Does California Really Limit Sellers To Not More Than 10 Sales In A 12 Month Period?

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The Mentor Blog this week noted the publication of a recent study of Blue Sky exemptions covering private resales. The study was prepared by SecondMarket, which describes itself as an ”online marketplace for illiquid assets”. The study was submitted to the North American Securities Administrators Association (NASAA) in support of SecondMarket’s push for adoption of a nationwide uniform exemption for non-issuer transactions.

Practitioners will find the study to be of limited utility because SecondMarket did not include any citations to statutes or rules. More importantly, I don’t think that the survey is strictly accurate, at least with respect to California. The study asserts:

California limits a seller to no more than 25 offers and 10 sales during any 12 month period. California also requires that purchasers “either have a preexisting personal or business relationship with the offeror or its partners, officers, directors or controlling persons or by reason of their business or financial experience could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction.” This greatly restricts the pool of potential purchasers to whom the sellers can make offers or sell.

Corporations Code Section 25104(a) exempts from the nonissuer qualification requirement (Section 25130) any offer or sale of a security by the bona fide owner thereof for his or her own account if the sale (1) is not accompanied by the publication of any advertisement and (2) is not effected by or through a broker-dealer in a public offering.

Note that the limitation on public offerings is limited to the second clause of Section 25104(a), i.e., when the transaction is effected by or through a broker-dealer. As explained in Marsh & Volk, Practice Under the California Securities Laws, the phrase “in a public offering” was intended to permit the use of licensed broker-dealers in making a private placement of securities. The limitation does not apply if a broker-dealer is not used. In that case, a bona fide owner may sell without qualification so long as the sale is not accompanied by the publication of any advertisement. “Advertisement” and “publish” are defined in Sections 25002 and 25014.

What about the quantitative and qualitative limitations cited by SecondMarket? Rule 260.102.2 provides that an offer and sale does not involve a public offering for purposes of Section 25104(a) if the limitations described by SecondMarket are met. However, the rule provides that it “does not create any presumption that a public offering is involved in offers not conforming to this section, and the determination of whether or not a transaction not covered bgy this section involves a public offering shall be made without reference to this section”.

The Mentor Blog is one three blogs published by TheCorporateCounsel.net. For the last several years, I’ve served as a practice consultant to the Marsh & Volk treatise, for which I receive a fee.