Proposed New Exemption from Qualification in California

News Brief

By Liz Blong

Last week a bill was introduced to the California Assembly to amend Section 25102 of the California Corporations Code to add an exemption from qualification for offerings or sales of securities using a general solicitation or general advertising. A copy of the bill as introduced can be found here.

Under the proposed amendment, an offer or sale of a security using any form of general solicitation or general advertising, as specified in Rule 502(c) of Regulation D under the Securities Act of 1933, as amended (except unsolicited telephone calls to a person's residence or cell phone, unless the issuer and caller reasonably believe, after reasonable inquiry, that the person is an accredited investor) will be exempt from provisions of Section 25110 of the California Corporations Code if the following conditions are met:

  • The sales of securities are made only to a person who is, or whom the issuer reasonably believes, after reasonable inquiry, to be an accredited investor immediately prior to the sale. (Dissemination of information regarding the proposed offering to a person who is not an accredited investor will not disqualify the offering from this exemption.)
  • The issuer reasonably believes, after reasonable inquiry, that the offering is suitable for the person based on the person's financial status, objectives, investment experience, time horizon, risk tolerance and any other criteria the issuer deems relevant. (Documentation that supports a suitability determination must be maintained for four years.)
  • The amount of consideration paid by a purchaser does not exceed 10% of his or her net worth (or joint net worth for married purchasers) immediately prior to the investment, and each investor's investment in the offering, together with all previous offerings under this exemption in the last 12 months, does not exceed 10% of the investor's net worth. "Net worth" is determined as set forth in Rule 501(a) of Regulation D.
  • The issuer can reasonably assume that the person has the capacity to protect his or her interests in connection with the offering because of the person's business or financial experience, or the business or financial experience of the person's professional adviser who is unaffiliated with and not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer. 
  • The issuer believes in good faith that the offering is exempt from registration under Section 5 of the Securities Act pursuant to Section 3(a)(11) of the Securities Act, or the rules and regulations adopted under Section 3(b) or Section 4(2) of the Securities Act.
  • The issuer specifies in all advertisements, communications, sales literature, or other information that is publicly disseminated in connection with the offering that the securities will be sold to accredited investors only. 
  • The issuer places a legend on the cover page of each disclosure document proposed to be used in connection with the offering or on the cover page of the subscription agreement that the securities described therein will be sold only to accredited investors.
  • The issuer files a notice and pays a fee with the commissioner within 15 days after the first sale of securities in California.

The proposed exemption is not available for offerings by investment companies or development stage companies, and is also not available to an issuer if certain "bad boy" provisions identified in the proposed amendment apply to the issuer, its predecessors, affiliates, directors, officers, general partners, beneficial owners of 10% or more of its equity securities, promoters presently connected with the issuer in any capacity, or any underwriter of the securities to be offered, or any of the underwriter's partners, directors or officers.

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