Securities – Frequently Asked Questions and Answers
I. Section 25102(f) Notice Filing – Limited Offering Exemption Notice
1. Do I need to file any documents with the DFPI if I have just incorporated my business?
Yes, if you issued securities in California. Securities issued in California must either be exempted or qualified. You can rely on the limited offering exemption provided by Corporations Code section 25102(f) if you meet all of the requirements in that section. To claim this exemption, a Limited Offering Exemption Notice (LOEN) must be filed with the Department.
2. How can I file the Limited Offering Exemption Notice?
The Limited Offering Exemption Notice can be filed online at https://docqnet.dfpi.ca.gov. The Self-Service DOCQNET Portal found on DFPI’s website allows filers to file the exemption notice and pay the required fee online.
3. What is the filing fee for the Limited Offering Exemption Notice?
The filing fee for the Limited Offering Exemption Notice varies depending on the value of the securities to be exempted. The fee is based on the value of the securities in the total offering, rather than on just the value of those securities to be offered in California.
Pursuant to Corporations Code section 25608(c), the fees range as follows:
|Values of Securities Proposed to be Sold||Filing Fee|
|$25,000 or less||$25|
|$25,001 to $100,000||$35|
|$100,001 to $500,000||$50|
|$500,001 to $1,000,000||$150|
4. Do I need to have an attorney prepare the Limited Offering Exemption Notice form?
No, the form is designed so that a lay-person can complete it. Another similar exemption – the small offering exemption provided by Corporations Code section 25102(h) – does require an attorney sign the notice form.
5. What are the requirements for claiming the Limited Offering Exemption Notice exemption?
There are four requirements to claim the Limited Offering Exemption Notice pursuant to Corporations Code section 25102(f).
The four requirements are:
- 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.
6. The fourth requirement for the Limited Offering Exemption Notice, under Corporations Code section 25102(f) requirement provides that the investor must not intend to resell the securities. Does that mean that an investor cannot resell the securities?
No, the investor may later resell the securities, but cannot have the intent to resell the securities at the time of purchase.
7. When must the Limited Offering Exemption Notice be filed?
The Limited Offering Exemption Notice must be filed within 15 calendar days after the first sale of a security in California or within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first. The notice may be filed in advance of the first sale of a security.
8. I formed my corporation and issued stock two years ago, and recently discovered that no exemption notice was filed. What do I do?
The 25102(f) exemption is not lost if the notice form is not timely filed. However, if you did not file the notice within 15 days after you first issued stock, you must file the notice within 15 days after discovering the failure to file the required notice or after the Commissioner makes a demand. The fee for a late filing is equal to the fee payable had the transaction been qualified under Corporations Code section 25110 ($200 plus 1/5 of 1% of the offering amount). This fee also applies if you failed to file within 15 days of discovery of a missed filing and make the filing late.
9. How long does it take DFPI to process the Section 25102(f) exemption notice before it is effective?
The notice is filed and effective when it is date-stamped as received by DFPI.
10. What happens if one of Limited Offering Exemption Notice requirements is not satisfied? For example, I would like to place an ad in the local newspaper to find possible investors for my new corporation. I do not plan to sell any securities until several weeks later. Would the exemption be available given these facts?
The advertisement could jeopardize the availability of the Limited Offering Exemption Notice exemption pursuant to Corporations Code section 25102(f). The possible absence of the required pre-existing relationship or sophistication on the part of those who respond to the advertisement could also be a problem. If you rely on the section 25102(f) exemption and one or more of the requirements is not satisfied, the exemption would be lost and each investor would be statutorily authorized to rescind his or her investment.
11. When should I check the box for Rule 260.103 at the top of the Limited Offering Exemption Notice form?
The Rule 260.103 space should be checked only if the notice form is being filed to exempt a change in the rights, preferences and privileges of securities that are already outstanding. (See Corporations Code section 25103.)
12. Do I need to file anything with the Securities and Exchange Commission pursuant to the Section 7 of the Limited Offering Exemption Notice form?
If sales of securities will be limited to residents of California, you probably will not have any filing requirements with the SEC. Questions about federal securities requirements, however, should be directed to the Securities and Exchange Commission. For more information go to http://www.sec.gov/.
13. Do I need to include an offering circular, prospectus, private placement memorandum or financial statements with the Limited Offering Exemption Notice?
To claim the exemption, only the notice itself, the filing fee and possibly a consent to service of process is required.
14. How do I determine if a consent to service of process should be filed with the Limited Offering Exemption Notice?
Every filer requesting an exemption from qualification, other than a California corporation, California limited partnership or California limited liability company, is required to file a consent to service of process form.
(Note: DFPI’s consent to service of process is not the same as the consent to service of process filed with the California Secretary of State.)
15. How do I submit the filing fee for the Limited Offering Exemption Notice?
On the Self-Service DOCQNET portal, you will be required to enter your credit card information at the time of payment submission. The Self-Service DOCQNET portal accepts the following credit card secured transactions:
- Discover Card
16. How can I confirm that my exemption notice has been filed with the Department of Financial Protection and Innovation?
Once the payment for the LOEN has been successfully processed, a receipt will be generated for the transaction. You should retain a copy of this receipt for your records.
17. How long does the Limited Offering Exemption Notice last?
The Limited Offering Exemption Notice is a “transaction” exemption, and can be relied on as long as successive issuances of securities are part of the same transaction. Therefore, the Limited Offering Exemption Notice does not need to be filed every year provided that the remaining value of securities on the notice filed with the DFPI is sufficient to cover the later issuances of securities.
Commissioner’s Release 67-C contains additional information concerning the definition of “transaction”, as well as other information about the Section 25102(f) exemption.
See Commissioner’s Release 67-C.
18. Do I need to file a notice each time the corporation issues new shares of common stock?
A new Limited Offering Exemption Notice must be filed if a later issuance of securities is not part of the exempted transaction.
19. I own shares of common stock issued under the Section 25102(f) exemption, and would like to sell some of the shares to my neighbor. Does the issuing corporation (or do I) need to file a Section 25102(f) exemption notice?
No. This would be considered a “nonissuer sale.” A secondary or nonissuer sale of shares involves a sale of shares by an existing shareholder. The Section 25102(f) exemption is an issuer exemption; therefore, it does not apply to a nonissuer transaction.
You may consider relying on the nonissuer exemption provided by Corporations Code section 25104(a). This self-executing exemption is available for most private sales that do not involve any advertising or use of a broker – dealer as part of a public offering. Since the exemption is self-executing, you do not have to file anything with DFPI to rely on this exemption.
II. Form D Filings – Rule 506 Transaction
20. I intend to file a Form D with the SEC to claim the federal exemption under Rule 506. Do I need to file anything with the Department of Financial Protection and Innovation if some of the securities are sold to accredited investors in California?
Yes. To claim the exemption from securities qualification under California law, a Form D notice filing must be submitted to the Commissioner no later than 15 days after the date of the first sale in this state.
21. What are the specific California filing requirements in connection with Rule 506 exemptions?
Issuers filing a notice for a Rule 506 offering under California Corporations Code section 25102.1(d), must submit:
a. A copy of the DFPI’s ADA compliant version of the Form D notice filing form; and
b. A filing fee of $300, pursuant to Corporations Code section 25608.1(c).
Commissioner’s Release 120-C contains additional information concerning the filing requirements for Rule 506.
22. Is an original signature required on the Form D filed with the Department of Financial Protection and Innovation?
23. I timely filed a notice pursuant to Corporations Code section 25102.1(d) with the Department of Financial Protection and Innovation. I would now like to increase the amount of the offering in California. Can I file an amendment to the information notice on file with the Department?
Yes. However, amendments are not required by the Department of Financial Protection and Innovation. You can file an amendment notice of the increased offering amount for informational purposes only. This can be accomplished by filing a paper amendment filing with the Department of Financial Protection and Innovation.
24. Where do I file the Form D notice?
The notice form can be filed online through the Department’s Self-Service DOCQNET Portal (https://docqnet.dfpi.ca.gov/). The DOCQNET Portal allows filers to file the notice and pay the required fee online. Alternatively, the notice can be filed through NASAA’s Electronic Filing Depository (EFD) system at https://efdnasaa.org, except a multiple-issuer Form D cannot be filed through NASAA’s EFD. See FAQ #26 for filing multiple-issuer notices.
25. I filed my Form D electronically with the SEC. Do I have to file a notarized consent to service of process with California?
If you filed your Form D electronically with the SEC, you do not have to file a notarized consent to service of process with California.
26. Can I file a multiple-issuer notice with California through the NASAA EFD system?
III. Section 25102(o) Notice Filing – Employee Benefit Plan Exemption
27. What are the requirements for claiming the employee benefit plan exemption?
The requirements for claiming this exemption are in Corporations Code section 25102(o). They are the following:
1. the securities that are the subject of the plan be exempt, at the time of issuance or grant, from registration under the Securities Act of 1933 pursuant to federal Rule 701;
2. the stock option plan or stock purchase plan should comply with each of the merit review regulations specified in Section 25102(o). They can be found at California Code of Regulations, Title 10, sections 260.140.40- 260.140.46; and
3. the employee benefit plan exemption notice set forth in California Code of Regulations, Title 10, section 260.102.19 be filed with the Department of Financial Protection and Innovation together with the appropriate filing fee and, if applicable, a consent to service of process, no later than 30 days after the initial issuance of a security under the plan.
28. Is it necessary to include a copy of the stock option or stock purchase plan with the notice filing?
29. Where can I file the 25102(o) notice form?
The notice form can be filed online at www.dfpi.ca.gov. The Self-Service DOCQNET Portal found on the Department’s website allows filers to file the 25102(o) notice and pay the required fee online.
30. How do I determine the filing fee to be paid with the Section 25102(o) notice?
The filing fee is computed by adding $200 to 1/5 of 1% (i.e., .002) of the value of securities to be exempted; the maximum fee is $2,500.
31. What is the filing fee for a purchase or stock option plan under Corporations Code section 25102(o) if I cannot determine the value?
Profits, interests, or options have value of some kind. Calculating that value at the time of issuance may be challenging, but it has some value that will be determined upon the occurrence of whatever triggering event applies. And it has some (incalculable) value in the present, or else companies would not use them, and it would make no sense for employees to accept them, particularly since they are usually offered in lieu of additional cash compensation. The problem is that it can be hard to determine what that value is right now. The Commissioner could require an issuer to provide an actual value as required under Corp. Code section 25608(g)(1) by virtue of the fact that the fee for 25102(o) notices is calculated in the same manner as qualification applications, pursuant to Corp. Code section 25608(y). However, for convenience, we allow the $0 value for form filing purposes, even though these securities have a non-zero value. When we cannot account for the value, the fee defaults to the $2,500 maximum to account for that fact. This ensures that the offering is fully covered.
32. Is it necessary to file a Section 25102(o) exemption notice each time the company issues securities under the plan?
No. The Section 25102(o) exemption is a “transaction” exemption, and it is assumed that all the securities that are subject to the plan will be issued as part of the same transaction. Therefore, when the notice is initially filed it should exempt all securities issuable under the plan. The only circumstance that would require a second notice filing would be an amendment to the plan that increases the number of securities subject to the plan. The second notice would pertain only to the securities added to the plan.
33. You mentioned that the maximum fee for filing a Section 25102(o) notice is $2,500. If I increase the number of securities subject to the plan and file a second employee benefit plan exemption notice, do I add the initial fee paid and the current fee together to determine if the $2,500 maximum fee is met?
No. The $2,500 maximum fee applies to each notice of exemption filed rather than to the sum of several fees paid in connection with a plan. Amendments to a stock option or stock purchase plan to increase the number of options or shares that may be issued under the plan, require the filing of a new notice and payment of an additional fee based on the value of the underlying securities. (See Commissioner’s Release 99-C). If you are filing your notice late, you must pay a fee equal to the maximum aggregate fee payable had the transaction been qualified under section 25110 (i.e., $2,500). See Corp. Code section 25102(o).
34. My company's plan includes participants in three other states in addition to those in California. Options were granted under the plan to company employees in Oregon five months ago and two weeks ago to California employees. Since Section 25102(o) requires the notice to be filed no later than 30 days after the initial issuance of any security under the plan, should I now file the notice with the Department of Financial Protection and Innovation to exempt plan securities that were issued to California employees?
Yes. An amendment to Regulation 260.102.19 effective August 31, 2001 clarified that it is the initial issuance of a security under the plan in California that starts the 30-day filing period.
35. The notice form refers to a "Flexible" Purchase/Option Plan or Agreement. What is a "flexible" plan?
A “flexible” plan is an employee benefit plan that combines both stock option and stock purchase programs.
36. Why did I get a deficiency letter regarding a balance fee due after filing my EPEN?
Corporations Code section 25102(o) requires the notice to be filed no more than 30 days after the initial issuance of securities under the plan. Notices filed after the 30-day time limit must be filed within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first. The notice, however, has to be accompanied by a fee equal to the maximum aggregate fee had the transaction been qualified by an application. The maximum aggregate fee is $2,500. [See Corporations Code section 25608(e) and (f)].
37. Can I get a waiver of the excess fee?
A waiver of the excess fee is not available under the Code or the Rules. The balance fee due however, can be broken up into multiple payments over time to ease the financial burden. The notice will not be completed and considered filed until the full balance has been received.
38. How do I pay my balance fee due electronically?
At this time, the Department does not have any means to accept balance of payments due electronically. A check referencing the notice ID number must be sent to the Department by mail to resolve the deficiency.
39. Why did I receive a letter from the Department for a regulatory examination?
The letter is notifying you of an upcoming examination of your books and records for the permit that was issued under Corporations Code section 25113, subdivision (b)(1)(2).
40. Under what authority am I being examined?
Under 25113, subdivision (e), of the Corporations Code, the Department may conduct an examination of those persons to whom permits are issued.
41. What is the purpose of examining my books and records?
The examination is being conducted to determine compliance with the conditions of the permit issued as well as other applicable state law.
42. I have renewed my securities permit several times in the past, why is the Department conducting an examination now?
The law authorizing the Department to conduct an examination of permit holders went into effect January 1, 2013. All permits issued after January 1, 2013 may be subject for an examination.
43. Do you still conduct an examination even if my permit has already expired?
Yes, there is no statute of limitation to conduct an examination on an issuer of securities after a permit has expired.
44. How often do you conduct an examination?
Generally, a regulatory examination is conducted on a three-year cycle.
45. What if I haven’t maintained any books and records for the securities that were sold?
Under Corporations Code 25145, every securities issuer shall at all times keep and maintain complete set of books, records and accounts for the sale of securities.
46. Can I avoid an examination if I have complied with the conditions of the permit?
The purpose of the regulatory examination is to allow the Department to make the determination of compliance with the conditions of the permit and other applicable state law.
47. Should I expect the Department to send someone over to examine my books and records?
Yes, examinations are conducted at the principal address where all records are kept.
48. Will I be notified when the Examiner will visit my place of business?
Yes, you will be notified in writing and/or phone call prior to the Examiner’s arrival.
49. How long does it take to conduct an examination?
The length of an examination depends on multiple factors and will be provided to you by the Examiner during the visit. Most examinations last between two to five days.
50. What are some of the typical documents requested by the Department?
Documents requested for an examination may vary, however, financial statements, bank records as well as the issuer’s investor ledger are often requested
V. Investment Company Notice Filings
51. Must investment company notices (NASAA Form NF) under Corporations Code section 25100.1(b) be filed at the Series level or Trust level?
Trust level. Investment companies that are registered or that have filed a registration statement under the Investment Company Act of 1940 and that are defined as a “covered security” pursuant to Section 18(b)(2) of the Securities Act of 1933 should file Form NF either with the Department via the Self-Service DOCQNET Portal or with NASAA EFD and pay the required notice filing fee at the trust level to fulfill the notice requirement under Corporations Code section 25100.1, subdivision (b) prior to offering or selling securities in California.
52. What are the notice filing and fee requirements if I am increasing the amount of the offering from what was previously filed with the Department on a Form NF?
If increasing the amount of securities to be offered or sold in California in a given 12-month effectiveness period, an investment company must file a notice to “Increase Dollar Amount” on Form NF and pay a filing fee to cover the additional amount of securities to be offered or sold. Pursuant to Corporations Code section 25608.1(a), the filing fee is $200 plus 1/5 of 1% (.002) of the value of the securities, up to a maximum fee of $2,500. The $2,500 maximum fee applies to the sum of all fees paid within the 12-month effectiveness period for a notice. Once you have paid $2,500 in total fees for a given 12-month effectiveness period, you do not have to pay any additional fees if you continue to increase the number of securities.
53. I am currently outside of the U.S. Can I have a foreign notary notarize the consent to service of process required for my notice or application?
54. Does the Department of Financial Protection and Innovation maintain lists of shareholders in public or private corporations?
55. How can I check whether a notice was filed for my business or a different business?
You can search for publicly available securities filings on the Department’s Self-Service Portal at https://docqnet.dfpi.ca.gov/.
56. I inherited some stock and would like to determine if it has any value. Can the Department of Financial Protection and Innovation provide this information?
No. The Department of Financial Protection and Innovation regulates the offer and sale of securities within California, but does not monitor the value of securities after the securities are issued.
57. I believe that the president of a private corporation deliberately provided false information on which I relied in purchasing the corporation's stock. The stock is now worthless. What can the Department of Financial Protection and Innovation do to assist me in recovering my investment?
If you would like to file a complaint with the Department, you should initiate the process by submitting a complaint form. These forms are available at the Department’s Web site at www.dfpi.ca.gov. However, the Department cannot serve as your private attorney in this matter.
Occasionally, the Department’s investigation will result in the violator making full or partial restitution, but there are no guarantees.
58. How do I find out if the Department of Financial Protection and Innovation has received any complaints concerning a specific business?
The Department cannot disclose whether it has received or is investigating any complaints of securities violations until the complaint becomes a matter of public record; i.e., until such time as the complaint is disclosed in a public administrative or judicial proceeding.
59. Can I obtain blank stock certificates from the Department of Financial Protection and Innovation?
The Department does not provide blank stock certificates. Blank stock certificates are usually part of a “corporation kit” and should be available at most legal stationery stores.