California’s Blue Sky Law May Cast A Shadow On Some Foreign Issuer Equity Plans

Allen Matkins
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Foreign issuers whose securities are not listed on either the NASDAQ or New York stock exchange may overlook the need to comply with California’s Corporate Securities Law of 1968 when making equity plan awards to their California employees.  Without the benefit of preemption pursuant to Section 18 of the Securities Act of 1933, these issuers generally have three compliance options in California:

Qualify:  A foreign issuer that is subject to the reporting requirements of the Securities Exchange Act of 1934 may register the offering under the Securities Act on a Form S-8.  At the same time, the foreign issuer may qualify the offer and sale under the CSL by coordination with its federal registration.  Cal. Corp. Code § 25111.  If the foreign issuer does not register the offering on Form S-8, it may qualify the offer and sale under the CSL by permit.  Cal. Corp. Code § 25113.  Qualification by permit is also available to foreign issuers that register the offering on Form S-8.  If an issuer chooses to qualify its offers and sales (whether by coordination or permit), it will generally need to satisfy the Commissioner of Business Oversight’s standards for qualification found in the Commissioner’s rules.

Option & Purchase Plan Exemption:  If the foreign issuer’s offering is exempt under Rule 701 of the Securities Act, it will be able to rely on California’s exemption for option and purchase plans.  Cal. Corp. Code § 25100(o).  Reliance on this exemption also requires compliance with the Commissioner of Business Oversight’s regulations, including the requirement for stockholder approval.  10 CCR §§ 260.140.41(g) & 260.140.42(e).

Limited Offering Exemption:  In a limited number of cases, a foreign issuer may be able to rely upon California’s limited offering exemption in Section 25102(f).  However, the conditions to this exemption will generally prevent its use to make awards to more than a handful of employees.

Note to readers:  The brief discussion above does not describe all of the conditions or limitations on the exemptions.  Any determination that an offering is exempt under the CSL requires a careful review of all of these conditions and limitations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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