Corporations form subsidiaries for a variety of purposes. For example, a corporation may form a subsidiary to acquire or hold specific assets or to engage in a merger or other transaction. The sale of shares to the parent is a sale of securities that is subject to qualification under the Corporate Securities Law of 1968. In many cases, counsel may be inclined to rely the limited offering exemption in Section 25102(f), but that exemption requires a notice filing with the Department of Corporations and the payment of a fee. Can these requirements be avoided? In some cases, the answer is “yes”.
Section 25102(i) exempts from the issuer qualification requirement of the CSL offers and sales to any corporation with outstanding securities registered under Section 12 of the Securities Exchange Act of 1934, or to a wholly-owned subsidiary. This exemption is self-executing (i.e., no notice filing is required) but is subject to two provisos. First, the corporation (or subsidiary) must directly or indirectly own 100% of the outstanding capital stock of the issuer after the sale. Second, the purchaser must represent that it is purchasing for its own account for investment and not with a view to or for sale in connection with any distribution of the security.
Note that the exemption refers to the “capital stock” of the issuer and thus would appear to be unavailable to the formation of other types of subsidiary entities, such as a single member limited liability company. The Commissioner has also adopted a rule, 10 CCR § 2220.127.116.11 which provides that an offer or resale made in reliance on Rule 218.104.22.168 (relating to private resales under Securities and Exchange Commission Rule 144A) is not considered to be inconsistent with the required purchaser representation.
For more on the CSL and Rule 144A, see “Blue Sky and Rule 144A“.