230.251(d)(1)(i). A form 2-A must be filed with the Securities and Exchange Commission every six months to report sales and uses of sale proceeds. 17 Code of Federal Regulations § 230.257.

Intrastate Securities Exemptions

Under SEC Rule 147, offers and sales made by an issuer doing business in a particular state to investors in that same state are exempt from the registration requirements of the Securities Act of 1933. 17 Code of Federal Regulations § 147; 17 Code of Federal Regulations § 147(c)(1); 17 Code of Federal Regulations § 147(c)(2); 17 Code of Federal Regulations § 117(d). Shares issued in reliance upon SEC Rule 147 may only be resold to persons residing in the same state until nine months after the last date the securities were issued. 17 Code of Federal Regulations § 230.147(e). Issuers must take precautions to ensure interstate sales do not occur until at least nine months after the last date the securities were issued. 17 Code of Federal Regulations § 147(f).

California Qualification of Securities

The California Corporate Securities Law of 1968 requires that all offers and sales of securities in California be qualified unless expressly exempt or not subject to qualification in both issuer and non-issuer transactions as well as reorganization. California Corporations Code §§ 25110, 25120, 25130.

California Securities Exemptions

The following is not an exhaustive list of California securities exemptions from qualification under the California Corporate Securities Law of 1968, but includes the most commonly used securities exemptions.

The Limited Offering Exemption

The main purpose of the limited offering exemption is to provide the promoters of small businesses with the ability to sell securities to family members, friends, business associates, and sophisticated investors with whom the issuer does not have a preexisting relationship, but the exemption is available to other situations as well. The number of investors to whom offers can be made is not limited, but the actual number of purchasers is limited to 35. California Corporations Code § 25102(f)(1). There are no disclosure requirements under the limited offering exemption, but untrue statements or omissions of material facts are prohibited. 10 California Reg. Code § 260.102.14; California Corporations Code § 25401.

The limited offering exemption does not limit the value of securities that may be offered or sold but otherwise are similar to the provisions of Regulation D. California Corporations Code § 25102(f); 17 Code of Federal Regulations §§ 230.501 – 230.506.

If the issuance of securities relies upon the limited offering exemption but fails to meet the requirements of the limited offering exemption and the securities are not qualified, investors may rescind their purchase of the securities or seek damages from the issuer. Criminal sanctions may also be imposed.

The Small Offering Exemption

The small offering is useful in some instances where the limited offering exemption cannot be satisfied but is generally only used in such cases.

Under the small offering exemption, the offer and sale of securities is exempt from qualification where there are less than thirty-five beneficial owners of the securities, and the securities are issued in only one class of ownership. California Corporations Code § 25102(h). The small offering exemption does not allow any offer or sale to be advertised and does not permit the payment of selling expenses in connection with the offer and sale. California Corporations Code §§ 25102(h)(1), 25014; 10 California Code of Regulations § 260.102.7. Likewise, promotional consideration may not be paid in connection with an issuance under the small offering exemption. California Corporations Code § 25102(h)(3).

The consideration paid by an investor to the issuer for the securities under the small offering exemption may only be:

  • The assets of a going concern;
  • Cash or Cancellation of Indebtedness; or
  • Cash Only.

Unless there is only one investor, any mixing of consideration types is not permitted. California Corporations Code § 25113.

Within ten days of receiving consideration for the sale of securities under the small offering exemption, the issuer must send a notice, signed by a member of the State Bar of California, to the Commissioner of Corporations containing the attorney’s opinion that the exemption is available. California Corporations Code § 25102(h)(4). A fee for filing the notice with the Commissioner of Corporations must be included, and it is scaled depending upon the value of securities sold. Failure to provide notice as required does not destroy the exemption, but the fine for non-compliance is equal to the fee required for qualification of the securities. Id.


Securities Exemption Questions?

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