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The California “Friends and Family” Exemption

Written by: Kim Arnone

March 8th, 2023

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

Usually, securities offerings must be registered meaning that materials are filed with a regulator prior to starting the offering–these offering materials can be onerous and expensive to produce. If the requirements discussed below are met, Section 25102(f) provides an exemption from registering the offering. 

This exemption allows an issuer to sell securities to an unlimited number of accredited investors (high net worth/high income individuals and others). Additionally, the exemption allows the issuer to sell to 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; 


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 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.

There is not a hard and fast rule as to what types of relationships qualify and not much guidance on what is sufficient to meet the requirements of this exemption. If there is a dispute on an issue that hinges on this definition, courts look at the specific circumstances of the relationship. One interpretation of these requirements by a California court stated that:

The relationship described in the rule contemplates more than mere acquaintance. . . 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. . . 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 California Department of Financial Protection and Innovation.
  • 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. Various federal exemptions exist within which a friends and family type of offering is likely to fit.

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