The Securities Act of 1933 ("1933 Act") mandates that a company file an effective registration statement pertaining to the sale of a security, each time a security is sold. However, the Act provides several exemptions from the registration requirements. Section 4(a)(2), the nonpublic offering exemption under the 1933 Act, and SEC Rule 506(b) permit an offering of restricted securities with no dollar limit to an unlimited number of "accredited investors" and, if desired, not more than 35 sophisticated unaccredited investors. Many of our founders and their early hires rely on this exemption on the federal level.
Each state has its own set of securities exemptions.
In California, businesses file a LOEN with the California Department of Business & Oversight. There are four requirements to claim the LOEN, pursuant to Corporations Code section 25102(f):
- The company’s sales of securities are limited to no more than 35 unaccredited investors, including those located outside California,
- Each investor is required to have a pre-existing business or personal relationship with the issuer of the securities, or, in the alternative, can be demonstrated to be a sophisticated investor,
- Advertising of the securities is prohibited, and
- At the time of purchase, the investor must not intend to resell the securities.
Notably, the Section 25102(f) exemption is an issuer exemption; therefore, it does not apply to a non-issuer transaction or, for example, a situation in which an individual shareholder sells its shares to a third party.
The time to file a LOEN exemption is (ideally) within 15 business days after the sale, upon the discovery of the failure to file the notice, or after a demand by the commissioner, whichever occurs first. Many times, the LOEN is filed during or shortly after the incorporation process, when the startup or small business sells its shares to founders and/or early stage hires by way of (restricted/common) stock agreements. Because the amount of securities sold at this time is usually under $25,000.00, the filing fee is minimal (only $25.00).
The penalty for failure to file a LOEN may include “any action that the commissioner deems necessary or appropriate under this division with respect to the offer and sale of the securities.” See Corporations Code Section 25102(f)(4). The commissioner may issue civil penalties and require that securities be evidenced by certificates having restrictive legends on them. See Corporations Code Sections 25530-25536.
Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding filing LOENs.
This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.