California Lags Behind The SEC In Permitting Testing Of The Waters In Regulation A Offerings

In 2015, the Securities and Exchange Commission adopted amendments to Regulation A and other rules and forms to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act.  One significant enhancement to Regulation A was to permit issuers and persons acting on their behalf to "test the waters" with all potential investors and to use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers.  See SEC Rule 255.  These communications are deemed "offers" for purposes of the antifraud provisions of the federal securities laws.  Except as permitted by Rule 255, no offers may be made unless an offering statement has been filed with the SEC.  SEC Rule 251(d)(1)(i).  After an offering statement has been filed, but before it is qualified, the issuer may make oral offers, written offers pursuant to Rule 254 (preliminary offering circular requirements), and solicitations of interest.  SEC Rule 251(d)(1)(ii).

The California Corporate Securities Law, like the Securities Act, governs both offers and sales.  Section 25102(b) exempts from the issuer qualification requirement (Cal. Corp. Code Section 25110) any offer (but not a sale) of a security for which a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and no public proceeding or examination looking towards an order is pending under Section 8 of the Securities Act and no order under Section 25140 or Corporations Code Section 25143(a) is in effect.  Notably this exemption does not extend to nonissuer (i.e., sales by security holders) that are subject to qualification under Section 25130.  The Commissioner has adopted a rule, 10 CCR § 260.105.29, that exempts from both Sections 25110 and 25130 the use of "red herring" offering circulars but only after an offering statement on Form 1-A has been filed with the SEC and a number of other conditions have been met.  Neither Section 25102(b) nor Rule 260.105.29 permits an issuer "test the waters".

The foregoing discrepancies will not affect issuers in Tier 2 offerings under Regulation A because the SEC has preempted state registration requirements as to those offerings.