California Corporations Code 25102
California Corporations Code 25102 allows certain business entities to sell securities without having to complete a time-consuming registration process.3 min read
2. Section 25102(n) Rules
3. New Equity Compensation Plan Rules
Updated November 12, 2020:
California Corporations Code 25102 allows certain business entities to sell securities without having to complete a time-consuming registration process. Taking advantage of this exemption does require filing some paperwork and meeting certain qualifications.
Basics of California Corporations Code 25102
Section 25102 of the California Corporations code includes several exceptions for companies that wish to offer security. For example, in Section 25102(f) there is an exemption for registration that many company founders use to make offering securities easier. Under Section 25102(f), startup companies can issue certain securities without having to meet the qualifications that might apply to other companies.
To use this exemption, the owners of a company need to file a limited offering exemption notice. Startup companies can also offer compensatory stock options without having to meet strict qualifications under Section 25102(o). Eligibility for 25102(o) exemption requires submitting a notice to the Department of Corporations and complying with certain rules of the California Securities Act.
Section 25102(n) Rules
Section 25102(n) is a newly approved section of the corporations code related to equity securities. Thanks to these new rules, it is possible for a company to offer equity securities without completing the expensive and lengthy registration process that is typically required. Section 25102(n) also eliminates limits on how much financing a business can raise using equity securities. Business entities that can take advantage of these rules include:
- Limited liability companies (LLCs)
To take advantage of these rules when offering or selling a security, there are additional qualifications that must be met:
- The sale cannot involve more than 95 people inside or outside the state of California.
- The person purchasing the security must be doing so for themselves or for a trust, and should not intend to sell the security at a later date.
- The company selling or offering the security cannot advertise the sale. The company may be requested to file a notice of the sale by a commissioner. The notice should be filed within 15 days of the request.
- If the offeror is a limited liability company, the purchaser should have an existing relationship with the company or with someone who works for the company. This relationship can be a business relationship or a personal relationship.
Since 2005, companies interested in using these exemptions must file their notices electronically. Filings can be made on the Department of Corporations website, but there is also a hardship exception that allows for filing the notice either by mail or in person. To prove hardship, you must demonstrate that filing electronically represents an undue burden or expense. The fee that you will need to pay depends on how much you plan to earn by selling securities:
- Between $0 and $25,000: $25 filing fee
- Between $25,000 and $100,000: $35 filing fee
- Between $100,000 and $500,000: $50 filing fee.
- Between $500,000 and $1 million: $150 filing fee.
- More than $1 million: $300 filing fee.
New Equity Compensation Plan Rules
In 2007, the California Corporations Commissioner relaxed the rules related to compensatory benefit plans. The reason for these changes is that the rules in the California Corporate Securities Law were no longer in line with laws at the federal level and in other states.
Another motivation for changing these rules is that the old regulations placed a burden on both California businesses and employees. For example, under the old rule, employees in California could not enroll in a compensatory benefit plan without making a large investment. The new rules were mostly intended to benefit private California companies, as public companies were already eligible for certain exemptions when offering securities.
In California, the corporations commissioner governs securities offerings and sales. The commissioner has the power and responsibility to approve all offerings and sales before they can occur. Most companies that want to sell securities use the Section 25102(o) exemption.
One of the primary purposes of these new rules is to revise Rule 701 of the Securities Law. In particular, the new rules open up the eligibility for who can be awarded stock options. After the revision went into effect, the following persons are eligible for stock options:
- Employees, including insurance agents.
- General partners.
The new laws also state that companies are no longer restricted to limiting a securities offering to 30 percent of the company's outstanding securities.
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