Form D or 25102(f) Notice?

Posted on August 06, 2010 by Keith Paul Bishop

Issuers relying on Rule 506 of Regulation D under the Securities Act of 1933 have the benefit of federal preemption of California's (and other states') qualification requirement by virtue of Section 18(b)(4)(D) of that act.  Although no state law change was required to effect this preemption, the California legislature acknowledged reality by enacting Section 25102.1 of the California Corporations Code.  That statute provides that a transaction is not subject to qualification under any of Sections 25110 (issuer transactions), 25120 (recapitalizations and reorganizations) or 25130 (non-issuer transactions).  Note that the statute says "not subject to" rather than "exempt" because California has no authority to require qualification.  Section 25102.1(d) does require that an issuer do all of the following:

  • File a notice "in the form of a copy of the completed Form D (17 C.F.R. 239.500) filed with the Securities and Exchange Commission" within 15 days of the first sale in California;
  • File a consent to service of process under Corporations Code Section 25165; and
  • Pay the notice filing fee set forth in Corporations Code Section 25608.1(c).

Since Section 25102.1(d) refers specifically to Form D, some have questioned whether an issuer may file a notice under Corporations Code Section 25102(f) pursuant to Rule 260.102.14 in lieu of the Form D.  This question may arise because Rule 260.130.14(a)(1) allows an issuer conducting an offering under Section 25102(f) to file a Form D if it is filing a Form D with the SEC in connection with the offering. (Form D is also required for Rule 504 and 505 offerings as well as offerings under Section 4(6) of the Securities Act).  Also, issuers may be attracted to the state form because it contains far less information than the federal Form D.

As a practical matter, the answer may be "yes" but as a technical matter that answer is "no".   From a practical perspective, if the offering meets the conditions of Rule 506, it will most likely meet the conditions to Section 25102(f) (applicable to issuer transactions) or Rule 260.103 (applicable to certain recapitalizations and reorganizations).   If it does, then filing the Rule 260.104.14 notice will simply evidence reliance on the Section 25102(f) exemption.   However, as I pointed out in this release  that I issued as Commissioner of Corporations way back in 1996, this may not be true in all cases.  

From a technical perspective, the issuer technically won't have met the literal requirement in Section 25102.1(d) that it file a Form D.  This is made clear in Commisioner's Release 120-C.  Also, the Section 25102(f) notice only allows an issuer to indicate whether the notice is being filed with respect to either Section 25102(f) or Rule 260.103.  Thus, there isn't a box for Rule 506 offerings on the Rule 260.102.14 notice form.

Finally, I plan to discuss the implications of not filing either form with the Department of Corporations.