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A Taxonomy Of Issuer And Nonissuer Transactions

Yesterday's post concerned a recent ruling by U.S. District Court Judge Phyllis J. Hamilton concerning whether a plaintiff's purchase of a cryptocurrency was subject to qualification as an "issuer transaction" under the California Corporate Securities Law of 1968.  Zakinov v. Ripple Labs, Inc., 2020 U.S. Dist. LEXIS 32982.  I noted that the CSL  does not define "issuer transaction" but does define "nonissuer transaction" as follows:

"'Nonissuer transaction' means any transaction not directly or indirectly for the benefit of the issuer. A transaction is indirectly for the benefit of the issuer if any portion of the purchase price of any securities involved in the transaction will be received indirectly by the issuer. An offering which involves both an issuer transaction and a nonissuer transaction shall be treated for the purposes of Chapters 2 (commencing with Section 25110) and 4 (commencing with Section 25130) of Part 2 of this division as an issuer transaction, but for the purposes of Chapter 1 (commencing with Section 25100) of Part 2 of this division they shall be treated as separate transactions."

Cal. Corp. Code § 25011.

According to the leading treatise on the subject, the "obvious intent of the statute is that any transaction directly or indirectly for the benefit of the issuer is to be treated and regulated as an issuer transaction, and any transaction which under this definition in Corp. Code § 25011 is not  directly or indirectly for the benefit of the issuer is to be treated and regulated as a nonissuer transaction".  Marsh & Volk, Practice Under the California Securities Laws § 10.03[2] (emphasis in original).  

Transactions that directly benefit an issuer should be reasonably easy to identify.  Under the second sentence of the statute, a transaction indirectly benefits an issuer if the issuer directly or indirectly receives any portion of the purchase price of the securities involved in the transaction.  This, of course, engenders that the question of what constitutes the "purchase price".  Commissioner's Rule 260.011 provides an answer:

"The term 'purchase price' as used in Section 25011 of the Code includes only the specific consideration bargained for in return for the securities (which may include the making of a loan to the issuer); it does not include any remote, contingent or incidental benefit which may accrue to the issuer, such as (without limitation) the inducement to a person to become or remain an employee of the issuer or perform other services for the issuer, even though a motive of the seller or the purchaser is to obtain such remote, contingent or incidental benefit for the issuer."

To illustrate, an existing shareholder might sell shares to a current employee in order to encourage the employee to remain employed.  If the employee's services are valuable, the corporation may benefit and that may even be a reason for the shareholder's decision to sell.  Nonetheless, that benefit is not part of the "purchase price" under the Commissioner's rule and the transaction is not for the benefit of the issuer under the second sentence of Section 25011.  As a result, the sale should not be considered to be an "issuer transaction". 

Note to readers: I have served as practice consultant to Marsh & Volk for the last several years.  

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