Key Takeaways

  • California Corporations Code §25102 provides multiple exemptions from securities registration, streamlining fundraising for startups and private companies.
  • Section 25102(f) allows limited offerings if certain requirements are met, while Section 25102(o) covers compensatory stock option and equity incentive plans.
  • Section 25102(n) expands exemptions for equity securities offerings, removing limits on financing amounts.
  • Companies using Section 25102(o) must file electronically with the DFPI and pay a filing fee based on offering size, ranging from $25 to $300.
  • In 2007, California aligned its equity compensation plan rules more closely with federal Rule 701, broadening eligibility and reducing burdens on private companies.

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.

Understanding 25102(o) Filing Fee Requirements

When relying on the Section 25102(o) exemption, companies must submit a Notice of Transaction (Form 25102(o)) to the California Department of Financial Protection and Innovation (DFPI). This filing ensures compliance with the Corporate Securities Law while allowing businesses to avoid the lengthy registration process.

The 25102(o) filing fee is tiered according to the value of securities being issued:

  • $25 fee for offerings up to $25,000
  • $35 fee for offerings between $25,001 and $100,000
  • $50 fee for offerings between $100,001 and $500,000
  • $150 fee for offerings between $500,001 and $1 million
  • $300 fee for offerings exceeding $1 million

The filing must be submitted electronically via the DFPI portal within 15 days of the securities issuance. A limited hardship exemption may allow paper filing by mail or in person, but only if electronic filing presents a demonstrated burden. Late filings may expose a company to penalties or enforcement actions, so startups should plan carefully when issuing equity.

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:

  • Corporations
  • Limited liability companies (LLCs)
  • Partnerships

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.
  • Directors.
  • Consultants.
  • Advisors.
  • Managers.
  • General partners.
  • Trustees.
  • Officers.

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.

Practical Implications for Startups and Private Companies

For startups and emerging businesses, Section 25102(o) provides a critical exemption for granting stock options and other equity-based compensation to employees, directors, consultants, and advisors. This allows companies to attract and retain talent without undergoing costly registration procedures.

Key considerations for companies using the 25102(o) exemption include:

  • Notice Filing: A notice must be filed with the DFPI for each securities issuance under this exemption.
  • Scope of Eligibility: Options can be granted not only to employees but also to advisors, consultants, officers, and directors.
  • Plan Compliance: The equity incentive plan must meet disclosure and reporting obligations to ensure securities remain exempt.
  • Federal Coordination: Many companies align their California filings with SEC Rule 701, which governs compensatory benefit plans at the federal level.

This exemption is particularly valuable for venture-backed startups, as it provides flexibility in structuring stock option plans while maintaining compliance at both the state and federal levels.

Frequently Asked Questions

1. What is the purpose of Section 25102(o)?

It allows companies, particularly startups, to grant stock options and equity compensation without registering the securities, provided notice is filed with the DFPI.

2. How much is the 25102(o) filing fee?

The fee ranges from $25 to $300 depending on the value of securities being issued, with $300 applying to offerings over $1 million.

3. When must the 25102(o) notice be filed?

The notice must be filed electronically within 15 days of the securities issuance.

4. Who can receive securities under 25102(o)?

Eligible recipients include employees, directors, consultants, advisors, officers, and other service providers of the company.

5. What happens if a company fails to file timely?

Failure to file may result in penalties, loss of the exemption, or enforcement action by the DFPI.

If you need help interpreting California Corporations Code 25102, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.