What Securities Exemptions are Available in California?
Under California Corporations Code Sections 25110, 25120 and 25130, as well as federal law, it is unlawful for any person to sell any type of security unless that security has either been registered with the California Secretary of State (or the Securities and Exchange Commission) or is exempt from registration. We all know, however, that many “securities” exist as investments that are not registered. So, what is a “security,” and what are the exemptions under California law allowing a security to be issued without registration?
To understand what exemptions are available, one must first understand what is meant by the term “security.” California Corporations Code Section 25019 defines security as “any note; stock; treasury stock; membership in an incorporated or unincorporated association; 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; viatical settlement contract or a fractionalized or pooled interest therein; life settlement contract or a fractionalized or pooled interest therein; voting trust certificate; certificate of deposit for a security; interest in a limited liability company and any class or series of those interests . . . .” and the list goes on, and on, and on, containing another 250 plus words. When taken with the decisions of the California courts, a security is potentially anything given in return for an investment of money by anyone.The exemptions available in California are as varied and numerous as are the things considered securities and are contained in California Corporations Code Sections 25100, et seq. The most commonly used exemptions include the following:
- Securities issued by the United States, any state, county, city or political subdivision thereof
[California Corporations Code Section 25100(a)]
- “Any security issued or guaranteed by and representing an interest in a direct obligation of a national bank or a bank or trust company incorporated under the laws” of the State of California [California Corporations Code Section 25100(c)]
- “Any beneficial interest in an employees’ pension, profit-sharing, stock bonus, or similar benefit plan which meets the requirements for qualification under Section 401 of the federal Internal Revenue Code . . . .” [California Corporations Code Section 25100(n)]
- Any offer or sale involving the sale of securities to no more than 35 persons who have a preexisting personal or business relationship with an officer or director or other person controlling the entity and such persons represent to the issuer the purchaser is acquiring the security on its own account and not with a view toward resale of the security and in which the sale is not accomplished by any advertisement. [California Corporations Code Section 25102(f)] (likely the most well known of the California exemptions)
- Any offer or sale of any security under, or pursuant to, a plan of reorganization under Chapter 11 of the federal bankruptcy law that has been confirmed or is subject to confirmation by the decree or order of a court of competent jurisdiction” [California Corporations Code Section 25102(k)]
- “Any offer or sale of a security to a ‘qualified purchaser’ as that term is defined by rule of the Securities and Exchange Commission pursuant to Section 18(b)(3) of the Securities Act of 1933 (15 U.S.C. 77r), . . . .” [California Corporations Code Section 25102.1]
As a cursory review of the very small sampling of the exemptions listed above shows, this area of the law is extremely complex and difficult to understand. In many instances, unless you have the appropriate training and experience, it is easy to run afoul of the California and federal securities laws.
Before issuing shares of stock for a corporation or handling securities in any way, you would be well served by consulting with an experienced and knowledgeable attorney who understands the laws and regulations governing the issuance of securities. Michael Leonard, Esq. of San Diego Corporate Law is that attorney. To schedule a consultation with Mr. Leonard you can contact him by visiting San Diego Corporate Law or by telephone at (858) 483-9200.