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Chart Comparing Common California and Federal Exemptions and Registration

When a California company wants to bring in investors through a private placement offering, it has to determine which securities exemption is the best one to use. The usual factors to consider are how much money needs to be raised, what forms of marketing are needed, how many investors are expected, what suitability standards will work for the expected potential investors, and whether the offering can be limited to California investors only or not. This chart lays out the pros and cons of each exemption with respect to these factors.

Note: Not all requirements are covered here, nor are variations for specific situations addressed; this is designed to give general guidance. Also, the securities law area is extremely complex; do not try to make an offering without advice from an attorney.

California 25102(f) California 25102(n) California Qualification by Permit Accredited Investor Exemptions (Most States but with Variations) Federal Rule 504/scor in Other States Federal Rule 506
Maximum Amount unlimited if a CA-only offering, no limit. Otherwise, up to $5 million. unlimited, but less strict review if limited to < $5 million unlimited $1 million unlimited
Advertising only non-specific info and targeted offers1 brief "tombstone" ad only (plus non-specific info and targeted offers1) full public advertising if limited to CA only brief "tombstone" ad only (plus non-specific info and targeted offers1) only non-specific info and targeted offers1 unless registered in at least one state only non-specific info and targeted offers1
Maximum Number of Investors 35 plus accredited investors2 unlimited unlimited unlimited unlimited 35 plus accredited investors
Qualifications of Investors pre-existing substantive relationship3 or sophisticated4  or accredited2 for corporations, either "qualified"5or accredited2. For LLC's, accredited2only. none, but no merit review if revenues < $25 million, offering is < $5 million and "minimum qualifications"6  used accredited investors2only usually none sophisticated4or accredited2
Foreign Investors – separate offering required? Must be a separate offering, but 35-investor limit must count both offerings unless 6 months apart. Foreign investors must sign certificate7 Can be part of single offer IF offer is $5 million or less. Foreign investors must sign certificate7 Must be separate offering (or Rule 504, 505 or 506 must also be complied with). Foreign investors must sign certificate7 May be single offering. Foreign investors must sign certificate7 May be single offering, though $1 million limit applies to total. Foreign investors must sign certificate7 May be single offering. Foreign investors must sign certificate7
Combining California and Other Exemptions limited to California only can be combined with accredited investor2exemptions in other states can be combined with a Rule 504/SCOR offering in other states – but may not be worth it can be combined with a California 25102(n) can be combined with a California qualification by permit preempts state merit review, though brief filing required in each state with investors
Comments easy for "friends and family" investors entity may have only one class of securities unless accredited investors2only extensive application is required that must be approved by the State  in advance; the "minimum qualifications"6  are much less than required for accredited investors must be combined with a CA 25102(n) offering of < $5 million to allow the tombstone ad; there are variations from state to state; brief filing is required in each state with investors regional approval (five regions) must be obtained in advance Form D must be filed with the SEC. A few states require issuer to also register as broker.

1. "Only non-specific info and targeted offers":

2. "Accredited investors":

3. "Pre-existing substantive relationship": A preexisting personal or business relationship with the company or one or more of its officers, directors or controlling persons of a nature and duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen and general business and financial circumstances of the person with whom such a relationship exists.

4. "Sophisticated": Having the capacity to protect own interests, meaning that by reason of substantial business or financial experience – or that of Investor's professional advisors (who are unaffiliated with and who are not compensated by the company or any affiliate or selling agent of the company, directly or indirectly) – the capacity to protect investor's interests in connection with the transaction.

5. "Qualified investors" (for a 25102(n)): Note that for this to apply the company must be a corporation and have only a single class of stock/units. This means a natural person who, either individually or jointly with the person's spouse, either:

"Net worth" must be determined exclusive of home, home furnishings, and automobiles. Also, the amount of the investment of each natural person cannot exceed 10 percent of their net worth.

6. "Minimum qualifications" (for a qualification by permit with no merit review): The investor (an individual, counting the husband and wife as one – and probably an entity) must meet one of the following requirements:

7. "Foreign investors certificate": Foreign investors must sign certificate stating that they will not re-sell or transfer the securities back into the U.S. unless U.S. securities laws are complied with.