Negotiating Permits?

The title of yesterday's post may have been a bit recondite for some readers as I never directly mentioned negotiating permits in the post.  Therefore, today's post will back up a bit and fill in some of the missing pieces.

As noted yesterday, the California Corporate Securities Law prohibits offers of securities by issuers unless the sale has been qualified or is exempt or not subject to qualification.  Cal. Corp. Code § 25110.  The CSL therefore explicitly exempts offers, but not sales, pursuant to a negotiating permit issued by the Commissioner of Business Oversight.  Cal. Corp. Code § 25102(c).  A negotiating permit is subject to the condition that none of the securities may be issued and none of the consideration may be received or accepted until the sale is qualified under the CSL.  Id.  The application for a negotiating permit is made on the same form used to qualify the sale of securities by permit.  10 CCR § 260.102.

Yesterday's post concerned an exemption for offers not involving a public offering.  Cal. Corp. Code § 25102(a).  That exemption also covers the execution and delivery of any agreement for the sale of securities pursuant to the offer if both of the following conditions are met:

  •  The agreement contains substantially the following provision:

“The sale of the securities that are the subject of this agreement has not been qualified with the Commissioner of Corporations [sic] of the State of California and the issuance of the securities or the payment or receipt of any part of the consideration therefor prior to the qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditioned upon the qualification being obtained, unless the sale is so exempt”

  • No part of the purchase price is paid or received and none of the securities are issued until the sale of the securities is qualified under the CSL unless the sale of securities is exempt from the qualification by this  Section 25100, 25102 or 25105.

This latter condition precludes reliance on the exemption for an agreement to advance funds to form a corporation on the basis that the advance will be cancelled by the issuance of shares.  The Commissioner of Business Oversight, however, has adopted a rule to address this situation. 10 CCR 260.105.23.  That rule imposes the following conditions:

  • The aggregate amount of the advances or loans made does not substantially exceed the funds required to pay the fees and expenses of organization and the initial issuance of share certificates, including attorney fees.
  • The advance or loan is made by persons, each of whom is in one or more of the following classes:
    • By a corporation, directly or indirectly, that will have a direct or indirect interest in the issuer.
    • By any officer, director or controlling shareholder of such corporation.
    • By any partnership whose business the issuer intends to acquire.
    • By any partner of such partnership.
    • By any person who is or is expected to become an officer or director of the issuer.
  • The number of persons making such advances or loans does not exceed 35.
  • The issuer has not commenced business other than activities in connection with the organization and preparation for regular business or issued shares at the time such advances or loans are made.
  • Prior to the earlier of the commencement of business (other than organizational activities) or the issuance of shares, the issuer qualifies such issuance or such issuance of shares is exempted from qualification under Section 25110 of the Corporations Code.