How the 25102(n) Exemption Can Help You Sell Securities

A little known law in California lets you sell securities to semi-wealthy folks and advertise your investment opportunity to the public!

The 25102(n) exemption was enacted in 1994 by the California legislature. It exempts offers or sales of securities in transactions that meet the following requirements (note that this a very abbreviated summary of an extremely complicated law!):

(1) The issuer is a California corporation or corporation formed under another state’s laws that does business in California or any other form of business entity organized in California.

(2) Sales of securities are made only to “qualified purchasers” which can include a person who, either individually or with his or her spouse, either

(i) has a minimum net worth of two hundred fifty thousand dollars ($250,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or

(ii) has a minimum net worth of five hundred thousand dollars ($500,000).

“Net worth” does not include the person’s home, home furnishings, and automobiles.

A qualifying natural person must, by reason of his or her business or financial experience (or that of his or her professional adviser whois unaffiliated and not compensated by the issuer), have the capacity to protect his or her interests in connection with the transaction. In addition, the amount of the investment cannot exceed 10 percent of his or her net worth.

Under this exemption, the offeror can actually announce the offering to the public!

There are several restrictions on the announcement and what information it may contain. For example it must include a statement that“no money or other consideration is being solicited or will be accepted, an indication of interest made by a prospective purchaser involves no obligation or commitment of any kind, and, if the issuer is required . . . to deliver a disclosure statement to prospective purchasers, no sales will be made or commitment to purchase accepted until five business days after delivery of a disclosure statement and subscription information to the prospective purchaser . . . .”

Interestingly, the federal Securities and Exchange Commission adopted Rule 1001 which provides an exemption from the federal securities registration requirement for offerings of up to $5 million that comply with the California 25102(n) exemption. California is the only state that has its own special federal securities law exemption!

Doesn’t that make you Californians feel special?