DOC Gives Notice of New Filing Requirements For Real Estate Issuers


New Filing Requirements

Yesterday, the Commissioner of Corporation issued Release 121-C announcing new filings required by Corporations Code Section 25102.2 which takes effect on January 1, 2013. As discussed in Bill Targets Real Estate Industry And Borrowers, these requirements were intended to address abuses in securities offerings by hard money lenders. Unfortunately, the new requirements will be about as effective as Revalenta Arabica and much more deleterious.

Rather than focus on the identified malefactors, this new law will apply to any issuer that is “engaged in the business of purchasing, selling, financing, or brokering real estate” and that relies upon an exemption from qualification in Corporations Code section 25102, subdivisions (e) (evidences of indebtedness), (f) (limited offerings), (h) (small offerings), or (n) (limited advertising), or Corporations Code section 25100, subdivision (p) (promissory notes secured by real property) if the following two conditions are met:

  • The offering involves the offer or sale of securities to any person who is not an accredited investor, as defined in Regulation D of the Securities and Exchange Commission (17 C.F.R. 230.501 et seq.); and
  • The transaction is not registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933.

To give you some idea of the over-breadth of this new requirement, all real estate brokers and real estate investors will be potentially subject to this statute even though they never make a single loan, let alone a “hard money” loan.

Note that the Commissioner’s Release wrongly states that the statute applies to an issuer engaged in the business of purchasing, selling etc. “under the exemption” in the identified subdivisions. Obviously, these are not exemptions that pertain the business of the issuer but the nature of the security and the transaction.

The Commissioner’s Release lists the statutory filing requirements. In general, issuers will be required to name names. The statute also requires filing of disclosure documents provided to prospective purchasers. As I expect that the Department of Corporations will conclude that these are subject to the Public Records Act, there will be no more confidential private placement memoranda for the real estate industry! The statute also Delphically requires disclosure of “all state and federal licenses required to further the purposes of the investment.” Does this mean every state and local business license? I hope that issuers will have better luck in interpreting this requirement than Croesus.

For those that have been filing notices of exemption electronically with the Department, this will no longer be possible with respect to the disclosures mandated by Section 25102.2. The Department has published this form.

I predict that these new requirements will not help the Department one whit in combating abusive borrowing practices by hard money lenders. Worse yet, I believe that these requirements will needlessly waste scarce resources and divert the Department from more important and effective regulation. Please don’t blame the Department as this was the brainchild of the legislature. SB 978 (Vargas & Price), Chapter 669, Statutes of 2012. However, I do question whether the Department’s new disclosure form constitutes an illegal underground regulation because it includes requirements beyond those set forth in the statute. See Cal. Gov’t Code §§ 11340.5 and 11340.9(c).

We All Know That Noah And Utnapishtim Were Flooded Out But Were They Entitled To Just Compensation?

I’m not an eminent domain lawyer (some of my partners are very good at it) but I couldn’t let the recent Supreme Court’s decision in Arkansas Game & Fish Comm’n v. United States, 2012 U.S. LEXIS 9409 (Dec. 4, 2012) pass without comment. In an 8-0 decision, the court concluded that recurrent floods, even if of finite duration, are not categorically exempt from the Fifth Amendment’s prohibition of taking private property without just compensation. Writing for the court, Justice Ruth Bader Ginsburg found “time is a factor in determining the existence vel non of a compensable taking”. Applying this logic, Noah may have suffered a taking because the rain lasted forty days and forty nights. Utnapishtim is perhaps a closer case, he only experienced a storm of six days and nights.


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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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