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How the California 25102(f) Exemption Can Help You Sell Securities

January 8th, 2021

How the California 25102(f) Exemption Can Help You Sell Securities

In California it is possible to do a private securities offering without a great deal of regulatory compliance work. This offering underSection 25102(f) of the California Securities Code is sometimes called a “friends and family” offering.

Using this exemption from the general requirement that securities offerings must be registered, you can sell securities to an unlimited number of accredited investors (as well as company executives) and up to 35 unaccredited investors, as long as the unaccredited investors meet one of the following requirements:

  • Have a preexisting personal or business relationship with the company or its principals; or
  • Have the ability to protect their interests due to their financial experience or the fact that they have experienced professional advisors.

“Preexisting Personal or Business Relationship”

The term “preexisting personal or business relationship” includes any relationship consisting of personal or business contacts 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 relationship exists.

Unfortunately, there is not much guidance on what qualifies as a sufficient preexisting personal or business relationship or sufficient financial experience to meet the requirements of this exemption. One interpretations of these requirements by a California court stated that

[t]he relationship described in the rule contemplates more than mere acquaintance. If the qualification requirement is to serve the purpose of the corporate securities law, which is to protect unsophisticated investors [citation omitted], the relationship must be one of sufficient duration and nature that the offeror of a security has reason to believe the investor is able to assess the issuer’s honesty and competence. . . Whether a prior relationship warranting reliance on the seller of an unregistered security exists is an objective test and looks to what a reasonably prudent investor would be aware of about the offeror from the prior personal or business relationship. This test is intended to protect investors by placing on the offeror the burden of establishing that the nature and duration of the relationship is one that would enable a reasonably prudent investor to assess the general business and financial circumstances of the issuer.

Another court stated that “it is unquestionable that occasional meetings between the offeror and offerees without demonstrating the true nature of the relationship between them, do not satisfy the regulatory condition for private exemption.”

“Financial Experience”

Again, this requirement is not well-defined. One court stated that the financial experience of the offeree should be measured:

from the issuer’s rather than the offeree’s point of view . . . [because] that approach . . . is more consistent with the statutory purpose of protecting the gullible investor [citations omitted] because it places on the issuer the burden of establishing his offerees’ abilities to “fend for themselves” as a condition for exemption from the regulatory provisions that would otherwise apply.

Courts have implied that qualifications such as prior investment experience in similar ventures, serving as a board director, operating a corporate enterprise, or a degree in business administration could be sufficient to satisfy the “financial experience” test.

Other requirements:

  • All purchasers must state in writing that they are purchasing for their own account and not for resale.
  • The offering of the security may not be advertised to the public.
  • A simple form must be filed online with the Department of Corporations.

Important note!

Even if you comply with the requirements of 25102(f), you also have to make sure you are complying with federal securities law as well. If most of your business is done in California, all of your investors live in California, and you are formed under California law, you should be eligible for the federal intrastate exemption from federal registration requirements, which means that there is no need todo a federal filing. Otherwise, it will be necessary to work with a securities law expert to determine how to complete the required federal securities compliance.


Mill Valley Beerworks, a successful brew pub in Mill Valley, relied on the §25102(f) exemption to raise almost $200,000 in capital needed to open the business. The owners used a creative pitch to people they knew in their community: Sponsor one bottle of beer for $5,000 and receive a note paying 10 percent interest. In addition, for each beer bottle sponsored, the company donated $250 to a charity chosen by the investor.