The First Fork - Limited Versus Open Qualification

As most securities lawyers know, California requires that the offer and sale of securities in an issuer transaction must be qualified unless the security or transaction is exempt or not subject to qualification.  Cal. Corp. Code § 25110.  The number of qualifications has declined over the years as the number of exemptions have increased and federal law has preempted state authority to require qualification.  Nonetheless, qualification remains a requirement with which lawyers will sometimes have to grapple.

Yogi Berra once observed "" When you come to a fork in the road....Take it."  When applying for qualification of the offer and sale of securities, the initial fork in the road is whether a qualification will be "open" or "limited".  An "open" qualification allows for the offer and sale of securities to the public generally, without restriction as to persons or class of persons.  10 CCR § 260.001(f).  In contrast, "limited qualification" authorizes the offer and sale of securities only to persons designated by name or class.  10 CCR § 260.001(e).

Generally, a limited offering qualification is appropriate when an issuer intends to offer and sell securities to a specific group such as its employees.  Also, a limited offering qualification will generally be necessary when the Commissioner varies the standards for qualification.  The Commissioner will not normally approve an open qualification for the offer and sale of debt securities unless they are issued pursuant to a trust indenture complying with the provisions of the Trust Indenture Act of 1939, regardless of whether the indenture must be qualified under that act.  10 CCR § 260.140.5.  Finally, an open qualification will generally not be granted if the transfer of the securities is subject to any restrictions imposed by the issuer's charter, indenture agreements, or other agreements pursuant to which the securities are to be issued.  10 CCR § 260.140.8(a).

When the Commissioner approves a limited offering qualification, he or she will impose a legend pursuant to 10 CCR § 260.141.11(c) and the issuer will be required to deliver to each issuee or transferee a copy of that rule.  With certain exceptions, sales of the security without the Commissioner's prior written consent are unlawful.