Chart Comparing Common California and Federal Exemptions and Registration

When a California company wants to bring in investors through a private
placement offering, it has to determine which securities exemption is the
best one to use. The usual factors to consider 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. This chart lays out the pros and cons of each exemption with
respect to these factors.

Note: Not all requirements are covered here, nor are variations for specific
situations addressed; this is designed to give general guidance. Also, the
securities law area is extremely complex; do not try to make an offering
without advice from an attorney.

  California 25102(f) California 25102(n) California Qualification by Permit Accredited Investor Exemptions (Most States but with Variations) Federal Rule 504/scor in Other States Federal Rule 506
Maximum Amount unlimited if a CA-only offering, no limit. Otherwise, up to $5 million. unlimited, but less strict review if limited to < $5 million unlimited $1 million unlimited
Advertising only non-specific info and targeted offers1 brief “tombstone” ad only (plus non-specific info and
targeted offers1)
full public advertising if limited to CA only brief “tombstone” ad only (plus non-specific info and
targeted offers1)
only non-specific info and targeted offers1 unless registered in
at least one state
only non-specific info and targeted offers1
Maximum Number of Investors 35 plus accredited investors2 unlimited unlimited unlimited unlimited 35 plus accredited investors
Qualifications of Investors pre-existing substantive relationship3 or sophisticated4 
or accredited2
for corporations, either “qualified”5or
accredited2. For LLC’s, accredited2only.
none, but no merit review if revenues < $25 million, offering
is < $5 million and “minimum qualifications”6 
accredited investors2only usually none sophisticated4or accredited2
Foreign Investors – separate offering required? Must be a separate offering, but 35-investor limit must count both
offerings unless 6 months apart. Foreign investors must sign certificate7
Can be part of single offer IF offer is $5 million or less. Foreign
investors must sign certificate7
Must be separate offering (or Rule 504, 505 or 506 must also be
complied with). Foreign investors must sign certificate7
May be single offering. Foreign investors must sign certificate7 May be single offering, though $1 million limit applies to total.
Foreign investors must sign certificate7
May be single offering. Foreign investors must sign certificate7
Combining California and Other Exemptions limited to California only can be combined with accredited investor2exemptions
in other states
can be combined with a Rule 504/SCOR offering in other states –
but may not be worth it
can be combined with a California 25102(n) can be combined with a California qualification by permit preempts state merit review, though brief filing required in each
state with investors
Comments easy for “friends and family” investors entity may have only one class of securities unless accredited investors2only extensive application is required that must be approved by the State 
in advance; the “minimum qualifications”6 
are much less than required for accredited investors
must be combined with a CA 25102(n) offering of < $5 million
to allow the tombstone ad;
 there are variations from state to
state; brief filing is required in each state with investors
regional approval (five regions) must be obtained in advance Form D must be filed with the SEC. A few states require issuer to
also register as broker.

1. “Only non-specific info and targeted offers”:

  • The company can make a general announcement, meaning that on web sites,
    in advertisements and at seminars can discuss what the company does, its
    need for money and what that money will be used for, and in general the
    type of investments it has or will have available. Certain warnings must
    accompany this general announcement. What the company cannot do is mention
    any rate of return, price per share or unit or percentage of ownership,
    performance of prior offers, solicit offers from potential investors,
    etc. You must have an attorney review the general announcement before
    using it.
  • Also, the company can contact individual potential investors by email,
    letter, etc. that it reasonably believes meet the investor suitability
    requirements for the investment and give them the specifics about the
    offering. (Although to actually invest the investor must usually be given
    an investor questionnaire, private placement memorandum or something similar,
    and a subscription agreement). Warning: Do NOT push the envelope on reasonable
    belief here; if unsure, send an appropriate investor questionnaire first.
  • Further, the SEC has said (although it has received wide criticism for
    this), that when a federal exemption is being used and there is no prior
    relationship between the offeror and potential investor, the offeror must
    wait 30 to 45 days after receiving responses to the investor questionnaire
    before giving the potential investors any specifics about he offering.

2. “Accredited investors”:

  • For companies: Basically, either a) any organization not formed for
    the specific purpose of acquiring the securities offered with total assets
    in excess of $5,000,000, OR b) any organization where each owner is an
    accredited investor.
  • For individuals:
    • Any director, executive officer, or general partner of the company
      making the offering;
    • Any natural person whose individual net worth, or joint net worth
      with that person’s spouse, at the time of his purchase exceeds $1,000,000
      (note that as of summer of 2010 the personal residence is not counted
      as part of net worth);
    • Any natural person who had an individual income in excess of $200,000
      in each of the two most recent years or joint income with that person’s
      spouse in excess of $300,000 in each of those years and has a reasonable
      expectation of reaching the same income level in the current year.
    • As of summer of 2010, equity in the principal residence must be
      excluded in determining net worth

3. “Pre-existing substantive relationship”: A preexisting personal
or business relationship with the company or one or more of its officers,
directors or controlling persons of a nature and duration such as would
enable a reasonably prudent purchaser to be aware of the character, business
acumen and general business and financial circumstances of the person with
whom such a relationship exists.

4. “Sophisticated”: Having the capacity to protect own interests,
meaning that by reason of substantial business or financial experience –
or that of Investor’s professional advisors (who are unaffiliated with and
who are not compensated by the company or any affiliate or selling agent
of the company, directly or indirectly) – the capacity to protect investor’s
interests in connection with the transaction.

5. “Qualified investors” (for a 25102(n)): Note that for this
to apply the company must be a corporation and have only a single class
of stock/units. This means a natural person who, either individually or
jointly with the person’s spouse, either:

  • (i) has a minimum net worth of $250,000 and had, during the immediately
    preceding tax year, gross income greater than $100,000) and reasonably
    expects gross income greater than $100,000) during the current tax year
  • (ii) has a minimum net worth of five hundred thousand dollars ($500,000).

“Net worth” must be determined exclusive of home, home furnishings,
and automobiles. Also, the amount of the investment of each natural person
cannot exceed 10 percent of their net worth.

6. “Minimum qualifications” (for a qualification by permit with
no merit review): The investor (an individual, counting the husband and
wife as one – and probably an entity) must meet one of the following requirements:

  • Have a minimum net worth of at least $75,000 and had minimum gross income
    of $50,000 during the last tax year and will have (based on a good faith
    estimate) minimum gross income of $50,000 during the current tax year
    (with net worth determined exclusive of homes, home furnishings and automobiles
    AND the investment not exceeding 10 percent of that net worth); OR
  • Have a minimum net worth of $150,000, provided that in either case the
    investment shall not exceed 10 percent of the net worth of the investor
    (with net worth determined exclusive of homes, home furnishings and automobiles
    AND the investment not exceeding 10 percent of that net worth); OR
  • Investing less than $2,500 total in the company, including any investments
    made during the prior 12 months.

7. “Foreign investors certificate”: Foreign investors must sign
certificate stating that they will not re-sell or transfer the securities
back into the U.S. unless U.S. securities laws are complied with.


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:
Copyright 2011 Bruce E. Methven, All Rights Reserved.

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

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