Does The Authorization Or Issuance Of A New Class Of Stock Require Qualification?


Corporations often amend their articles of incorporation to create one or more new classes of securities. These newly created classes often have priority over the previously issued and outstanding shares. Does the amendment or issuance of these shares require qualification under the Corporate Securities Law? The answer is “yes” – and “no”.

Of course, any offer or sale of the new shares will be subject to qualification under Corporations Code Section 25110, unless the issuer can rely on an exemption or the offer and sale is not subject to qualification (e.g., a “covered security” under the National Securities Markets Improvement Act of 1996).

The Corporate Securities Law also requires qualification of any offer or sale of a security in an issuer transaction in connection with any change in the rights, preferences, privileges, or restrictions of or on outstanding securities. Cal. Corp. Code § 25120(a)(1). Thus, the question is the creation of a new class of stock, a change in the rights, preferences, privileges or restrictions of or on the outstanding shares? Fortunately, the Commissioner has adopted a rule, 260.103.1, that answers the question in the negative. Readers will note that the rule refers not to all changes, but the changes enumerated in Section 25103(e). The reason for this construction is that Section 25103(e) exempts any change other than those listed. Thus, the rule works to exempt those changes not already exempted by the statute.

Kudos to a “Money Hero”

Recently, one the Department of Corporations’ staffers was honored as a “Money Hero”:

Longtime Department employee Jackie Wiley-Sistrunk was honored in 2012 as a “Money Hero” by MONEY Magazine (a nationally circulated magazine affiliated with CNN). Jackie was honored for her work with the Seniors Against Investment Fraud (SAIF) program, and her years of service with the Education & Outreach unit of the Department to help assist Seniors and other vulnerable communities to avoid financial traps and investment fraud. Jackie’s feature may be viewed here.


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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