A Brief Rundown on Common Securities Exemptions

With only few exceptions, the securities laws apply whenever a company
offers investments. This is true whether the investment is stock, LLC interests,
a percentage of profits or promissory notes (even if secured by mortgages
or deeds of trust).

Securities Exemptions Generally. When the securities laws apply, the offering
company must either register the securities in advance or, more usually,
meet the requirements of an offering exemption. Almost all offerings require
that filings be made with the appropriate government securities agency.

Intrastate (Single-State) Offerings. Generally, if the offering crosses
state lines, then both federal and state securities laws apply. If the offering
can be limited to a single state (an intrastate offering), then only that
one state’s laws will apply and federal law will not. For an offering
to be an intrastate offering, though, it must meet certain requirements.
The entity must be formed in that state, have its principal place of business
in that state and (almost always) have at least 80% of it assets, revenues
and expenditures in/from that state. Of course, all the investors must be
from that state as well.

Accredited Investors. Individuals are accredited investors if they have
at least $1 million in net worth or annual income of $200,000. An entity
(a corporation, LLC, etc.) is an accredited investor if either a) it has
assets of more than $5 million and is not formed for the purpose of making
the investment or b) all of its owners are accredited investors.

Federal Rule 506 Exemption. If an offering is crossing state lines, the
most common exemption used is federal Rule 506. There can be an unlimited
number of accredited investors and up to 35 non-accredited investors who
are sophisticated in terms of investments or represented by an independent
investment advisor. An unlimited amount can be raised. No public advertising
is allowed, but direct communications with individual potential investors
who are believed to qualify are permitted. Also, the company can post general
information about itself (though nothing about specific offerings), for
example on a web site, and state that people who may be interested in investing
can answer an investor questionnaire and receive more information if they

There is more flexibility in terms of exemptions for California-only (intrastate)

California 25102(f) Exemption. The most common California exemption is
25102(f). This is very similar to a Rule 506 offering (see above) except
that it also has a “friends, family and colleagues” exception
for those who have a prior substantial personal or business relationship
with one of the principals. This is useful when friends, family or colleagues
want to invest but are not accredited or sophisticated.

California 25102(n) Exemption. The California 25102(n) exemption is unusual
in that it allows a brief “tombstone” ad describing the offering.
All of the investors must be Californian. A non-California corporation (but
not an LLC) can use this exemption if it conducts more than half of its
business in California and the offering is limited to $5 million. The offering
must be limited to accredited investors (see definition above). There is
an exception: If the company is a corporation with only one class of stock
(common stock), then in addition investors qualify if they have either a)
a minimum net worth of $250,000 and annual income in excess of $100,000
or b) a minimum net worth of $500,000. (These are substantially less than
the accredited investor requirements.) In each case, homes, home furnishings
and automobiles must be excluded in calculating net worth.

California Qualification by Permit. With a California qualification by
permit a fairly extensive application is required and the offering must
be pre-approved by the State. One advantage, though, is full public advertising.
In addition, if the offering is $5 million or less, there are relatively
low investor qualifications of either 1) minimum net worth of at least $75,000
and minimum gross income of $50,000 or 2) minimum net worth of $150,000.
(In addition, there are no qualifications if the investor is investing less
than $2,500 total in the company.) In both cases, though, the investment
cannot exceed 10 percent of the net worth of the investor, and net worth
must be determined exclusive of homes, home furnishings and automobiles.

Of course, one of the first steps in raising money is determining which
approach works best for the situation.


You are welcome to copy and distribute this document for non-commercial
purposes, but both of the following must be left on it:

Bruce E. Methven
2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019; Fax: (510) 649-4024
Web Site: www.TheCaliforniaSecuritiesAttorneys.com
Email:  bmethven@TheCaliforniaSecuritiesAttorneys.com
Copyright 2011 Bruce E. Methven, All Rights Reserved.

The foregoing article constitutes general information only and should not
be relied upon as legal advice.

One Response to A Brief Rundown on Common Securities Exemptions

  1. fdnj says:

    Nice topic – respect !

Leave a Reply

Your email address will not be published. Required fields are marked *