Understanding the penalties associated with late and unfiled California Limited Offering Exemption Notices (LOENs) for California Corporations is essential to avoid unnecessary startup costs and more severe penalties from the California Department of Financial Protection and Innovation and its Commissioner (the securities regulators for the State of California).

A California Corporation is a business entity subject to double taxation (as opposed to a as opposed to a California S-Corp which is a small business corporations making an S Corporation election to be treated for income tax purposes as having S Corporation status). California Corporations are formed by filing Articles of Incorporation with the California Secretary of State and must maintain corporate records such as corporate bylaws, stock certificates, make a registered agent election, maintain a business license when required by applicable local laws and regulations, identify initial directors, and otherwise maintain corporate documents in order to establish a corporate veil to provide limited liability protection to shareholders in corporate form.

This article discusses the California Limited Offering Exemption Notice (LOEN) and the potential penalties for both late filing and non-filing of a LOEN when these penalties, outlines the potential financial and operational impacts, and highlights steps businesses can take to avoid costly mistakes.

What is the California Department of Financial Protection and Innovation?

The California Department of Financial Protection and Innovation (DFPI) serves as the primary regulatory agency in the State of California for financial services and professional industries, aiming to protect consumers while fostering integrity and fairness in the marketplace. Established originally as the Department of Corporations in 1913, the agency has undergone various evolutions including the California Department of Business Oversight in 2013 when merged with the Department of Financial Institutions to a newly formed Business, Consumer Services and Housing Agency, and the most recent transformation in 2020 under the California Consumer Financial Protection Law (CCFPL). This change expanded its authority and scope, positioning it as one of the most comprehensive financial regulators in the United States.

The fundamental mission of the California Department of Financial Protection and Innovation is to oversee the stability of financial organizations while safeguarding consumers from harmful practices. It regulates a diverse range of entities, including banks, credit unions, mortgage providers, securities brokers, investment advisers, and fintech companies. Additionally, the California Department of Financial Protection and Innovation is the securities regulator for the State of California investigating complaints, enforcing compliance with state securities laws, and holding businesses accountable by issuing penalties or sanctions where necessary.

What are the California Laws and Regulations for Initial Issuance of a California S Corporation’s Stock?

Navigating the issuance of securities can be a complex process for California Corporations. The state of California imposes specific laws and regulations that these corporations must adhere to, ensuring compliance and protecting investors.

Registration and Qualification Requirements

Under California law, the offer and sale of securities are regulated by the Corporate Securities Law of 1968. California Corporations issuing securities must typically qualify (the California terminology for register) their offerings with the California Department of Financial Protection and Innovation unless they meet specific exemptions.

Process for Qualifying Securities of a California Corporation with the California Department of Financial Protection and Innovation

To qualify shares with the California Department of Financial Protection and Innovation, a California Corporation must file an application that complies with the requirements of the Corporate Securities Law of 1968. This process involves submitting detailed documentation, including information about the financial status of the California Corporation, the intended use of proceeds of the securities offering, and details about the securities being offered. The application must be filed using the appropriate forms provided by the DFPI, such as the Qualification by Permit Application.

Fees for Qualifying Shares of Stock of a California Corporation with the California Department of Financial Protection and Innovation

Filing for qualification of shares of stock of a California Corporation with the California Department of Financial Protection and Innovation also necessitates the payment of applicable fees, calculated based on the proposed aggregate offering price. While fees are subject to periodic adjustments, they are generally tiered, with higher offering amounts incurring larger fees. The California Corporation may also incur additional costs for legal or advisory services required to prepare an accurate and compliant filing. Upon submission, the California Department of Financial Protection and Innovation conducts a review to ensure the offering complies with certain California securities laws, and once approved, issues a permit authorizing the sale of the securities.

Exemptions from Qualification Requirements for Initial Issuance of Securities of a California Corporation

When issuing securities, California Corporations may qualify for certain exemptions that reduce regulatory burdens and streamline the issuance process of securities compared to registration. One of the most common and popular exemptions is the California Limited Offering Exemption found in California Corporations Code Section 25102(f), which is the subject of this article. However, the securities exemption the California Limited Offering Exemption provides is far from the only exemption available in California, and below are some examples of a few such exemptions:

Limited Offering Exemption (California Corporations Code Section 25102(f))

This exemption applies to private offerings where securities are not sold to the public. To qualify, the issuance must be limited to 35 or fewer investors who meet specific qualifications, such as accredited investors under federal securities laws, pre-existing business or personal relationship with the issuer, or those with sufficient financial sophistication to understand the risks and be deemed a sophisticated investor. No public advertising or general solicitation is allowed under this exemption.

Small Offering Exemption (California Corporations Code Section 25102(h))

Securities offerings of $1,000,000 or less over a 12-month period may qualify for this exemption, provided that no single purchaser invests more than $2,500 unless they are accredited investors. Additionally, the issuer must meet specific disclosure and filing requirements with the California Department of Financial Protection and Innovation.

Intrastate Offering Exemption

For securities offerings conducted entirely within California, companies may qualify for this exemption by ensuring that all purchasers reside in California and that the transaction aligns with federal Rule 147 or Rule 147A. The offering must comply with state rules on disclosure to protect investors.

Employee Benefit Plan Exemption (California Corporations Code Section 25102(o))

Securities issued as part of an employee stock option or other employee benefit plans may be exempt, provided the plan meets certain legal requirements. This exemption is commonly used by Corporations to incentivize employees or attract top talent through stock options, profit-sharing plans, or other stock purchase programs.

Crowdfunding Exemption

Under California-specific rules, certain crowdfunding offerings with limited total investments and strict investor caps may be exempt from qualification. This exemption aims to assist smaller businesses in raising capital from a broad pool of investors while maintaining appropriate investor protections.

Filing for Exemptions

Even when an exemption applies in California, California Corporation issuers may still be required make certain filings pursuant to federal securities regulations such as the Securities Act of 1933, such as filing a Form D under federal Regulation D with the United States Securities and Exchange Commission and equivalent filings at the state level in the State of California and other states. Compliance with these filing requirements ensures the exemption remains valid and safeguards the issuance process.

Understanding California Limited Offering Exemption Notice Filing Under California Corporations Code Section 25102(f)

The California Limited Offering Exemption under California Corporations Code Section 25102(f) is specifically designed to streamline the securities issuance process for private companies issuing shares in compliance with the exemption. For California Corporations, these compliance requirements include filing a California Limited Offering Exemption Notice with the California Department of Financial Protection and Innovation by providing the required information about the California Corporation and the securities being issued (such as the corporate entity type, the federal law exemption for the securities offering, the California issuer exemption type, federal Employer Identification Number, the physical and mailing addresses of the corporate offices, and details about all the securities in the exempted transaction for which the securities filing is being made) on the required form and timely filing the California Limited Offering Exemption Notice together with the appropriate filing fee.

Importance of Timely Filing a California Limited Offering Exemption Notice

Filing the California Limited Offering Exemption Notice on time helps California Corporations maintain compliance with state securities regulations. The California Limited Offering Exemption Notice for an initial issuance of securities of a California Corporation must be filed within fifteen (15) calendar days after the first sale of securities in California. The timely submission safeguards the business against legal repercussions and preserves its ability to solicit private investors without engaging in a formal registration process. Failure to meet the required deadlines can result in unfavorable outcomes, including financial penalties and disruptions to funding opportunities that could easily be avoided by making a filing within the timeline to which the notice form refers. A second notice filing (or subsequent notice filings thereafter)

Filing Fees for a California Limited Offering Exemption Notice

The filing fees for the California Limited Offering Exemption Notice for a California Corporation are determined based on the value of the securities being offered. For securities valued at $25,000 or less, a fee of $25 is required. If the value exceeds $25,000 but is less than or equal to $100,000, the fee is $35. For securities exceeding $100,000 but not more than $500,000, the fee increases to $50. Any offering with a value above $500,000 but not more than $1,000,000 requires a filing fee of $150. For an offering with a value above $1,000,000 the filing fee is $300. The correct California Limited Offering Exemption Notice fee must be submitted with the initial filing to ensure the notice is processed without delay.

Penalties for Late Filing or Not Filing a California Limited Offering Exemption Notice

Filing a California Limited Offering Exemption Notice on time is critical for California Corporations engaging in securities offerings in California. While late filing or not filing a California Limited Offering Exemption Notice can lead to significant penalties for California Corporations, failing to timely file a California Limited Offering Exemption Notice does not automatically cause a California Corporation to lose the California Limited Offering Exemption. However, failing to file the notice in a timely manner can result in significant penalties and administrative complications. Certain key penalties and implications are outlined below, but the list below is not an exhaustive list.

Financial Penalties

Under California law, late filing of a California Limited Offering Exemption Notice can result in substantial fines. The California Department of Financial Protection and Innovation enforces a fine structure that includes a $200 base penalty, accompanied by an additional fee of 0.2% of the total value of securities involved in the offering up to $2,500. These charges can quickly escalate, depending on the size of the securities offering, placing significant financial strain on the California Corporation.

Regulatory Consequences

Missing or delayed California Limited Offering Exemption Notice submissions increase the likelihood of regulatory scrutiny.

Pursuant to California Corporations Code Section 25102(f): “The failure to file the notice or the failure to file the notice within the time specified by the rule of the commissioner shall not affect the availability of the exemption. Any issuer that fails to file the notice as provided by rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Neither the filing of the notice nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action that the commissioner deems necessary or appropriate under this division with respect to the offer and sale of the securities.”

The California Department of Financial Protection and Innovation may subject a California Corporation to closer examination, merit review regulations, and demand corrective actions, resulting in further compliance costs and prolonged resolution timelines.

Such scrutiny can hinder normal operations and create additional friction with the California securities regulator.

Reputational Risks

Missing a California Limited Offering Exemption Notice filing or filing deadline may also lead to reputational damage. Investors and business partners of a California Corporation may perceive late or missing filings as a red flag for poor compliance practices, potentially eroding trust and deterring future investment opportunities in a California Corporation. Such reputational harm can have a long-term impact, threatening the ability of a California Corporation to secure funding or form critical partnerships and alliances.

Implications for Future Compliance

Failure to timely file a California Limited Offering Exemption Notice not only results in immediate penalties, but can also complicate the overall compliance efforts of a California Corporation. Late filing creates an unfavorable compliance history, potentially leading to more rigorous oversight or difficulties in obtaining approvals for future filings, which can result in ongoing regulatory challenges for years to come.

Liability to Investors for Late Filing of a California Limited Offering Exemption Notice

Failure to timely file a California Limited Offering Exemption Notice can expose a California Corporation to serious liability risks. Non-compliance with California Limited Offering Exemption Notice filing requirements may not only result in regulatory actions, including fines and penalties imposed by the California Department of Financial Protection and Innovation, but failing to timely file a California Limited Offering Exemption Notice could potentially jeopardize the exemption status of a California Corporation, potentially rendering certain securities offerings as unqualified. This could expose the California Corporation and its corporate officers, directors, and other investors to legal risks such as rescission rights, where investors may demand a return of their investment. Furthermore, failure to comply with regulatory obligations could significantly damage investor confidence, harm the reputation of the California Corporation, and deter future investment opportunities.

Ensure Securities Exemption Compliance with Confidence — Contact San Diego Corporate Law to File the California Limited Offering Exemption Notice for Your California Corporation Today!

Do not take risks with your future of your California Corporation. Trust the experienced attorneys at San Diego Corporate Law for guidance and filing the required California Limited Offering Exemption Notice for your California Corporation and other business entities seamlessly and accurately when your company issues securities. Contact us today to ensure your California Corporation securities subject to securities regulation requirements and safeguard your investment opportunities. Reach out now for expert assistance!