Failure to comply with the securities laws increases the offeror’s risk
of lawsuits by the investors – and can even lead to criminal prosecution.
Given this, it is important for a company or person making an investment
offering to understand some basics of securities laws and to have competent
When either a company or an individual (such as a real-estate syndicator)
seeks investors, the securities laws virtually always apply, regardless
of whether the investment is in stock, LLC ownership or otherwise. This
means that the offeror must either register the securities with a government
entity or must use an exemption from registration and comply with its requirements.
Except where an IPO (initial public offering) is involved, these offering
are often known as private placement offerings or direct public offerings,
basically depending on whether an exemption is used or the offering is registered.
(An IPO involves an underwriter and is a much more expensive and lengthy
We work with companies and individuals who want to make securities offerings
(including real-estate syndications) at least partially in California to
determine which securities exemption is the best one to use – or whether
registration is the best option. The usual factors are how much money needs
to be raised, what forms of marketing are needed, how many investors are
expected, what suitability standards will work for the expected potential
investors, and whether the offering can be limited to California investors
only or not. Once we determine the best approach, we review and revise the
private placement memorandum (also known as the offering circular, prospectus,
etc.), prepare the investor questionnaire (if needed), investor subscription
agreement and make the required filings with government securities agencies.
If an offering is limited to residents of a single state, the entity is
formed in that state and has its principal office there, and at least 80%
of its assets, revenues and expenditures are there, then just the securities
laws of that state apply. Otherwise both federal securities laws and the
laws of each state where there are investors apply (although with a federal
Rule 506 offering the states cannot conduct a merit review).
In California-only offerings, generally the 25102(f) or 25102(n) exemptions
are used, unless the qualification by permit method (a type of registration)
is used. Most private-placement offerings with investors in multiple states
use the federal Rule 506 exemption, although it is possible to combine the
California 25102(n) exemption with the Model Accredited Investor Exemption
that many states use as long as the offering is limited to $5 million or
less. There are pros and cons with each approach.
Offerors should realize that with private placement offerings and direct
public offerings it usually is up to them to find the investors. Securities
brokers often will not handle an offering unless at least $10 million is
being raised and they are convinced that it will be easy to find investors.
On California-only offerings (but not multiple-state offerings) it is possible
to pay unlicensed “finders” on a performance basis if all the finders do
is merely introduce the offeror and investor.
While a few approaches (the 25102(n) and qualification by permit) allow
at least some advertising, many do not. When no public advertising is allowed
(e.g., 25102(f) and Rule 506 offerings), one can discuss the company/syndication
generally and in general the need for investment money – but not mention
any specifics – rate of return, stock price, percentage of ownership that
will be provided per dollar amount invested, etc. (Disclaimers are also
strongly recommended.) Announcements can state that anyone wanting further
information can submit responses to an investor questionnaire – and if the
offeror determines that the investor is qualified the offeror can then provide
specifics on an offering.