1. Federal and California Securities Exemptions Details
2. Exemptions for Federal Securities
3. Securities Exemption: Nonpublic Offerings
4. Securities Exemptions: Regulation D

California securities exemptions are financial instruments that aren't required to be registered with the state agency in California over securities exchange. These instruments are usually less risky than securities offered by public companies because they are backed by the government.

Federal and California Securities Exemptions Details

Except for those that fall under the list of securities exemptions, all sales and offers of securities must be registered with the Securities Exchange Commission. This requirement went into effect as a result of the Federal Securities Act of 1933.

Exemptions for Federal Securities

Some of the most commonly used securities exemptions include:

  • Nonpublic Offering Securities Exemptions
  • Regulation D Securities Exemptions
  • Regulation A Securities Exemptions
  • Intrastate Securities Exemptions

Securities Exemption: Nonpublic Offerings

Under the Federal Securities Act of 1933, section 4(2), an issuer that is not involved in public offerings may engage in transactions that are considered to be exempt from any registration requirements. This section was last amended on August 20, 1964. Investors must meet certain criteria to qualify for this exemption:

  • They must agree not to distribute or resell the securities to the public
  • They must be able to manage the economic risk of the investment, which is referred to as a sophisticated investor
  • They must be able to provide information that would typically be included in a prospectus

An investor who is sophisticated has the necessary experience and knowledge to weigh the risks and merits of an investment. Before a transaction can be labeled as non-public, those involved must consider all circumstances, such as the manner, scope, type, nature, and size of the offering.

The purpose of the Federal Securities Act of 1933 is to offer protection to investors by requiring all information to be fully disclosed, allowing investors to make informed decisions about their investments. In order to interpret an exchange as non-public, this purpose must be applied to each situation. In the court case S.E.C. v. Ralston Purina Co., 346 U.S. 119, 123, 125 in 1953, new information outlined that all promoters who start or organize a business can fall within the requirements of the exemption.

In Release No. 33-4552 from the U.S. Securities and Exchange Commission, additional information was brought to light regarding public transactions. When promoters involve more people in a transaction, including uninformed associates, neighbors, and friends, this transaction tends to become more publicized. Promoters may not share information about an offering that is private through public advertising, as the two are incompatible. Other restricted circumstances include selling securities to underwriters and placing a securities exchange.

Even a financial offering that is exempt from registration can still be considered fraudulent and be subject to criminal sanctions and civil liability under the Federal Securities Act of 1933.

Securities Exemptions: Regulation D

The purpose of Regulation D was to create a more universal set of exemptions for federal securities, allowing for better coordination with Blue Sky regulations and laws. This is considered a limited offering exemption and was adopted by the state government in California. The state's exemption is compatible with the federal Regulation D. Under this regulation, private and limited offerings of securities are exempt from requirements for registration if any of the following apply:

  • The sales and offers are less than $1,000,000.00 (no restriction on how many investors are involved)
  • The sales and offers are less than $5,000,000.00 (with 35 or fewer unaccredited investors)
  • The sales and offers are made to 35 or fewer sophisticated investors (not accredited investors)

Under Regulation D, an accredited investor is:

  • A private business development company (based on the terms in the Investment Company Act of 1940, section 202(a)(22)
  • A bank (based on the terms of the Federal Securities Act of 1933, section 3(a)(2)
  • An employee benefit plan (based on the terms of the Employment Retirement Income Security Act of 1974)
  • An insurance company (based on the terms of the Federal Securities Act of 193, section 2(13)
  • A government employee benefit fund that has assets totaling over $5,000,000.00
  • An investment company (based on the terms and registration requirements under the Investment Company Act of 1940)
  • A small business development company (based on the terms of the Small Business Investment Act of 1958, section 301)
  • A business development company (based on the Investment Company Act of 1940, section 2(a)(48)

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