California's Corporate Securities Law of 1968 imposes a qualification requirement on the offer and sale of securities in three categories of transactions: issuer, recapitalization and reorganization, and nonissuer. Corp. Code §§ 25110, 25120 & 25130. In Zakinov v. Ripple Labs, Inc., 2020 U.S. Dist. LEXIS 32982, the plaintiffs sued various defendants for, among other things, the failure to quality the offer and sale of a cryptocurrency known as XRP as an issuer transaction in violation of Section 25110. Ruling on the defendants' motions to dismiss, U.S. District Court Judge Phyllis J. Hamilton described the question to be "whether plaintiff's alleged subsequent purchases on an exchange that defendants sold to qualifies as an 'issuer transaction' for purposes of stating a claim for violation of § 25011".
As an initial matter, it is simply not possible to state a claim under Section 25011 because the statute proscribes or requires nothing. It is simply a definition of "nonissuer transaction":
"'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."
The problem for the parties was that the CSL does not define the term "issuer transaction". Judge Hamilton defined the term by focusing on the last sentence of Section 25011 and the word "involves". Because she found the defendants were "involved" in the transactions, the plaintiff's purchase of XRP on an exchange qualifies as an "issuer transaction" under Section 25011.
I disagree. The last sentence of Section 25011 applies only after it has been determined that an offering involves both an "issuer transaction" and a "nonissuer transaction". It does not define "issuer transaction". Indeed, to hold that any after market transaction that merely "involves" the issuer would greatly expand the ambit of issuer transactions. That would be contrary to the purpose of the statute:
"Because of the fact that nonissuer transactions are not generally left unregulated by the Corporate Securities Law of 1968, it was decided that there was not the same necessity or desirability as under the previous law of attempting to broaden the scope of the category of issuer transactions. Therefore, the second sentence of Corp. Code § 25011 was added to define more precisely when a transaction would be considered to be “indirectly” for the benefit of the issuer. That sentence provides that such a transaction will be so considered only “if any portion of the purchase price of any securities involved in the transaction will be received indirectly by the issuer."
Marsh & Volk, Practice under the California Securities Laws § 10.03.
Note to readers: I have served as practice consultant to Marsh & Volk for the last several years.