California Legislature—2013–14 Regular Session

Assembly Bill No. 783

Introduced by Assembly Member Daly

February 21, 2013

An act to amend Section 25102 of the Corporations Code, relating to securities transactions.

LEGISLATIVE COUNSEL’S DIGEST

AB 783, as introduced, Daly. Securities transactions: qualification requirements: exemptions.

Existing law, the Corporate Securities Law of 1968, requires certain securities offered or sold in this state to be qualified through application filed with the Commissioner of Corporations, or to be exempt from the qualification requirements. Existing law exempts offers and sales of securities in specified transactions including, but not limited to, offers made to no more than 35 persons, excluding accredited investors, as defined by reference to Regulation D promulgated under the federal Securities Act of 1933, as amended, to include specified minimum net worth and income requirements for prospective investors.

This bill would exempt from qualification offerings or sales of securities using a general solicitation or general advertising, provided the transaction meets specified requirements, including a requirement that the sales are made to accredited investors and the aggregate offering price of securities, as defined by reference to Regulation D, does not exceed $1,000,000, less the aggregate offering price for all securities sold within 12 months, as specified.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 25102 of the Corporations Code is
amended to read:

25102.  

The following transactions are exempted from the
provisions of Section 25110:

(a) Any offer (but not a sale) not involving any public offering
and the execution and delivery of any agreement for the sale of
securities pursuant to the offer if (1) the agreement contains
substantially the following provision: “The sale of the securities
that are the subject of this agreement has not been qualified with
the Commissioner of Corporations of the State of California and
the issuance of the securities or the payment or receipt of any part
of the consideration therefor prior to the qualification is unlawful,
unless the sale of securities is exempt from the qualification by
Section 25100, 25102, or 25105 of the California Corporations
Code. The rights of all parties to this agreement are expressly
conditioned upon the qualification being obtained, unless the sale
is so exempt”; and (2) no part of the purchase price is paid or
received and none of the securities are issued until the sale of the
securities is qualified under this law unless the sale of securities
is exempt from the qualification by this section, Section 25100,
or 25105.

(b) Any offer (but not a sale) of a security for which a
registration statement has been filed under the Securities Act of
1933 but has not yet become effective, or for which an offering
statement under Regulation A has been filed but has not yet been
qualified, if no stop order or refusal order is in effect and no public
proceeding or examination looking begin delete towards end delete begin insert toward end insert an order is
pending under Section 8 of the act and no order under Section
25140 or subdivision (a) of Section 25143 is in effect under this
law.

(c) Any offer (but not a sale) and the execution and delivery of
any agreement for the sale of securities pursuant to the offer as
may be permitted by the commissioner upon application. Any
negotiating permit under this subdivision shall be conditioned to
the effect that none of the securities may be issued and none of
the consideration therefor may be received or accepted until the
sale of the securities is qualified under this law.

(d) Any transaction or agreement between the issuer and an
underwriter or among underwriters if the sale of the securities is
qualified, or exempt from qualification, at the time of distribution
thereof in this state, if any.

(e) Any offer or sale of any evidence of indebtedness, whether
secured or unsecured, and any guarantee thereof, in a transaction
not involving any public offering.

(f) Any offer or sale of any security in a transaction (other than
an offer or sale to a pension or profit-sharing trust of the issuer)
that meets each of the following criteria:

(1) Sales of the security are not made to more than 35 persons,
including persons not in this state.

(2) All purchasers either have a preexisting personal or business
relationship with the offeror or any of its partners, officers,
directors or controlling persons, or managers (as appointed or
elected by the members) if the offeror is a limited liability
company, or by reason of their business or financial experience or
the business or financial experience of their professional advisers
who are unaffiliated with and who are not compensated by the
issuer or any affiliate or selling agent of the issuer, directly or
indirectly, could be reasonably assumed to have the capacity to
protect their own interests in connection with the transaction.

(3) Each purchaser represents that the purchaser is purchasing
for the purchaser’s own account (or a trust account if the purchaser
is a trustee) and not with a view to or for sale in connection with
any distribution of the security.

(4) The offer and sale of the security is not accomplished by
the publication of any advertisement. The number of purchasers
referred to above is exclusive of any described in subdivision (i),
any officer, director, or affiliate of the issuer, or manager (as
appointed or elected by the members) if the issuer is a limited
liability company, and any other purchaser who the commissioner
designates by rule. For purposes of this section, a husband and
wife (together with any custodian or trustee acting for the account
of their minor children) are counted as one person and a
partnership, corporation, or other organization that was not
specifically formed for the purpose of purchasing the security
offered in reliance upon this exemption, is counted as one person.
The commissioner shall by rule require the issuer to file a notice
of transactions under this subdivision.

The failure to file the notice or the failure to file the notice within
the time specified by the rule of the commissioner shall not affect
the availability of begin delete the end delete begin insert this end insert exemption. begin delete Any end delete begin insert An end insert issuer begin delete that end delete begin insert who end insert fails
to file the notice as provided by rule of the commissioner shall,
within 15 business days after discovery of the failure to file the
notice or after demand by the commissioner, whichever occurs
first, file the notice and pay to the commissioner a fee equal to the
fee payable had the transaction been qualified under Section 25110.
Neither the filing of the notice nor the failure by the commissioner
to comment thereon precludes the commissioner from taking any
action that the commissioner deems necessary or appropriate under
this division with respect to the offer and sale of the securities.

(g) Any offer or sale of conditional sale agreements, equipment
trust certificates, or certificates of interest or participation therein
or partial assignments thereof, covering the purchase of railroad
rolling stock or equipment or the purchase of motor vehicles,
aircraft, or parts thereof, in a transaction not involving any public
offering.

(h) Any offer or sale of voting common stock by a corporation
incorporated in any state if, immediately after the proposed sale
and issuance, there will be only one class of stock of the
corporation outstanding that is owned beneficially by no more than
35 persons, provided all of the following requirements have been
met:

(1) The offer and sale of the stock is not accompanied by the
publication of any advertisement, and no selling expenses have
been given, paid, or incurred in connection therewith.

(2) The consideration to be received by the issuer for the stock
to be issued consists of any of the following:

(A) Only assets (which may include cash) of an existing business
enterprise transferred to the issuer upon its initial organization, of
which all of the persons who are to receive the stock to be issued
pursuant to this exemption were owners during, and the enterprise
was operated for, a period of not less than one year immediately
preceding the proposed issuance, and the ownership of the
enterprise immediately prior to the proposed issuance was in the
same proportions as the shares of stock are to be issued.

(B) Only cash or cancellation of indebtedness for money
borrowed, or both, upon the initial organization of the issuer,
provided all of the stock is issued for the same price per share.

(C) Only cash, provided the sale is approved in writing by each
of the existing shareholders and the purchaser or purchasers are
existing shareholders.

(D) In a case where after the proposed issuance there will be
only one owner of the stock of the issuer, only any legal
consideration.

(3) No promotional consideration has been given, paid, or
incurred in connection with the issuance. Promotional consideration
means any consideration paid directly or indirectly to a person
who, acting alone or in conjunction with one or more other persons,
takes the initiative in founding and organizing the business or
enterprise of an issuer for services rendered in connection with the
founding or organizing.

(4) A notice in a form prescribed by rule of the commissioner,
signed by an active member of the State Bar of California, is filed
with or mailed for filing to the commissioner not later than 10
business days after receipt of consideration for the securities by
the issuer. That notice shall contain an opinion of the member of
the State Bar of California that the exemption provided by this
subdivision is available for the offer and sale of the securities. The
failure to file the notice as required by this subdivision and the
rules of the commissioner shall not affect the availability of this
exemption. An issuer who fails to file the notice within the time
specified by this subdivision shall, within 15 business days after
discovery of the failure to file the notice or after demand by the
commissioner, whichever occurs first, file the notice and pay to
the commissioner a fee equal to the fee payable had the transaction
been qualified under Section 25110. The notice, except when filed
on behalf of a California corporation, shall be accompanied by an
irrevocable consent, in the form that the commissioner by rule
prescribes, appointing the commissioner or his or her successor in
office to be the issuer’s attorney to receive service of any lawful
process in any noncriminal suit, action, or proceeding against it
or its successor that arises under this law or any rule or order
hereunder after the consent has been filed, with the same force and
validity as if served personally on the issuer. An issuer on whose
behalf a consent has been filed in connection with a previous
qualification or exemption from qualification under this law (or
application for a permit under any prior law if the application or
notice under this law states that the consent is still effective) need
not file another. Service may be made by leaving a copy of the
process in the office of the commissioner, but it is not effective
unless (A) the plaintiff, who may be the commissioner in a suit,
action, or proceeding instituted by him or her, forthwith sends
notice of the service and a copy of the process by registered or
certified mail to the defendant or respondent at its last address on
file with the commissioner, and (B) the plaintiff’s affidavit of
compliance with this section is filed in the case on or before the
return day of the process, if any, or within the further time as the
court allows.

(5) Each purchaser represents that the purchaser is purchasing
for the purchaser’s own account, or a trust account if the purchaser
is a trustee, and not with a view to or for sale in connection with
any distribution of the stock.

For the purposes of this subdivision, all securities held by a
husband and wife, whether or not jointly, shall be considered to
be owned by one person, and all securities held by a corporation
that has issued stock pursuant to this exemption shall be considered
to be held by the shareholders to whom it has issued the stock.

All stock issued by a corporation pursuant to this subdivision as
it existed prior to the effective date of the amendments to this
section made during the 1996 portion of the 1995-96 Regular
Session that required the issuer to have stamped or printed
prominently on the face of the stock certificate a legend in a form
prescribed by rule of the commissioner restricting transfer of the
stock in a manner provided for by that rule shall not be subject to
the transfer restriction legend requirement and, by operation of
law, the corporation is authorized to remove that transfer restriction
legend from the certificates of those shares of stock issued by the
corporation pursuant to this subdivision as it existed prior to the
effective date of the amendments to this section made during the
1996 portion of the 1995-96 Regular Session.

(i) Any offer or sale (1) to a bank, savings and loan association,
trust company, insurance company, investment company registered
under the Investment Company Act of 1940, pension or
profit-sharing trust (other than a pension or profit-sharing trust of
the issuer, a self-employed individual retirement plan, or individual
retirement account), or other institutional investor or governmental
agency or instrumentality that the commissioner may designate
by rule, whether the purchaser is acting for itself or as trustee, or
(2) to any corporation with outstanding securities registered under
Section 12 of the Securities Exchange Act of 1934 or any wholly
owned subsidiary of the corporation that after the offer and sale
will own directly or indirectly 100 percent of the outstanding
capital stock of the issuer, provided the purchaser represents that
it is purchasing for its own account (or for the trust account) for
investment and not with a view to or for sale in connection with
any distribution of the security.

(j) Any offer or sale of any certificate of interest or participation
in an oil or gas title or lease (including subsurface gas storage and
payments out of production) if either of the following apply:

(1) All of the purchasers meet one of the following requirements:

(A) Are and have been during the preceding two years engaged
primarily in the business of drilling for, producing, or refining oil
or gas (or whose corporate predecessor, in the case of a corporation,
has been so engaged).

(B) Are persons described in paragraph (1) of subdivision (i).

(C) Have been found by the commissioner upon written
application to be substantially engaged in the business of drilling
for, producing, or refining oil or gas so as not to require the
protection provided by this law (which finding shall be effective
until rescinded).

(2) The security is concurrently hypothecated to a bank in the
ordinary course of business to secure a loan made by the bank,
provided that each purchaser represents 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.

(k) Any offer or sale of any security under, or pursuant to, a
plan of reorganization under Chapter 11 of the federal bankruptcy
law that has been confirmed or is subject to confirmation by the
decree or order of a court of competent jurisdiction.

(l) Any offer or sale of an option, warrant, put, call, or straddle,
and any guarantee of any of these securities, by a person who is
not the issuer of the security subject to the right, if the transaction,
had it involved an offer or sale of the security subject to the right
by the person, would not have violated Section 25110 or 25130.

(m) Any offer or sale of a stock to a pension, profit-sharing,
stock bonus, or employee stock ownership plan, provided that (1)
the plan meets the requirements for qualification under Section
401 of the Internal Revenue Code, and (2) the employees are not
required or permitted individually to make any contributions to
the plan. The exemption provided by this subdivision shall not be
affected by whether the stock is contributed to the plan, purchased
from the issuer with contributions by the issuer or an affiliate of
the issuer, or purchased from the issuer with funds borrowed from
the issuer, an affiliate of the issuer, or any other lender.

(n) Any offer or sale of any security in a transaction, other than
an offer or sale of a security in a rollup transaction, that meets all
of the following criteria:

(1) The issuer is (A) a California corporation or foreign
corporation that, at the time of the filing of the notice required
under this subdivision, is subject to Section 2115, or (B) any other
form of business entity, including without limitation a partnership
or trust organized under the laws of this state. The exemption
provided by this subdivision is not available to a “blind pool”
issuer, as that term is defined by the commissioner, or to an
investment company subject to the Investment Company Act of
1940.

(2) Sales of securities are made only to qualified purchasers or
other persons the issuer reasonably believes, after reasonable
inquiry, to be qualified purchasers. A corporation, partnership, or
other organization specifically formed for the purpose of acquiring
the securities offered by the issuer in reliance upon this exemption
may be a qualified purchaser if each of the equity owners of the
corporation, partnership, or other organization is a qualified
purchaser. Qualified purchasers include the following:

(A) A person designated in Section 260.102.13 of Title 10 of
the California Code of Regulations.

(B) A person designated in subdivision (i) or any rule of the
commissioner adopted thereunder.

(C) A pension or profit-sharing trust of the issuer, a
self-employed individual retirement plan, or an individual
retirement account, if the investment decisions made on behalf of
the trust, plan, or account are made solely by persons who are
qualified purchasers.

(D) An organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, each with total assets in excess of
five million dollars ($5,000,000) according to its most recent
audited financial statements.

(E) With respect to the offer and sale of one class of voting
common stock of an issuer or of preferred stock of an issuer
entitling the holder thereof to at least the same voting rights as the
issuer’s one class of voting common stock, provided that the issuer
has only one-class voting common stock outstanding upon
consummation of the offer and sale, a natural person who, either
individually or jointly with the person’s spouse, (i) has a minimum
net worth of two hundred fifty thousand dollars begin delete ($250,000) end delete
begin insert ($250,000), end insert and had, during the immediately preceding tax year,
gross income in excess of one hundred thousand dollars ($100,000)
and reasonably expects gross income in excess of one hundred
thousand dollars ($100,000) during the current tax year or (ii) has
a minimum net worth of five hundred thousand dollars ($500,000).
“Net worth” shall be determined exclusive of home, home
furnishings, and automobiles. Other assets included in the
computation of net worth may be valued at fair market value.

Each natural person specified above, by reason of his or her
business or financial experience, or the business or financial
experience of his or her professional adviser, who is unaffiliated
with and who is not compensated, directly or indirectly, by the
issuer or any affiliate or selling agent of the issuer, can be
reasonably assumed to have the capacity to protect his or her
interests in connection with the transaction. The amount of the
investment of each natural person shall not exceed 10 percent of
the net worth, as determined by this subparagraph, of that natural
person.

(F) Any other purchaser designated as qualified by rule of the
commissioner.

(3) Each purchaser represents that the purchaser is purchasing
for the purchaser’s own account (or trust account, if the purchaser
is a trustee) and not with a view to or for sale in connection with
a distribution of the security.

(4) Each natural person purchaser, including a corporation,
partnership, or other organization specifically formed by natural
persons for the purpose of acquiring the securities offered by the
issuer, receives, at least five business days before securities are
sold to, or a commitment to purchase is accepted from, the
purchaser, a written offering disclosure statement that shall meet
the disclosure requirements of Regulation D (17 C.F.R. 230.501
et seq.), and any other information as may be prescribed by rule
of the commissioner, provided that the issuer shall not be obligated
pursuant to this paragraph to provide this disclosure statement to
a natural person qualified under Section 260.102.13 of Title 10 of
the California Code of Regulations. The offer or sale of securities
pursuant to a disclosure statement required by this paragraph that
is in violation of Section 25401, or that fails to meet the disclosure
requirements of Regulation D (17 C.F.R. 230.501 et seq.), shall
not render unavailable to the issuer the claim of an exemption from
Section 25110 afforded by this subdivision. This paragraph does
not impose, directly or indirectly, any additional disclosure
obligation with respect to any other exemption from qualification
available under any other provision of this section.

(5) (A) A general announcement of proposed offering may be
published by written document only, provided that the general
announcement of proposed offering sets forth the following
required information:

(i) The name of the issuer of the securities.

(ii) The full title of the security to be issued.

(iii) The anticipated suitability standards for prospective
purchasers.

(iv) A statement that (I) no money or other consideration is
being solicited or will be accepted, (II) an indication of interest
made by a prospective purchaser involves no obligation or
commitment of any kind, and, if the issuer is required by paragraph
(4) to deliver a disclosure statement to prospective purchasers,
(III) no sales will be made or commitment to purchase accepted
until five business days after delivery of a disclosure statement
and subscription information to the prospective purchaser in
accordance with the requirements of this subdivision.

(v) Any other information required by rule of the commissioner.

(vi) The following legend: “For more complete information
about (Name of Issuer) and (Full Title of Security), send for
additional information from (Name and Address) by sending this
coupon or calling (Telephone Number).”

(B) The general announcement of proposed offering referred
to in subparagraph (A) may also set forth the following
information:

(i) A brief description of the business of the issuer.

(ii) The geographic location of the issuer and its business.

(iii) The price of the security to be issued, or, if the price is not
known, the method of its determination or the probable price range
as specified by the issuer, and the aggregate offering price.

(C) The general announcement of proposed offering shall
contain only the information that is set forth in this paragraph.

(D) Dissemination of the general announcement of proposed
offering to persons who are not qualified purchasers, without more,
shall not disqualify the issuer from claiming the exemption under
this subdivision.

(6) No telephone solicitation shall be permitted until the issuer
has determined that the prospective purchaser to be solicited is a
qualified purchaser.

(7) The issuer files a notice of transaction under this subdivision
both (A) concurrent with the publication of a general announcement
of proposed offering or at the time of the initial offer of the
securities, whichever occurs first, accompanied by a filing fee, and
(B) within 10 business days following the close or abandonment
of the offering, but in no case more than 210 days from the date
of filing the first notice. The first notice of transaction under
subparagraph (A) shall contain an undertaking, in a form acceptable
to the commissioner, to deliver any disclosure statement required
by paragraph (4) to be delivered to prospective purchasers, and
any supplement thereto, to the commissioner within 10 days of
the commissioner’s request for the information. The exemption
from qualification afforded by this subdivision is unavailable if
an issuer fails to file the first notice required under subparagraph
(A) or to pay the filing fee. The commissioner has the authority
to assess an administrative penalty of up to one thousand dollars
($1,000) against an issuer that fails to deliver the disclosure
statement required to be delivered to the commissioner upon the
commissioner’s request within the time period set forth above.
Neither the filing of the disclosure statement nor the failure by the
commissioner to comment thereon precludes the commissioner
from taking any action deemed necessary or appropriate under this
division with respect to the offer and sale of the securities.

(o) An offer or sale of any security issued by a corporation or
limited liability company pursuant to a purchase plan or agreement,
or issued pursuant to an option plan or agreement, where the
security at the time of issuance or grant is exempt from registration
under the Securities Act of 1933, as amended, pursuant to Rule
701 adopted pursuant to that act (17 C.F.R. 230.701), the provisions
of which are hereby incorporated by reference into this section,
provided that (1) the terms of any purchase plan or agreement shall
comply with Sections 260.140.42, 260.140.45, and 260.140.46 of
Title 10 of the California Code of Regulations, (2) the terms of
any option plan or agreement shall comply with Sections
260.140.41, 260.140.45, and 260.140.46 of Title 10 of the
California Code of Regulations, and (3) the issuer files a notice of
transaction in accordance with rules adopted by the commissioner
no later than 30 days after the initial issuance of any security under
that plan, accompanied by a filing fee as prescribed by subdivision
(y) of Section 25608. The failure to file the notice of transaction
within the time specified in this subdivision shall not affect the
availability of this exemption. An issuer that fails to file the notice
shall, within 15 business days after discovery of the failure to file
the notice or after demand by the commissioner, whichever occurs
first, file the notice and pay the commissioner a fee equal to the
maximum aggregate fee payable had the transaction been qualified
under Section 25110.

Offers and sales exempt pursuant to this subdivision shall be
deemed to be part of a single, discrete offering and are not subject
to integration with any other offering or sale, whether qualified
under Chapter 2 (commencing with Section 25110), or otherwise
exempt, or not subject to qualification.

(p) An offer or sale of nonredeemable securities to accredited
investors (Section 28031) by a person licensed under the Capital
Access Company Law (Division 3 (commencing with Section
28000) of Title 4), provided that all purchasers either (1) have a
preexisting personal or business relationship with the offeror or
any of its partners, officers, directors, controlling persons, or
managers (as appointed or elected by the members), or (2) by
reason of their business or financial experience or the business or
financial experience of their professional advisers who are
unaffiliated with and who are not compensated by the issuer or
any affiliate or selling agent of the issuer, directly or indirectly,
could be reasonably assumed to have the capacity to protect their
own interests in connection with the transaction. All nonredeemable
securities shall be evidenced by certificates that shall have stamped
or printed prominently on their face a legend in a form to be
prescribed by rule or order of the commissioner restricting transfer
of the securities in the manner as the rule or order provides. The
exemption under this subdivision shall not be available for any
offering that is exempt or asserted to be exempt pursuant to Section
3(a)(11) of the Securities Act of 1933 (15 U.S.C. Sec. 77c(a)(11))
or Rule 147 (17 C.F.R. 230.147) thereunder or otherwise is
conducted by means of any form of general solicitation or general
advertising.

(q) Any offer or sale of any viatical or life settlement contract
or fractionalized or pooled interest therein in a transaction that
meets all of the following criteria:

(1) Sales of securities described in this subdivision are made
only to qualified purchasers or other persons the issuer reasonably
believes, after reasonable inquiry, to be qualified purchasers. A
corporation, partnership, or other organization specifically formed
for the purpose of acquiring the securities offered by the issuer in
reliance upon this exemption may be a qualified purchaser only if
each of the equity owners of the corporation, partnership, or other
organization is a qualified purchaser. Qualified purchasers include
the following:

(A) A person designated in Section 260.102.13 of Title 10 of
the California Code of Regulations.

(B) A person designated in subdivision (i) or any rule of the
commissioner adopted thereunder.

(C) A pension or profit-sharing trust of the issuer, a
self-employed individual retirement plan, or an individual
retirement account, if the investment decisions made on behalf of
the trust, plan, or account are made solely by persons who are
qualified purchasers.

(D) An organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, each with total assets in excess of
five million dollars ($5,000,000) according to its most recent
audited financial statements.

(E) A natural person who, either individually or jointly with the
person’s spouse, (i) has a minimum net worth of one hundred fifty
thousand dollars ($150,000) and had, during the immediately
preceding tax year, gross income in excess of one hundred thousand
dollars ($100,000) and reasonably expects gross income in excess
of one hundred thousand dollars ($100,000) during the current tax
year or (ii) has a minimum net worth of two hundred fifty thousand
dollars ($250,000). “Net worth” shall be determined exclusive of
home, home furnishings, and automobiles. Other assets included
in the computation of net worth may be valued at fair market value.

Each natural person specified above, by reason of his or her
business or financial experience, or the business or financial
experience of his or her professional adviser, who is unaffiliated
with and who is not compensated, directly or indirectly, by the
issuer or any affiliate or selling agent of the issuer, can be
reasonably assumed to have the capacity to protect his or her
interests in connection with the transaction.

The amount of the investment of each natural person shall not
exceed 10 percent of the net worth, as determined by this
subdivision, of that natural person.

(F) Any other purchaser designated as qualified by rule of the
commissioner.

(2) Each purchaser represents that the purchaser is purchasing
for the purchaser’s own account (or trust account, if the purchaser
is a trustee) and not with a view to or for sale in connection with
a distribution of the security.

(3) Each natural person purchaser, including a corporation,
partnership, or other organization specifically formed by natural
persons for the purpose of acquiring the securities offered by the
issuer, receives, at least five business days before securities
described in this subdivision are sold to, or a commitment to
purchase is accepted from, the purchaser, the following information
in writing:

(A) The name, principal business and mailing address, and
telephone number of the issuer.

(B) The suitability standards for prospective purchasers as set
forth in paragraph (1) of this subdivision.

(C) A description of the issuer’s type of business organization
and the state in which the issuer is organized or incorporated.

(D) A brief description of the business of the issuer.

(E) If the issuer retains ownership or becomes the beneficiary
of the insurance policy, an audit report of an independent certified
public accountant together with a balance sheet and related
statements of income, retained earnings, and cashflows that reflect
the issuer’s financial position, the results of the issuer’s operations,
and the issuer’s cashflows as of a date within 15 months before
the date of the initial issuance of the securities described in this
subdivision. The financial statements listed in this subparagraph
shall be prepared in conformity with generally accepted accounting
principles. If the date of the audit report is more than 120 days
before the date of the initial issuance of the securities described
in this subdivision, the issuer shall provide unaudited interim
financial statements.

(F) The names of all directors, officers, partners, members, or
trustees of the issuer.

(G) A description of any order, judgment, or decree that is final
as to the issuing entity of any state, federal, or foreign country
governmental agency or administrator, or of any state, federal, or
foreign country court of competent jurisdiction (i) revoking,
suspending, denying, or censuring for cause any license, permit,
or other authority of the issuer or of any director, officer, partner,
member, trustee, or person owning or controlling, directly or
indirectly, 10 percent or more of the outstanding interest or equity
securities of the issuer, to engage in the securities, commodities,
franchise, insurance, real estate, or lending business or in the offer
or sale of securities, commodities, franchises, insurance, real estate,
or begin delete loans, end delete begin insert loans; end insert (ii) permanently restraining, enjoining, barring,
suspending, or censuring any such person from engaging in or
continuing any conduct, practice, or employment in connection
with the offer or sale of securities, commodities, franchises,
insurance, real estate, or begin delete loans, end delete begin insert loans; end insert (iii) convicting any such
person of, or pleading nolo contendere by any such person to, any
felony or misdemeanor involving a security, commodity, franchise,
insurance, real estate, or loan, or any aspect of the securities,
commodities, franchise, insurance, real estate, or lending business,
or involving dishonesty, fraud, deceit, embezzlement, fraudulent
conversion, or misappropriation of begin delete property, end delete begin insert property; end insert or (iv)
holding any such person liable in a civil action involving breach
of a fiduciary duty, fraud, deceit, embezzlement, fraudulent
conversion, or misappropriation of property. This subparagraph
does not apply to any order, judgment, or decree that has been
vacated, overturned, or is more than 10 years old.

(H) Notice of the purchaser’s right to rescind or cancel the
investment and receive a refund pursuant to Section 25508.5.

(I) The name, address, and telephone number of the issuing
insurance company, and the name, address, and telephone number
of the state or foreign country regulator of the insurance company.

(J) The total face value of the insurance policy and the
percentage of the insurance policy the purchaser will own.

(K) The insurance policy number, issue date, and type.

(L) If a group insurance policy, the name, address, and telephone
number of the group, and, if applicable, the material terms and
conditions of converting the policy to an individual policy,
including the amount of increased premiums.

(M) If a term insurance policy, the term and the name, address,
and telephone number of the person who will be responsible for
renewing the policy if necessary.

(N) That the insurance policy is beyond the state statute for
contestability and the reason therefor.

(O) The insurance policy premiums and terms of premium
payments.

(P) The amount of the purchaser’s moneys that will be set aside
to pay premiums.

(Q) The name, address, and telephone number of the person
who will be the insurance policy owner and the person who will
be responsible for paying premiums.

(R) The date on which the purchaser will be required to pay
premiums and the amount of the premium, if known.

(S) A statement to the effect that any projected rate of return to
the purchaser from the purchase of a viatical or life settlement
contract or a fractionalized or pooled interest therein is based on
an estimated life expectancy for the person insured under the life
insurance policy; that the return on the purchase may vary
substantially from the expected rate of return based upon the actual
life expectancy of the insured that may be less than, equal to, or
may greatly exceed the estimated life expectancy; and that the rate
of return would be higher if the actual life expectancy were less
than, and lower if the actual life expectancy were greater begin delete than end delete begin insert than, end insert
the estimated life expectancy of the insured at the time the viatical
or life settlement contract was closed.

(T) A statement that the purchaser should consult with his or
her tax adviser regarding the tax consequences of the purchase of
the viatical or life settlement contract or fractionalized or pooled
interest therein and, if the purchaser is using retirement funds or
accounts for that purchase, whether or not any adverse tax
consequences might result from the use of those funds for the
purchase of that investment.

(U) Any other information as may be prescribed by rule of the
commissioner.

begin insert

(r) (1) (A) Any offer of a security by an issuer using any form
of general solicitation or general advertising, as specified in Rule
502(c) of Regulation D under the Securities Act of 1933 (17 C.F.R.
230.502(c)), except as provided in subparagraph (B).

end insert begin insert

(B) Any offer of a security made by means of an unsolicited
telephone call to a person’s residence or cellular telephone, unless
the issuer and the caller take reasonable steps, prior to the
unsolicited telephone call, to verify that the person is an accredited
investor, as defined in Rule 501 of Regulation D promulgated
under the Securities Act of 1933, as amended (17 C.F.R. 230.501),
and the transaction meets all the requirements of this subdivision.

end insert begin insert

(2) In order for the exemption under this subdivision to apply,
all of the following shall be satisfied:

end insert begin insert

(A) The aggregate offering price for an offering of securities
under this subdivision, as defined in Rule 501(c) of Regulation D
under the Securities Act of 1933 (17 C.F.R. 230.501(c)), shall not
exceed one million dollars ($1,000,000), less the aggregate offering
price for all securities sold within 12 months before the start of
and during the offering of securities pursuant to the exemption
under this subdivision.

end insert begin insert

(B) Sales of securities shall be made only to a person who is,
or with respect to whom the issuer has taken reasonable steps to
verify is, an accredited investor immediately prior to the sale.

end insert begin insert

(C) The issuer shall take reasonable steps to verify that each
purchaser has an individual net worth, or joint worth with that
person’s spouse, that exceeds one million five hundred thousand
dollars ($1,500,000).

end insert begin insert

(D) Prior to selling any security to a person solicited pursuant
to this subdivision, an issuer shall obtain from that person a
completed offeree questionnaire in a form adopted by the
commissioner.

end insert begin insert

(E) The issuer shall maintain the confidentiality of any and all
information in the questionnaire and not otherwise sell, distribute,
or use the information in that questionnaire for any purpose other
than to assist in establishing the suitability of that investor for that
particular offering. A violation of this subparagraph shall result
in disqualification of the offering and from the future use of this
exemption under this subdivision by the issuer.

end insert begin insert

(F) The issuer shall take reasonable steps to verify that,
immediately prior to the sale, the offering is suitable for the person,
based on the person’s financial status, objectives, investment
experience, time horizon, risk tolerance, and any other information
the issuer deems relevant to determine whether the offering is
suitable to the person. The issuer shall maintain, for a period of
four years, documentation sufficient to establish the basis for its
determination of suitability.

end insert begin insert

(G) For purposes of this paragraph, an issuer may reasonably
assume that the person has the capacity to protect his or her
interests in connection with the offering due to his or her business
or financial experience, or the business or financial experience of
his or her professional adviser, who is unaffiliated with and not
compensated, directly or indirectly, by the issuer or any affiliate
or selling agent of the issuer.

end insert begin insert

(H) If the person is a natural person, the amount of
consideration paid by the purchaser shall not exceed 10 percent
of his or her net worth, or joint net worth with the purchaser’s
spouse or domestic partner, immediately prior to the investment,
and each investor’s investment in the offering, together with all
previous offerings under this subdivision made during the previous
12 months, shall not exceed 10 percent of his or her net worth.
“Net worth” shall be determined as specified in Rule 501(a) of
Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (17
C.F.R. 230.501(a)).

end insert begin insert

(I) The issuer believes in good faith that the offer and sale are
exempt from registration under Section 5 of the Securities Act of
1933 (15 U.S.C. Sec. 77e) pursuant to Section 3(a)(11) of the act
(15 U.S.C. Sec. 77c(a)(11)), or the rules and regulations adopted
by the Securities and Exchange Commission under Section 3(b)
or Section 4(2) of the act (15 U.S.C. Sec. 77d(2)).

end insert begin insert

(J) The issuer specifies in all advertisements, communications,
sales literature, or other information that is publicly disseminated
in connection with the offering, including by means of electronic
transmission or broadcast media, that the securities will be sold
to accredited investors only, and the offering is exempt from the
qualification requirements of Section 25110 under the exemption
provided for in this subdivision.

end insert begin insert

(K) An issuer shall maintain a copy of any advertisement or
solicitation, and any other offering material, for four years.

end insert begin insert

(3) Dissemination of information regarding the proposed
offering to a person who is not an accredited investor shall not
disqualify the offering from the exemption under this subdivision.

end insert begin insert

(4) The commissioner may by rule require the issuer to file a
notice of transactions under this subdivision. The failure to file
the notice or the failure to file the notice within the time specified
by the rule of the commissioner shall not affect the availability of
the exemption. An issuer who has failed to file the notice as
provided by rule of the commissioner shall, within 15 business
days after discovery of the failure to file the notice or after demand
by the commissioner, whichever occurs first, file the notice and
pay to the commissioner a fee equal to the fee payable had the
transaction been qualified under Section 25110.

end insert begin insert

(5) (A) A person who purchases securities in an offering that
fails to meet all the terms and conditions of this subdivision may
bring an action under Sections 25503, 25504, and 25504.1 for
rescission of the purchase and any other remedy provided in those
sections.

end insert begin insert

(B) The court shall award attorney’s fees and costs to a
prevailing purchaser in any such action and may award treble or
punitive damages.

end insert begin insert

(6) The exemption under this subdivision shall not be available
for an offering by an issuer who is (A) an investment company as
defined in Section 3(a)(1) of the Investment Company Act of 1940
(15 U.S.C. Sec. 80a et seq.), or (B) a development stage company
as referred to in Rule 504(a)(3) under the Securities Act of 1933.

end insert begin insert

(7) The exemption under this subdivision shall not be available
to an issuer if any of the following apply to the issuer or its
predecessors, affiliates, directors, officers, general partners,
beneficial owners of 10 percent or more of any classification of
its equity securities, promoters presently connected with the issuer
in any capacity, or any underwriter of the securities to be offered,
or any of the underwriter’s partners, directors, or officers:

end insert begin insert

(A) Within the 10 years immediately prior to the first offer of
the security, the person has filed a registration statement that is
the subject of a currently effective stop order entered by any state
securities administrator or the Securities and Exchange
Commission.

end insert begin insert

(B) The person has been convicted of any criminal offense
involving fraud, deceit, or any offense concerning the offer,
purchase, or sale of any security, or is subject to any order,
judgment, or decree of any court of competent jurisdiction
involving the commission of elder or dependent adult financial
abuse.

end insert begin insert

(C) The person is currently subject to a state or federal
administrative enforcement order or judgment entered within the
10 years immediately prior to the first offer of the security finding
fraud or deceit in connection with the purchase or sale of any
security.

end insert begin insert

(D) The person is currently subject to any order, judgment, or
decree of any court of competent jurisdiction, entered within the
10 years immediately prior to the first offer of the security,
temporarily, preliminarily, or permanently restraining or enjoining
the person from engaging in or continuing to engage in any
conduct or practice involving fraud or deceit in connection with
the purchase or sale of any security, except if any of the following
apply:

end insert begin insert

(i) The person is licensed or registered to conduct
securities-related business in the state in which the order,
judgment, or decree described in subparagraph (A), (B), (C), or
(D) was entered against the person.

end insert begin insert

(ii) Before the first offer of securities is made in reliance upon
the exemption under this subdivision, the state securities
administrator, the court, or the regulatory authority that entered
the order, judgment, or decree removes, reverses, or vacates the
order, judgment, or decree.

end insert begin insert

(iii) The issuer, exercising reasonable care and based on a
factual inquiry, establishes that it could not have known of the
existence of circumstances described in subparagraph (A), (B),
(C), or (D).

end insert