Periodic Chart of
the Essential Elements
of Securities Laws and Regulations

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California and Federal

Prepared by William D. Evers of Evers & Hendrickson, LLP

 

Forward: This chart covers only the highlights of the various California and Federal laws and regulations. Unfortunately, each state has its own laws covering small business offerings. No state other than California is covered by this chart. This chart is not to be viewed as a definitive explanation of the laws and their application. It was created to be a convenience to assist clients in understanding the basic structure of the laws; it is not to be taken as legal advice.

 

PUBLIC OFFERINGS AND SALES

UpPreface: This part of the Chart covers the primary vehicles for public offerings of securities in California. Rule 504 is used in conjunction with SCOR's in California. These considerations were taken into account in designing this Chart.

 

Item

California SCOR Regulation A SB-2
Statutory Source Federal 013 Rule 504 of Reg. D. State §25113(b)(2)1 Federal - Section 3(b) of the '33 Act2.

State §25113(b)(1)

Federal - Section 5 of the '33 Act .

State §25113(b)(1)

Dollar Limit $1 million $5 million (Secondary $1.5 million) No Limit
Number of Purchasers3 No limit, but suitability4. No limit, but suitability. No limit, but suitability.
Purchaser Qualification

Suitability, but under Small Business Rules - $2,500 O.K. from any investor.

Same as California SCOR

Suitability and if over $5 million, $2,500 exclusion doesn't apply.

Qualification of Issuer

California Corporation or subject to §25115; no "blind pools", not in oil and gas or mining; not an investment company; and not a Reporting Company.

Incorporated in California, other state or Canada. Limited Partnerships and Limited Liability Companies are qualified.

Same as Reg. A and revenue and public float of less than $25 million.

Manner of Offering: General Solicitation

General Solicitation permitted with use of U-7 Form upon approval by Commissioner*. Internet can be used.

*"Commissioner" herein refers to the California Commissioner of Corporations

General solicitation permitted. May use U-7 or Form 1-A, Model B (regular Offering Circular). Federal: "Can test the Waters". California: Can't test the Waters.

General solicitation permitted. Must use Form SB-2 disclosure format (not U-7 or Form 1-A).

Integration with other offerings?

Yes, unless a proper 25102(f) "Notice of Transaction" is filed for an earlier private placement or six months has elapsed. State Rule is '260.102.12. Federal Rules are 152 and 502(a)).

Prevents integration with prior offerings or registered subsequent offerings. Safe harbor given by Rule 251(c).

Similar to SCOR rules for California. Under federal rules, no integration if offering follows a 4(2) or Rule 506 offering.

Information Requirements

Use of Form U-7 (50 questions).

Form U-7 or Form 1-A, Model B.

SB-2 format (based on SEC Regulation S-B).

Financial Information

Up to $500,000 need "reviewed" financials; over $500,000, audit of Balance Sheet within 90 days and two years of Income and Cash flows5.

Federal: No audit required unless audited financials are otherwise prepared. California: if no audited financials, high suitability imposed.

1 year audited balance sheet; 2 years audited statement of income and cash flows; Unaudited interim financial information and reconciliation of equity accounts.

Required Filings

File with commissioner. All sales material (including Internet) must be submitted prior to Use.

File with SEC in Washington D.C. File with Commissioner. All sales material to be filed with Federal and State.

File with SEC and Commissioner (within 5 days of SEC filing).

Fees

$2,500; can go to $3,500 if difficult to process.

SEC - No fees. California: $200 plus one-fifth of 1% maximum $2,500.

Varied - based on size of offering.

Resale

Restrictions

Tradeable, except under some circumstances in California.

Same as SCOR.

None.


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  1. Unless noted otherwise, all California citations are from the Corporate Securities Law of 1968 and refer to Code Sections in the California Corporations Code.
  2. The '33 Act is the Securities Act of 1933.
  3. Until recently, the law was explicit that offers could not be made without an exemption or a permit. However, with the advent of the Internet, this area is a bit fuzzy. For purposes of this Chart, "Purchasers" shall be deemed to include "Offerees."
  4. Suitability is usually imposed on offerings by non-reporting (to the SEC) small businesses. Suitability is rather rare in SB-2 Offerings. California has special rules for Small Business (see Section 3.3 in the Primer).
  5. This applies to "small business issuers" only (revenues of less than $12.5 million), all others must file a balance sheet within 90 days prior to the date of the Application (filing date) on statements of income and cash flows for three years. For an "open" permit (one without suitability) audited balance sheet for last fiscal year (if ended more than 90 days before filing) and audited statements of income and cash flow for three years up to the date of the audited balance sheet. Unaudited Interim Statements are also required.

 

PRIVATE OFFERINGS AND SALES

Preface: This part of the Chart covers the most often used private placement exemptions.

Item

Section 4(2)

Rule 506

Section 25102(f)

Source '33 Act Section 4(2); '33 Act Calif. Corp. Code
Dollar Limit No Limit No Limit No Limit
Number of Purchasers

No set limit, but as a rule of thumb, caution over 25. Try for accredited; must Blue Sky.

No limitation on accredited; up to 35 non-accredited.

Any number of accredited (excluded), no more than 35 non-accredited (non-excluded).

Purchaser Qualification

Need to have access to information and must be sophisticated (capable of fending for themselves).

Non-accredited must be provided prescribed info and be sophisticated (able to evaluate the investment).

Pre-existing relationship or be sophisticated enough to protect their interests.

Qualification of Issuer None

None unless failed to file Form D and court order.

None
General Solicitation

No general solicitation or advertising.

Same as 4(2). Same as 4(2)5.
Integration with other Offerings Yes, no safe harbor.

Yes, but has six month safe harbor and can be followed by a public offering.

Yes, six month safe harbor. Can follow immediately if file Af2 form and use qualified filing (e.g. SCOR).

Required Filings

None, except must Blue Sky.

Form D must be filed with the SEC within 15 days of sale.

Notice of Transaction must be filed with Department of Corporations within 15 days of sale.

Resale Restrictions

Yes, stock is restricted and can only be sold under a registration statement, Rule 144 or another exemption to registration.

Same as 4(2).

California: none specifically, however, federal restrictions will apply if interstate.

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