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Can a corp issue stock to a co-founder in CA by relying on the securities reg exemption of Section 25102(a) of CA Corps Code?

Menlo Park, CA |

The DE corp/start-up (based in CA) wants to issue restricted stock to its co-founder (CA resident). Section 25110 of the CA Corps Code provides that it’s unlawful for an issuer to sell stock unless it’s qualified by 25111, 25112, or 25113 [all three preceding sections are n/a to our facts] , or unless such security is exempted or not subject to qualification under Chapter 1 (i.e., Sections 25100 – 25105). I understand that issuers typically rely on the CA securities registration exemption under Section 25102(f) of the CA Corps Code, however that exemption requires filing a notice in CA, and I was wondering if we can instead just qualify for the exemption under Section 25102 (a), the non public offering exemption, to forego any notice requirement. Offering would be strictly nonpublic.

Attorney Answers 3

Posted

You cannot qualify for the exemption under CC Section 25102(a) because the statute clearly states "(2) no part of the purchase price is paid or received and none
of the securities are issued until the sale of the securities is
qualified under this law unless the sale of securities is exempt from
the qualification by this section, Section 25100, or 25105" I read to mean the that 25012(a) is not an exemption statute, but statute allowing and offer but approving a sale until an exemption is met under other security laws.

Good luck

THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court.

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Posted

Hi Phillip. I see your read of CC Section 25102(a), but the last part of that section does say "unless the sale of securities is exempt from the qualification by this section" which I think should allow for an issuer to receive a specific exemption under the section ITSELF instead of as you say only "under other security laws". I think the crux of the section first centers upon an offer "not involving any public offering" and second on "the execution and delivery of any agreement for the sale of securities pursuant to the offer" if it contains that special provision/legend. My hunch is that 25102(f) is arguably geared for a bit wider offering since it starts out qualifying that: "Sales of the security are not made to more than 35 persons, including persons not in this state." In our case, the corp is issuing stock to JUST ONE PERSON with no solicitations/advertising which is clearly non-public, and we are including the special provision/legend from 25102(a) in the RSPA. In light of my preceding analysis, please advise if you think we have a decent case to rely on 25102(a). We would rather not spend time and money and have to track a CA filing. Thanks a ton Phil

Posted

The section you cite generally provides a temporary exemption until another exemption is obtained/proven/etc. As Phillip pointed out, (a) is not itself a general basis for exemption, and certainly not a broad-based exemption for any non-public stock!

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Posted

I read with great interest your posting and comment to Mr. Smith. I agree with the analysis of Mr. Smith and my other colleague and commend you on your research and reasoning. I suspect you are a law school graduate who pursued other avenues. All besides the point.

Avvo attorneys give "analysis" which you can not rely on. Avvo attorneys do not give "advice" which is something you can rely on. California requires a written retainer agreement to be retained and Avvo is clear that no attorney client relationship is formed by participation in the Avvo question and answer format. Legal malpractice insurance carriers would have a blanket prohibition against participation if it were otherwise.

It is a common misconception that even if you do a lot of a type of work, you don't have to go back for each new client to check your memory of a statute and its applicability and interpretation to the specific facts of the client. If you need "advice" (which I think is a good idea), now might be the time to get an "outside general counsel" to give you (1) an idea of what really needs the attention of an attorney, e.g. securities, labor law, IP) and (2) locate "experts" if needed on a per-project basis where the outside general counsel cannot provide the answer.

Good luck in your endeavor.

The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.

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