1 - General Purpose of Securities Laws
Ensure that investors in securities are provided with sufficient information on which to make an informed investment decision.
Ensure that the information provided to an investor is accurate and complete.
2 - California Law
California law regulating offers and sales of securities is the Corporate Securities Law of 1968. Under California law, offers and sales of securities must be qualified with the Commissioner of Corporations unless the transaction or the security being sold is exempt.
Law is administered by the Department of Corporations under the direction of the Commissioner of Corporations, appointed by the Governor. Commissioner has the power to issue and rescind rules to implement the law, similar to the power of the Securities and Exchange Commission under federal securities laws. Commissioner may waive any requirements of any rule where the requirement is not necessary for the protection of investors.
3 - What is a Security?
California definition modeled after the federal definition.
Very broadly defined, includes stock, notes, bonds, evidences of indebtedness, puts, calls, investment contracts and any passive investment interest.
4 - Definition of Offer and Sale
Offer: Every attempt or offer to dispose of, or solicitation of an offer to buy, a security or an interest in a security.
Sale: Every sale or disposition of a security or an interest in a security.
5 - Offers and Sales Covered by California Law
Offer to sell or buy directed to person domiciled in California.
Offer to sell or buy originates in California.
Acceptance of an offer to buy is communicated to the offeror in California.
Both seller and purchaser are domiciled in California and the security is delivered in California.
Some offers and sales exempt from qualification.
6 - Types of Transactions Under California Law
Issuer Transactions - Offers or sales of a security by a person who issues or proposes to issue a security, e.g. sale of stock by a company to raise capital.
Nonissuer Transactions - Offers or sales of a security by a person that is not directly or indirectly for the benefit of the issuer of the security, e.g. sales of stock in the stock market by a shareholder for personal portfolio.
Recapitalizations and Reorganizations - Offers or sales of securities by an issuer in connection with:
Changes in rights or preferences of, or restrictions on, outstanding securities.
Any exchange of securities by an issuer with its existing securityholders.
Exchanges involving a merger or consolidation or the purchase of assets in exchange for the issuance of securities.
7 - Federal Preemption of California Law
Section 18 of the Securities Act prohibits any State from requiring registration or qualification of a "Covered Security" or the use of any offering document relating to a "Covered Security".
Also prohibits State from limiting or imposing conditions based on the merits of an offering or an issuer of a "Covered Security".
8 - What is a "Covered Security"
"Covered Security" is a security listed or authorized for listing on the NYSE, AMEX or Nasdaq or a security issued by an investment company registered under the Investment Company Act of 1940. In addition, the SEC may determine that a security is a "Covered Security" by rule.
A "Covered Security" is a security offered and sold in a transaction that is exempt from registration under Sections 4(1) and 4(3) of the Securities Act if the issuer is a reporting company.
Section 4(1) covers transactions by a person other than an issuer, underwriter or dealer.
Section 4(3) covers transactions by a dealer (i.e. someone who trades for his own account).
A "Covered Security" includes securities in transactions that do not involve a public offering (i.e. offerings under Rule 506 of Regulation D under the Securities Act).
A "Covered Security" includes securities transactions by a broker (i.e. someone who trades for accounts of others).
A "Covered Security" includes most securities that are exempt securities under the Securities Act, but does not include securities sold only within one State which are not Covered Securities.
9 - Offers and Sales of Securities Exempt from Issuer Transactions
Offers and Sales which meet certain statutory criteria:
Sales are made to no more than 35 people.
All purchasers have a preexisting relationship with the offeror or could otherwise be expected to be able to protect their interests.
Not purchasing with a view towards distribution.
No advertisements of the offering.
Offers and sales to large institutions or to publicly registered corporations.
Offers and sales to approved pension plans.
Negotiations and agreements for a merger, consolidation or sale of assets entered into prior to a general solicitation.
Any change in rights, unless the holders of 25% or more of the shares are Californians and would be "affected substantially and adversely from by such change".
Stock splits, unless the resulting price would be less than $2 per share.
10 - Securities Exempt from Nonissuer Transactions
Securities issued by a person that is the issuer of any security listed on a national securities exchange or Nasdaq because there is an alternative form of regulation in place.
Exemption does not apply to securities offered pursuant to registration under the Securities Act if offering price is over $50,000.
11 - Unless Exempt, Qualification Required
Application must be filed with the Commissioner.
Timing could be delayed depending on review.
Commissioner could impose conditions on the offer or sale.
12 - Enforcement
Commissioner may issue order to force compliance or institute class actions to obtain damages for people injured by violation of law.
13 - Summary
Except for small transactions, California securities laws preempted by Federal law.
Laws apply to issuers and nonissuers.