california securities law

When assembling a real-estate transactions with other investors, sometimes known as" Syndication ", it must be the state and, where applicable federal securities laws. When securities are issued, they must be registered, or are in an exemption. Otherwise, investors may later sue the entities B and the State and - or SEC can impose fines and prison sentences. Often an offer is structured so that they are exceptions to the laws that might otherwise registration of the securities. One must weigh the advertising needed, whether financial requirements to eliminate many investors, whether the investors come from more than one state, etc., to provide the best relief.

Definition of ASecurities @

The definition of Asecurities @ quite broad. Under federal law, the term Asecurity @ means any note, stock ... Evidence of indebtedness, certificate of interest or participation in profit-sharing agreement ...@, etc. The California definition generally tracks the Federal Republic. Note that this definition includes promissory notes secured by real estate, although there are exceptions to the laws, the securities may, in this case.

There are some exceptions to the definition of Asecurities @. General partnership interests are not considered securities, on the theory that the general partners have the power to exercise meaningful control over the partnership. Limited Partnership interests, but the presumption of the securities.

If the investors are all tenants in common (ie they are on the deed, but there is no formal unit), then there is no securities - but the owners all have the same personal liability as if they were general partners. Good coverage is key in this case.

Limited liability company interests as securities generally. This is certainly also for manager-managed LLC = s. However, there is an exception under California law for the Member States managed LLC = s, if all members are active in the management of the LLC. The statute provides that California @ Asecurity does not mean that:

membership in a society with limited liability in which the person who made the exception, that all members actively participate in the management of the company with limited liability, provided that evidence that members vote or have the right to choose or the right to information about the business and affairs of the limited liability company, or the right to participate in the administration, not founded, without that all members actively participate in the management of the limited liability company ....

As the definition shows that if the members have to be really in the areas of management, not only have the right to do so.

It is not yet clear whether it is a similar exception to the federal government (the cases appear to conflict), so that the safer course at this stage is expected that offers of LLC interests for the residents of different states are securities under Federal legislation.

It is also an exemption under California law for certain secured promissory notes. More precisely, there is an exception for:

A promissory notes notice by a lien on property that is neither part of a series of notes equal priority with the same interests in real estate or a note in which economic interests are more than a natural person or legal entity.

This works when there is only one investor per property. It does not work if there are different investors through the same property (unless each investor has a lien with different priority). This is an unusual except that it does not require any form, in the state.

Even if the note is a debt note loans equity (profit) "" kicker "(as opposed to just interest), then the note is a security.

Unfortunately, there is nothing comparable on the federal level.

General rules

Generally the position of the investors (and not the State where the company was) to find out what securities are. For example, if you sell securities just in California, then you only need to be secured by California laws. If you sell in other states, one must usually also with federal securities laws and the laws of each country in which you sell.

Since the registry an offer of securities with state and / or federal agencies can be expensive and time-consuming, usually in the range is specifically designed to work with one or more exemptions from registrations. These kind of offers are often called Aprivate Internships @.

One of the consequences of the use of securities exemptions, however, that B, with some exceptions - the public advertising is not allowed. Is it allowed, restrictions on advertising to the general rule apply.

Another consequence of the use of securities of the exceptions is that many of them impose financial demands on the investors.

Most securities exemptions require the submission of the full exemption forms with the relevant state / federal securities agencies. Nevertheless, this is considerably simpler than officially register the offer.

California Exemptions

If public advertising is required, then either a 25102 (s) or California SCOR offering can be used. See how the securities can be sold to a discussion of what does and not as a public advertisement.

The California 25102 (n) exemption allows up to $ 5 million increase, but only one Atombstone @ (bare bones) display can be used if it has a B to B site and only Aqualified @ buyer can invest. Complete information about the offer can only be granted for those who display the tombstone and then a document verifying that they have a qualified buyer.

If the company, with a corporation is (compared to an LLC), then qualified buyers for 25102 (n) purposes are companies with more than $ 5 million U.S. dollars in assets, and people who either a) a minimum net worth (in conjunction with their spouses) of $ 250,000 and gross income of more than 100,000 U.S. Dollar, or b) a net worth of at least $ 500,000. The kicker is that the value of the residence must be excluded in both cases. Moreover, the level of investment by the individual no more than 10 percent of the net value of the individual.

The 25102 (n) exemption can also be used with an LLC, but then, investors have to the Federal-A @ accredited investor standards, which are discussed below.

Another alternative is the SCOR (Small Company provides registration) with the exception. This is due to the bids of up to $ 1 million. Unfortunately, California makes it much more difficult, a SCOR offering than other states. Audited Financial for Aopen @ offerings (as opposed to those, for example, accredited investors) or for the offerings of more than $ 500,000. The money may only be used for operations that are not in the debt retirement, California and requires a minimum of $ 2 per share. Moreover, the exemption is limited to corporations (not LLC = s) with one class of shares. Finally, California requires that the SCOR offering qualified permit. This means that, unlike most securities exemptions, the state has to approve the offer before they can be made. The result is a SCOR offering in California is generally not particularly attractive.

If public advertising is not required, the California-25102 (f) and (h) exemptions are much easier to handle.

These two exceptions are a number of similarities. Both have no limit on the dollar amount of the bid. Both are limited to 35 investors, but in general, insiders and accredited investors on the number and spouse as an investor.

An important difference is that the 25102 (h) The exemption is limited to companies with a class of shares, the 25102 (f) The exemption may be applied to any securities. This can be important, because LLC = s are often used with real estate investments, as a Subchapter S Corporation can not be used if their income from passive investments (such as rent) for more than 25% of total income for more than three years in a row. Another difficulty with the 25102 (h) exemption is that it is not the selling costs (commissions, discounts to brokers, promotional expenses), the 25102 (f) the exemption is not.

On the other hand, the 25102 (f) exemption requires that investors have a significant existing relationship with one or more directors of the Company or the capacity to protect their own interests (alone or in conjunction with an Investment Advisor), the 25102 ( h) exemption has no restrictions on the type of investor. Also during Ageneral @ prompt is allowed neither the one with the 25102 (h) exemption allows individual personal communications to anyone. In contrast, the 25102 (f) exemption allows advertising only to persons reasonably believed in advance to the 25102 (f) qualifications. This means that the 25102 (h) exemption (but not the 25102 (f) exemption), letters or e-mails about the offer can be sent to a list of potential investors, without knowing anything about them.

Federal Exemptions

If the offer is made for the residents of more than one state, then the federal securities are considered to be good. This means that, with the exception of Article 506 of the Federal service (see below), the conditions for exceptions for state laws and the securities of the Federal securities laws are complied with.

The Federal Article 504 exemption may be attractive if the offer is for U.S. $ 1 million or less, since it is a public advertisement, and there are no investor qualifications.

If the offer is limited to accredited investors (as defined below), there are about 40 states, the Model Accredited Investor Exemption (MAIE) B, and no registration is required, the. The public can MAIE advertising of a tombstone ad for the investment, such as the display for the tombstone, California 25102 (n) exemption up (although some states have variations).

The Article 504 exemption can also be used in connection with a SCOR offering or (at least in California) California 25102 (n) exemption.

The Federal Article 505 exemption includes up to $ 5 million. Although no general solicitation / advertising is allowed, there are no investor qualifications. It could possibly in conjunction with a California 25102 (h), which, if we wanted to offer to individual lists of persons, without knowing what qualifications might be. Some other states also a form of D / Article 505 Submission and not with their own forms of relief, although of these states is less than the MAIE. This has the effect of the Article 506 exemption is generally much more attractive.

The Federal Article 506 exemption allows offers unlimited B but only to sophisticated or accredited investors. The big advantage of this kind has to offer is that all state regulation (however, information must be given in some states). In other words, no state is allowed to make any kind of review of the terms of the offer and, where appropriate, prohibit the offer. For this reason, this exemption is often used.

The offer can only be used on individual accredited investors (although sophisticated investors may invest, as well as long as it is an essential pre-existing relationship).

Basically accredited investors are:

Any organization that is not for the specific purpose of acquiring the securities, with total assets of more than $ 5,000,000;

Any director, manager or personally liable partner of the issuer of the securities being offered or sold, or director, manager or personally liable partner of the general partner of the issuer;

Any natural person whose individual net worth, or joint property, that their spouses, at the time of the acquisition of more than $ 1,000,000;

Any natural person who is an individual income of over $ 200,000 in each of the last two years or joint income with their spouse of more than $ 300,000 in the three years and has a reasonable expectation on the same income in the current year.

While the federal regulation provides an exemption initially looks attractive because of the test the water @ determination, the problem in California is that an application for a B test is relatively complex B with the state must come first. Other countries = laws for securities Reg. An offer. (Reg A offerings are also limited to a maximum of $ 5 million.) In addition, Reg. A @ Atest waters offer can only be used by an authorized broker-dealers. If the entire offer is made exclusively in California, the broker-dealer only be registered with California, if the securities will be offered in other states, the broker-dealer must also be filed with the SEC. Because of these limitations, the Reg. An exemption is not very attractive.

Who may the securities

As a general rule that anyone who tries to sell securities must be licensed as an intermediary.

Fortunately, California law says that this is not also an officer or director of the company, the offer, or an individual who has a similar status or performing similar functions (such as the manager of a GmbH), provided that he / she not received, especially in connection with the purchase or sale of securities. In other words, what they can do as a part of the salaries, but not, for example, on a commission basis.

Federal law is virtually the same.

All others must have a broker = s license. If the offer is only in one state, then the broker must be licensed in this state only. If the offer is more than one state, then the broker must be licensed with the SEC as well.

As the securities can be sold

As discussed above, the rule with many private placements is that public advertising is not allowed.

What you can do in these offers is individual contact with potential investors to believe you are right, the requirements of the Securities liberation. (This is often referred to potential investors that a substantive pre-existing companies or the social relationship with one or more of the client.) You can get them by letter, telephone, email, etc., so long as the communications provided to them individually. What you can not do, is a newspaper ad, a website on the flyer, etc. offer the securities for sale. You also can not offer for sale to individuals on a list if you have no idea whether they qualify for an investor. On the other hand, if you as a Article 506 provides, you can create a list of investors from a reputable company if the company warrants that it has pre-screening of investors and had a licensed broker that they accredited investors in this case, you can contact the potential investors on the list individually.

In addition, companies may learn about themselves to the public, while the information is not considered an offer. In other words, as long as there is not an attempt to sell B or attempt to solicit an offer to buy securities of B, you can find information about what the company does or intends to do.

For example, a company may have a website that describes what, in general, the company does and says something like Afore more information, please click here. @ (The site itself, of course, can not offer to sell securities or elicit offers to buy the securities.) This link will then lead to an investor questionnaire / certification and a statement that they completed and returned to the company. The questionnaire / certification must be reviewed and a determination whether the person is qualified. Only if the person reasonably appears to be qualified, then offering materials and / or a password for a specific section of the website, with materials.

Another possibility is to Aeducational @ seminars where you present what the company does. The seminars, of course, can not make an offer, or to invest. But you can pass investor questionnaire and tell people that if you want more information about the company they need to complete the questionnaire and returned. You can also e-mail or e-mail the questionnaire to participants. The forms, which can be returned, then reviewed to determine which investors for the offering. Then you can offer is directed exclusively to those who reasonably appear to qualify.

Although the SEC is the question whether a federal securities exemption used (because not all investors are of a country), then only a licensed broker may determine that a potential investor is qualified (unless the prospective investor has a material already existing businesses or the social relationship with one or more of the client, so that the principal reasonably believes that the potential investor is qualified). This is not the case if the offer is only for potential investors in California.

Note that you can not just ask potential investors if they are qualified to invest. Instead, you need an investor questionnaire and the responses are checked to determine whether the investor is qualified or not.

The above article is general information only and should not be considered legal advice.

Methven & Associates
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e-mail: bmethven@methvenlaw.com
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