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California Securities Lawyers

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Complying with the Securities Laws

Failure to comply with the securities laws increases the offeror’s risk of lawsuits by the investors – and can even lead to criminal prosecution. Given this, it is important for a company or person making an investment offering to understand some basics of securities laws and to have competent legal representation.

When either a company or an individual (such as a real-estate syndicator) seeks investors, the securities laws virtually always apply, regardless of whether the investment is in stock, LLC ownership or otherwise. This means that the offeror must either register the securities with a government entity or must use an exemption from registration and comply with its requirements. Except where an IPO (initial public offering) is involved, these offering are often known as private placement offerings or direct public offerings, basically depending on whether an exemption is used or the offering is registered. (An IPO involves an underwriter and is a much more expensive and lengthy process.)

We work with companies and individuals who want to make securities offerings (including real-estate syndications) at least partially in California to determine which securities exemption is the best one to use – or whether registration is the best option. The usual factors 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. Once we determine the best approach, we review and revise the private placement memorandum (also known as the offering circular, prospectus, etc.), prepare the investor questionnaire (if needed), investor subscription agreement and make the required filings with government securities agencies.

If an offering is limited to residents of a single state, the entity is formed in that state and has its principal office there, and at least 80% of its assets, revenues and expenditures are there, then just the securities laws of that state apply. Otherwise both federal securities laws and the laws of each state where there are investors apply (although with a federal Rule 506 offering the states cannot conduct a merit review).

In California-only offerings, generally the 25102(f) or 25102(n) exemptions are used, unless the qualification by permit method (a type of registration) is used. Most private-placement offerings with investors in multiple states use the federal Rule 506 exemption, although it is possible to combine the California 25102(n) exemption with the Model Accredited Investor Exemption that many states use as long as the offering is limited to $5 million or less. There are pros and cons with each approach.

Offerors should realize that with private placement offerings and direct public offerings it usually is up to them to find the investors. Securities brokers often will not handle an offering unless at least $10 million is being raised and they are convinced that it will be easy to find investors. On California-only offerings (but not multiple-state offerings) it is possible to pay unlicensed “finders” on a performance basis if all the finders do is merely introduce the offeror and investor.

While a few approaches (the 25102(n) and qualification by permit) allow at least some advertising, many do not. When no public advertising is allowed (e.g., 25102(f) and Rule 506 offerings), one can discuss the company/syndication generally and in general the need for investment money – but not mention any specifics – rate of return, stock price, percentage of ownership that will be provided per dollar amount invested, etc. (Disclaimers are also strongly recommended.) Announcements can state that anyone wanting further information can submit responses to an investor questionnaire – and if the offeror determines that the investor is qualified the offeror can then provide specifics on an offering.

For more information, see the list of our articles at Raising Capital.

Also, we will provide a private placement memorandum (PPM) template without charge upon request. Contact Bruce E. Methven at or 510-649-4019.