Stock Option Exercise – Sale or No Sale?

The Corporate Securities Law prohibits the offer and sale of a security in an issuer transaction "in this state" unless the sale is (a) qualified; (b) the security is exempt from qualification; (c) the transaction is exempt from qualification; or (d) not subject to qualification.  The term "sale" is defined in Corporations Code Section 25017(a) to include every disposition of a security for value.  Thus, one might logically conclude that a stock option exercise constitutes a sale under the CSL.  However, Section 25017(e) provides a contrary, and perhaps unexpected, answer.  That section provides that every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer includes an offer and sale of the other security only at the time of the offer or sale of the warrant or right.  The statute drives the point home by adding that neither the exercise of the right to purchase nor the issuance of the security is an offer or sale.

This can lead to some unexpected results.  For example, a corporation may grant a stock option to an employee in another state.  No qualification in California is required if the offer and sale of the option do not occur "in this state" (see yesterday's post).  If the employee moves to California and exercises the option, no qualification of the stock "sale" will be required by reason of Section 25017(e).  For more on this topic, see Marsh & Volk, Practice Under the California Securities Laws, § 3.08[4][b]. (Incidentally, for the last several years, I have served with Roy Finkle as a Practice Consultant to this treatise.)