Securities – Frequently Asked Questions and Answers

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.

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.

The Department is updating its electronic filing system to improve usability and performance. The Franchise and Securities Electronic Submissions (FRANSES) is estimated to launch in Q4 2024, sign up for email notifications (FRANSES Updates) to receive updates and future engagement opportunities.

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:

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.

There are four requirements to claim the Limited Offering Exemption Notice pursuant to Corporations Code section 25102(f). 
The four requirements are:

1. sales of securities are limited to no more than 35 unaccredited investors, including those located outside California,
2. 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,
3. advertising of the securities is prohibited, and
4. at the time of purchase, the investor must not intend to 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.

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.

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.

The notice is filed and effective when it is date-stamped as received by DFPI.

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.

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.)

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/.

To claim the exemption, only the notice itself, the filing fee and possibly a consent to service of process is required.

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.)

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:

• Visa
• MasterCard
• Discover Card

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.

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.

A new Limited Offering Exemption Notice must be filed if a later issuance of securities is not part of the exempted transaction.

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.

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.

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.

See Commissioner’s Release No. 120-C (PDF).

No.

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.

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.

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.

No. If a Form D identifies multiple issuers, issuers may not file the notice through the NASAA EFD system. Each Issuer must separately file the required notice with California directly. See FAQ #21 and #24 for specific California filing requirements.

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.

No.

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.

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.

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.

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.

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).

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.

A “flexible” plan is an employee benefit plan that combines both stock option and stock purchase programs.

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)].

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.

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.

We are actively working to improve the usability and functionality of our electronic filing system (currently referred to as the DOCQNET Portal). For more information about our new Franchise and Securities Electronic Submissions (FRANSES), estimated to launch Q4 2024, sign up for email notifications (FRANSES Updates) to receive updates and future engagement opportunities.

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).

Under 25113, subdivision (e), of the Corporations Code, the Department may conduct an examination of those persons to whom permits are issued.

The examination is being conducted to determine compliance with the conditions of the permit issued as well as other applicable state law.

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. 

Yes, there is no statute of limitation to conduct an examination on an issuer of securities after a permit has expired. 

Generally, a regulatory examination is conducted on a three-year cycle.

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.

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. 

Yes, examinations are conducted at the principal address where all records are kept.

Yes, you will be notified in writing and/or phone call prior to the Examiner’s arrival.

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.

Documents requested for an examination may vary, however, financial statements, bank records as well as the issuer’s investor ledger are often requested

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.

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.

Yes.

No.

You can search for publicly available securities filings on the Department’s Self-Service Portal at https://docqnet.dfpi.ca.gov/.

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.

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.

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.

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.