View Mobile Site

Ask the Expert

Signal Photos


Even small businesses have to consider securities laws

It's the Law

Posted: July 17, 2008 11:18 p.m.
Updated: September 18, 2008 5:02 a.m.
Have you had a legal compliance check-up for your corporation or limited liability company lately? Did you use one of those online services to form your own corporation or LLC and wonder if you did everything that was necessary to properly organize your business entity? Are you covering all of the legal bases in the organization and operation of your company? One frequently missed area for small businesses is compliance with securities laws.

Every corporation at its formation, and from time to time thereafter, issues stock to its shareholders and such stock interests (aka "securities") are subject to the California and federal securities laws. LLCs issue membership interests to their members. If the members are not "actively engaged" in the management of the business of the LLC, the membership interests issued to non-active members are also treated as securities. The rights of a member to participate in management or to vote on matters do not, by themselves, establish that a member is active. That's right, even LLCs have to consider securities laws.

Every company issuing securities in California must comply with the California Corporate Securities Laws administered by the Department of Corporations. And if the company issues securities outside California, it may be subject to the securities laws of those other jurisdictions, as well as the federal securities laws administered by the Securities and Exchange Commission.

Fortunately, most small companies issuing securities are able to qualify for exemptions from the full qualification and registration requirements of these securities agencies. In California, the securities laws exempt sales of securities that meet certain requirements. The most frequently used exemption is provided by Corporations Code section 25102(f).

The basic requirements for the 25102(f) exemption are:

Sales of securities must to limited to 35 persons (not counting "accredited investors")

The purchasers must have a pre-existing relationship with the issuing company or its management personnel or, by reason of their business or financial experience (or that of their professional advisors), they are capable of protecting their own interests

Each purchaser must purchase for their own account and not for resale

The offer and sale of the securities must be accomplished without advertising
While most small companies can meet the above requirements, they frequently neglect to file the DOC-required notice of transaction regarding the issuance of the securities. A notice of transaction is a general informational statement regarding the company and the securities being issued. Filings are generally required to be submitted on-line to the DOC, though, in cases of hardship, a paper copy notice may be submitted.

Failure to file the notice of transaction within the required time period (15 days after the first issuance) does not affect the availability of the exemption. However, if a company fails to file the notice of transaction as required, it must do so within 15 business days after demand by the DOC and pay an increased filing fee based on the fee schedule applicable to a full securities qualification.

If you are unsure whether your company has filed a notice of transaction with the DOC, the DOC's Cal-EASI Database is searchable on-line at, and copies of earlier filings are available upon request to the DOC.

Most small company securities issuances can similarly escape the full federal registration process of the SEC. Exemptions from that process are available for, among others, intrastate offerings (Section 3(a)(11) of the Securities Act), non-public offerings (Section 4(2) of the Securities Act) and limited offerings (Regulation D). Filings with the SEC may not be required in order for a company to take advantage of certain of these exemptions.

A periodic review of your company's legal compliance is an important part of its management and operation. The review can help prevent or minimize the legal issues and expenses that your company may face. A little proactive effort and expense now is a great investment in your company's future.

Chris S. Jacobsen is an attorney with the law firm of Poole & Shaffery, LLP, a law firm which provides General Counsel and litigation services to businesses and management personnel. He can be reached at (661) 290-2991. His column represents his own views, and not necessarily those of The Signal. "Business Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association.


Most Popular Articles

There are no articles at this time.
Commenting not available.
Commenting is not available.


Powered By
Morris Technology
Please wait ...