The California Corporate Securities Law of 1968 forbids the offer and sale in this state of any security in an issuer transaction unless the sale has been qualified or the security or transaction is exempt or not subject to qualification. Cal. Corp. Code Section 25110. This important principle is the same whether it is the initial sale of securities by a start-up business or a large public offering of shares by a seasoned corporation.
I began practicing law within a few weeks of the end of that dark and dismal time when there was but one private placement exemption generally available in California. That exemption, Corporations Code Section 25102(h), imposed a number of major limitations, including the requirement that the issuer file a notice of transaction (including an opinion of counsel) with the Department of Corporations.
It was therefore my good fortune to enter into the practice of law a few short weeks after the effectiveness of the limited offering exemption - Section 25102(f). Professor Harold Marsh and Robert H. Volk describe the enactment of Section 25102(f) as "the most significant change which has been made by the Legislature in the securities law since the enactment of the Corporate Securities Law of 1968 and the most significant single amendment since the original enactment of the Corporate Securities Law in 1917." H. Marsh, Jr. & Robert H. Volk, Practice under the California Securities Laws § 4.02A[a] (emphasis added)*. This new exemption was deemed to be so important and so critical that the Legislature enacted it as an urgency statute. Section 25102(f) therefore took effect on November 1, 1981.
In enacting Section 25102(f), the Legislature authorized the Commissioner to require by rule that the issuer file a notice of transaction. Cal. Corp. Code § 25102(f)(4). The Commissioner adopted an emergency regulation to take effect on the same day as the new exemption. 10 CCR § 260.102.14. Although a notice of transaction must be filed pursuant to the Commissioner's rule, the availability of the exemption is not conditioned upon filing the notice. In this respect, the exemption operates in a manner that is similar to Regulation D under the Securities Act of 1933.
In the ensuing years, Section 25102(f) has served California reasonably well. Unfortunately, there is a very dark and threatening cloud on the horizon in the form of SB 978 that was introduced by Senators Juan Vargas and Curren Price. In an avulsive break with both Regulation D and over three decades of experience, these legislators are proposing to delete the provision specifying that failure to file will not vitiate the exemption and add the following:
The exemption from qualification afforded by this subdivision shall be unavailable if an issuer fails to file the notice within the time specified by the commissioner or fails to pay the filing fee. The commissioner may assess an administrative penalty of up to one thousand dollars ($1,000) against an issuer that fails to deliver the notice within the time period set forth above. Neither the filing of the notice nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action that the commissioner deems necessary or appropriate under this division with respect to the offer and sale of the securities.
I fear that this amendment will punish thousands of new and start-up businesses who through lack of sophistication and resources or innocent mistake will fail to timely file. The denial of the exemption will have a particularly draconian consequences because it will provide investors with a right of rescission pursuant to Section 25503. This remedy should be reserved for cases of investor fraud and not simply late filings.
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*I serve as a practice consultant to this treatise.