Securities and Franchises – Frequently Asked Questions and Answers

Questions

    I. Section 25102(f) Notice Filing - Limited Offering Exemption Notice

  1. Do I need to file any documents with the DBO if I have just incorporated my business?

  2. How can I file the Limited Offering Exemption Notice?

  3. What is the filing fee for the Limited Offering Exemption Notice?

  4. Do I need to have an attorney prepare the Limited Offering Exemption Notice form?

  5. What are the requirements for claiming the Limited Offering Exemption Notice exemption?

  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?

  7. When must the Limited Offering Exemption Notice be filed?

  8. I formed my corporation and issued stock two years ago, and recently discovered that no exemption notice was filed. What do I do?

  9. How long does it take DBO to process the Section 25102(f) exemption notice before it is effective?

  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?

  11. When should I check the box for Rule 260.103 at the top of the Limited Offering Exemption Notice form?

  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?

  13. Do I need to include an offering circular, prospectus, private placement memorandum or financial statements with the Limited Offering Exemption Notice?

  14. How do I determine if a consent to service of process should be filed with the Limited Offering Exemption Notice?

  15. How do I submit the filing fee for the Limited Offering Exemption Notice?

  16. How can I confirm that my exemption notice has been filed with the Department of Business Oversight?

  17. How long does the Limited Offering Exemption Notice last?

  18. Do I need to file a notice each time the corporation issues new shares of common stock?

  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?

  20. II. Form D Filings - Rule 506 Transaction

  21. 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 Business Oversight if some of the securities are sold to accredited investors in California?

  22. What are the specific California filing requirements in connection with Rule 506 exemptions?

  23. Is an original signature required on the Form D filed with the Department of Business Oversight?

  24. I timely filed a notice pursuant to Corporations Code section 25102.1(d) with the Department of Business Oversight. 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?

  25. Where do I file the Form D notice?

  26. I filed my Form D electronically with the SEC. Do I have to file a notarized consent to service of process with California?

  27. III. Section 25102(o) Notice Filing - Employee Benefit Plan Exemption

  28. What are the requirements for claiming the employee benefit plan exemption?

  29. Is it necessary to include a copy of the stock option or stock purchase plan with the notice filing?

  30. Where can I file the 25102(o) notice form?

  31. How do I determine the filing fee to be paid with the Section 25102(o) notice?

  32. Is it necessary to file a Section 25102(o) exemption notice each time the company issues securities under the plan?

  33. You mentioned that the maximum filing fee for filing a Section 25102(o) notice is $2,500. If, because of an increase in the number of securities subject to the plan, it is necessary to file a second employee benefit plan exemption notice, do I add the initial fee paid to the current fee computation to determine if the $2,500 maximum fee is exceeded?

  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 Business Oversight to exempt plan securities that were issued to California employees?

  35. The notice form refers to a "Flexible" Purchase/Option Plan or Agreement. What is a "flexible" plan?

  36. IV. Franchise Registration

  37. Do I need to file any documents with the DBO if I franchise my business?

  38. What should I include with my initial franchise application?

  39. Where can I send my application?

  40. What are the fees for the various applications?

  41. What are the required financial statements for registration?

  42. I do not have audited financial statements. Can I submit compiled financial statements?

  43. Does the DBO accept a "Review" report balance sheet in lieu of an audit?

  44. After I submit my franchise application, how long does it take for the application to be approved?

  45. What constitutes a "complete application"?

  46. I received a comment letter from the DBO and it states that all material changes must be submitted by pre-effective amendment. What is a pre-effective amendment and how do I file a pre-effective amendment?

  47. The registration of my franchise application is effective, but I need to amend material information contained in the franchise application. Do I need to file anything with the DBO?

  48. When should I submit my renewal of registration?

  49. The audited financial statements will not be finalized before the expiration of the registration. Can I still file my renewal application?

  50. What happens if I file my renewal application late?

  51. V. Miscellaneous

  52. 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?

  53. Does the Department of Business Oversight maintain lists of shareholders in public or private corporations?

  54. How can I check whether a notice was filed for my business or a different business?

  55. I inherited some stock and would like to determine if it has any value. Can the Department of Business Oversight provide this information?

  56. 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 Business Oversight do to assist me in recovering my investment?

  57. How do I find out if the Department of Business Oversight has received any complaints concerning a specific business?

  58. Can I obtain blank stock certificates from the Department of Business Oversight?




Answers

    I. Section 25102(f) Notice Filing - Limited Offering Exemption Notice

  1. Do I need to file any documents with the DBO 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.dbo.ca.gov. The Self-Service DOCQNET Portal found on DBO'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
    Over $1,000,000 $300

  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:

    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.

  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. If you filed within 15 business days after discovery of the failure to file the notice and before the Commissioner demands compliance you may pay the regular fee. Otherwise, you must pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Corporations Code section 25110.


  9. How long does it take DBO 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 DBO.


  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: DBO'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:

    • Visa
    • MasterCard
    • Discover Card

  16. How can I confirm that my exemption notice has been filed with the Department of Business Oversight?

    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 DBO 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 at /Commissioner/Releases/pdf/67c.pdf.


  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 DBO to rely on this exemption.


  20. II. Form D Filings - Rule 506 Transaction

  21. 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 Business Oversight 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.


  22. 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 version of Form D filed with and accepted by the SEC; 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 at /Commissioner/Releases/pdf/120C.pdf.


  23. Is an original signature required on the Form D filed with the Department of Business Oversight?

    No.


  24. I timely filed a notice pursuant to Corporations Code section 25102.1(d) with the Department of Business Oversight. 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 Business Oversight. 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 Business Oversight or by filing through the NASAA Electronic Filing Depository System at https://www.efdnasaa.org/


  25. Where do I file the Form D notice?

    The notice form can be filed online at www.dbo.ca.gov. The Self-Service DOCQNET Portal found on the Department's website allows filers to file the notice and pay the required fee online. The DOCQNET Portal is at https://docqnet.dbo.ca.gov/.


  26. 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.


  27. III. Section 25102(o) Notice Filing - Employee Benefit Plan Exemption

  28. 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 Business Oversight 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.


  29. Is it necessary to include a copy of the stock option or stock purchase plan with the notice filing?

    No.


  30. Where can I file the 25102(o) notice form?

    The notice form can be filed online at www.dbo.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.


  31. 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.


  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 filing fee for filing a Section 25102(o) notice is $2,500. If, because of an increase in the number of securities subject to the plan, it is necessary to file a second employee benefit plan exemption notice, do I add the initial fee paid to the current fee computation to determine if the $2,500 maximum fee is exceeded?

    No. The $2,500 fee limit applies to each notice of exemption filed rather than to the sum of several fees paid in connection with a plan.


  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 Business Oversight 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. IV. Franchise Registration

  37. Do I need to file any documents with the DBO if I franchise my business?

    Yes. A franchisor that offers a franchise in California is required to file an application for registration or exemption notice. The franchise application must be filed in accordance with the California Guidelines for Franchise Registration.

    For more information, please see the Guidelines for Franchise Registration at /Licensees/franchise_investment_law/pdf/310111UFDD.pdf.


  38. What should I include with my initial franchise application?

    The initial franchise application should include all of the following:

    1. i. Filing fee of $675, payable to the "Department of Business Oversight";
    2. ii. Cover letter clearly stating the name of the applicant, the Org-Id number (if known), and the franchisor's fiscal year-end date;
    3. iii. Application Facing Page and a signed and notarized Signature Verification Page and Corporate Acknowledgment (by an officer or general partner of the franchisor or an individual with a power of attorney if the appropriate resolution is attached);
    4. iv. Customer Authorization of Disclosure of Financial Records;
    5. v. Consent to Service of Process (not required for California entities);
    6. vi. Supplemental Information Page;
    7. vii. Sales Agent Disclosure Forms;
    8. viii. Franchise Disclosure Document in plain English with all exhibits including the Franchise Agreement;
    9. ix. California State addendum;
    10. x. Audited Financial statements according to GAAP, with a manually signed consent by the certified public accountant or firm that audited the financial statements;
    11. xi. Internet Ad Exemption Notice; and
    12. xii. Guarantee of Performance or other Financial Assurances (if required/needed).

    Note: Please do not submit CD-ROMs with your application. The DBO does not accept CD-ROMs.


  39. Where can I send my application?

    You can file electronically at:

    https://docqnet.dbo.ca.gov/

    Department of Business Oversight
    320 West 4th Street, Suite 750
    Los Angeles, CA 90013-2344

    OR

    Department of Business Oversight
    One Sansome Street, Suite 600
    San Francisco, CA 94104-4448

    OR

    Department of Business Oversight
    1515 K Street, Suite 200
    Sacramento, CA 95814-4052


  40. What are the fees for the various applications?

    FEES:

    Franchise Registration $675
    Renewal Franchise Registration 450
    Post-Effective Amendment 50
    Pre-Effective Amendment No Fee
    Material Modification 50
    Notice of Violation 675
    Reinstatement Following Abandonment No Fee

  41. What are the required financial statements for registration?

    The application must include the franchisor's financial statements audited by an independent certified public accountant in accordance with generally accepted accounting principles (GAAP). The financial statements required to be filed include a balance sheet as of a date within 90 days prior to the application filing date, and profit and loss statements for each of the three fiscal years preceding the date of the balance sheet and for the period, if any, between the close of the last fiscal year and the date of the balance sheet. (10 C.C.R. § 310.111.2.)


  42. I do not have audited financial statements. Can I submit compiled financial statements?

    No. The DBO does not accept compiled financial statements unless they are interim financials submitted with audited financial statements.


  43. Does the DBO accept a "Review" report balance sheet in lieu of an audit?

    The DBO may accept a current "Review" report balance sheet instead of an audit if:

    • It is the franchisor's first registration application in California and the franchisor has no prior audited financial statements;
    • The "Review" report balance sheet is as of a date within 90 days of the application filing date;
    • The financials include profit and loss statements covering the prior three years, or from inception of the business; a Statement of Cash Flow, and appropriate footnotes;
    • The "Review" report conforms to American Institute of Certified Public Accountants standards.

  44. After I submit my franchise application, how long does it take for the application to be approved?

    If the DBO has not issued a stop order pursuant to Corporations Code section 31115 or sent a comment letter citing deficiencies in your application, the registration automatically becomes effective on the 30th business day after the filing of a "complete application" for registration.


  45. What constitutes a "complete application"?

    A "complete application" means an application that contains the appropriate filing fee, Uniform Franchise Disclosure Document, and all additional exhibits, including financial statements in conformity with regulations of the Commissioner.


  46. I received a comment letter from the DBO and it states that all material changes must be submitted by pre-effective amendment. What is a pre-effective amendment and how do I file a pre-effective amendment?

    A pre-effective amendment makes changes to an application that is pending. There is no fee to file a pre-effective amendment, unless a balance fee is owed on the previous filing. The applicant must include a facing page and a notarized verification page. Amended materials should be marked to show all changes.


  47. The registration of my franchise application is effective, but I need to amend material information contained in the franchise application. Do I need to file anything with the DBO?

    Yes. The franchisor must file a post-effective amendment with the DBO. A post-effective amendment is filed after a registration is effective. A post-effective amendment must include a facing page and a notarized verification page. The fee for filing a post-effective amendment application is $ Amended materials should be marked to reflect changes from the prior filing.


  48. When should I submit my renewal of registration?

    A renewal application must be filed before the expiration of the registration. The expiration is stated on the registration order issued by the DBO. The applicant must submit a renewal application and include all documents required for an initial registration. The fee for the renewal application is $450.

    You must submit the audited financial statements for the most recent fiscal year. You are required to submit one complete, updated, clean copy of the franchise disclosure document and exhibits. Additionally, you must submit any revisions to the franchise disclosure document by sending one copy of the changed pages only with the changes marked.


  49. The audited financial statements will not be finalized before the expiration of the registration. Can I still file my renewal application?

    Yes. You can still file your renewal application. However, the application will not be considered a "complete application." Incomplete applications cannot go automatically effective. Therefore, the renewal application will not become automatically effective after the 30th business day.

    In the cover letter of your application, please acknowledge whether any documents or exhibits will be submitted at a later time.


  50. What happens if I file my renewal application late?

    If the renewal application is filed after the expiration of the registration, the applicant must check "REGISTRATION OF AN OFFER AND SALE OF FRANCHISES" on the application-facing page and pay a $675 filing fee.


  51. V. Miscellaneous

  52. 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?

    Yes.


  53. Does the Department of Business Oversight maintain lists of shareholders in public or private corporations?

    No.


  54. 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.dbo.ca.gov/.


  55. I inherited some stock and would like to determine if it has any value. Can the Department of Business Oversight provide this information?

    No. The Department of Business Oversight regulates the offer and sale of securities within California, but does not monitor the value of securities after the securities are issued.


  56. 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 Business Oversight 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.dbo.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.


  57. How do I find out if the Department of Business Oversight 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.


  58. Can I obtain blank stock certificates from the Department of Business Oversight?

    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.