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lnulvluuALS uSlnC A SLCu8l1lLS LxLM1lCn?

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8efore even Lhlnklng of ralslng caplLal for any Lype of venLure, lL ls essenLlal Lo
undersLand some baslcs of securlLles law. Lven Lhe mosL experlenced buslness
aLLorneys make Lhe mlsLake of assumlng LhaL securlLles laws don'L apply Lo small
LransacLlons, Lo loans, Lo lnvesLmenLs by frlends and famlly, or Lo nonproflLs. 8uL
Lhls could noL be furLher from Lhe LruLh! SecurlLles laws apply ln almosL any
slLuaLlon lnvolvlng fundlng for a venLure. Any caplLal-ralslng acLlvlLy wlll need Lo
comply wlLh boLh federal securlLles Anu Lhe securlLles laws of any sLaLe ln whlch
Lhe caplLal-ralslng ls Laklng place. 1he deflnlLlon of whaL a securlLy ls, ls complex
and can dlffer sLaLe Lo sLaLe.

MosL baslcally, any Llme you glve somebody Lhe opporLunlLy Lo lnvesL money ln
your buslness wlLh Lhe !"#!$%&%'() of a reLurn of proflL, lL could be consldered a
securlLy. 1he deflnlLlon ln Callfornla ls even broader, an lnvesLmenL opporLunlLy
wlLhouL Lhe expecLaLlon of a proflLable reLurn could be consldered a securlLy. lL ls
wlse Lo consulL an aLLorney wheLher your caplLal-ralslng scheme would be
lmpllcaLe securlLles law lssues. lf lL does, you need Lo reglsLer Lhe offerlng wlLh Lhe
sLaLe and federal governmenL (an expenslve process) or flnd an exempLlon LhaL flLs
your offerlng.

!"&) 35326)*0'- 35*-) )0 1&*-3 %&6)*&7 /102 !3&7)"#
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1wo exempLlons exlsL aL Lhe federal and Callfornla sLaLe level Lo help caplLallze
your buslness Lhrough lnvesLmenLs, elLher equlLy or debL, from wealLhy
lndlvlduals-SecurlLles and Lxchange (SLC) 8ule 306 and Callfornla's CorporaLlon
Code 23102(n).

!"# %&'( )*+
8ule 306(b) allows emerglng growLh buslnesses Lo ralse caplLal from up Lo 33
*)&$$+!,'%!, lnvesLors and an unllmlLed number of accredlLed lnvesLors, buL you
are nC1 allowed Lo publlcly adverLlse or sollclL lndlvlduals for Lhese funds. As of
SepLember 2013, Lhe laLesL !umpsLarL Cur 8uslness SLarLups AcL (!C8S AcL)
amendmenL Look effecL openlng up general sollclLaLlon and adverLlslng for
accredlLed lnvesLors only, 8ule 306(c). 1he federal governmenL deflnes an
accredlLed lnvesLor ln several ways:

ersons wlLh an lndlvldual neL worLh, or [olnL neL worLh wlLh a spouse, LhaL
exceeds $1 mllllon dollars !"$-*,'). Lhe value of Lhe prlmary resldence,
An lndlvldual lncome of over $200,000 or a [olnL lncome wlLh a spouse
exceedlng $300,000 for Lhe Lwo precedlng years and a reasonable
expecLaLlon of Lhe same ln Lhe currenL year, and
A buslness wlLh asseLs exceedlng $3 mllllon.



WlLh Lhe new 8ule 306(c), you can now publlcly adverLlse LhroughouL Lhe counLry and your offerlng
can use any medla, lncludlng onllne, Lhrough soclal medla, or ln newspapers.

Powever, Lhe new 8ule 306(c) lmposes addlLlonal requlremenLs on buslnesses Lo perform Lhe due
dlllgence necessary and Lake reasonable sLeps" Lo ensure Lhe lnvesLors are ln facL accredlLed.
revlously, you could rely on Lhe lnvesLor's assurances of Lhelr lncome and asseLs quallflcaLlons
because of Lhe added proLecLlon Lhe preexlsLlng relaLlonshlp requlremenL provldes. now, you musL
verlfy lncome Lhrough a revlew of Lhe lnvesLors l8S SLaLemenLs, W-2 or 1099s, bank sLaLemenLs,
securlLles holdlng sLaLemenLs, Lax assessmenLs, and credlL reporLs. 1he SLC also allows Lhlrd parLles
Lo verlfy accredlLed lnvesLor sLaLus from elLher an SLC reglsLered broker-dealer, an SLC-reglsLered
lnvesLmenL advlser, a llcensed aLLorney, or a cerLlfled publlc accounLanL. lf you elecL Lo use Lhe old
8ule 306(b) provlslons and noL publlcly adverLlse, Lhen Lhls due dlllgence ls noL requlred.

%:;<=>?@<: %>?A>?:B<>@C %>DE F GHIJGK@L
Callfornla has had a slmllar exempLlon on lLs books LhaL allow for Lhe offer and sale of securlLles Lo
quallfled purchasers" Lhrough a publlc announcemenL.
1
AfLer Lhe poLenLlal lnvesLor submlLs
verlflcaLlon of lncome and asseL sLaLus, you can Lhen provlde and medla Lo adverLlse your offerlng.
AlLhough Lhe adverLlslng requlremenLs are more resLrlcLed Lhan 8ule 306(c), Lhls exempLlon lowers
Lhe lncome requlremenLs and opens up Lhe opporLunlLy Lo less wealLhy lndlvlduals Lo lnvesL. 1he
securlLles ln 8ule 306(c) have resLrlcLlons. Lach lnvesLor musL represenL LhaL she ls purchaslng for
her own accounL (or a LrusL accounL) and noL for sale ln connecLlon wlLh any dlsLrlbuLlon of Lhe
securlLy (Lhls ls slmllar Lo Lhe SLC 8ule 144 resale resLrlcLlons whlch are lmposed on all 8egulaLlon u
offerlngs, lncludlng 8ule 306). SecLlon 23102(n) has no resLrlcLlon on Lhe number of lnvesLors and
how much can be ralsed, such resLrlcLlons only lmposed dependlng on whlch federal exempLlon ls
used.
2


Callfornla deflnes a quallfled lnvesLor" ln several ways lncludlng Lhe federal deflnlLlon of an
accredlLed lnvesLor. AddlLlonally, Callfornla exempLs naLural persons wlLh lesser moneLary
quallflcaLlons lf Lhey are also able Lo proLecL Lhelr own lnLeresL because of Lhelr buslness and
flnanclal acumen. naLural persons are consldered quallfled Lo lnvesL so long as Lhe offered securlLy
conslsLs of one class of voLlng sLock, or lf preferred sLock, wlLh Lhe same voLlng rlghLs as Lhe lssuer's
one class voLlng common sLock &), Lhe followlng condlLlons are meL:

A person elLher lndlvldually (+ $(01')!, 2'%3 & 4#(*4! has a mlnlmum neL worLh of over
$230,000, and gross lncome over $100,000 ln Lhe prevlous Laxable year, as well as a
reasonable expecLaLlon of gross lncome for Lhe currenL year of Lhe same amounL, or
A mlnlmum neL worLh of $300,000 excluslve of home, home furnlshlngs, and auLomoblles, or
A buslness wlLh asseLs ln excess of $3 mllllon accordlng Lo mosL recenL audlLed flnanclals, ,-.
Lach person's lnvesLmenL shall noL exceed 10 percenL of Lhe neL worLh, ,-.
Lach person by reason of her buslness or flnanclal experlence, or LhaL of her uncompensaLed
professlonal advlsor, can be reasonably assumed Lo have Lhe capaclLy Lo proLecL her lnLeresLs
ln connecLlon wlLh Lhe LransacLlon.
3


Callfornla's 23102(n) allows for whaL ls essenLlally LombsLone adverLlslng" or a general
announcemenL of Lhe proposed offerlng. 1he adverLlsemenL can only be ln wrlLlng, prohlblLlng ln-

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When utilizing a state exemption, the offering and sale must also comply with federal law.
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person or Lelephone sollclLaLlon unLll Lhe buslness has reasonably deLermlned LhaL Lhe prospecLlve
lnvesLor ls a quallfled purchaser. 1he publlc announcemenL 0*4% lnclude:

(1) 1he name of Lhe lssuer,
(2) 1he full LlLle of Lhe securlLy,
(3) 1he anLlclpaLed sulLablllLy requlremenLs,
(4) A sLaLemenL LhaL no money or oLher conslderaLlon ls belng sollclLed, an lndlcaLlon of
lnLeresL made by a prospecLlve purchaser lnvolves no obllgaLlon or commlLmenL, and lf
dlsclosure sLaLemenL ls requlred, no sale wlll be accepLed unLll flve days afLer Lhe
dlsclosure sLaLemenL and subscrlpLlon lnformaLlon ls made,
(3) Any oLher lnformaLlon Lhe requlred by rule of Lhe commlssloner, and
(6) A legend LhaL sLaLes where Lhe prospecLlve lnvesLor can seek more lnformaLlon.
4


lf Lhese provlslons are saLlsfled, Lhe buslness may also lnclude (1) a general announcemenL of Lhe
proposed offerlng lncludlng a brlef descrlpLlon, (2) Lhe geographlc locaLlon, (3) Lhe prlce of Lhe securlLy
Lo be lssued or meLhod of deLermlnlng Lhe probable prlce. CfLen, Lhls general announcemenL ls all one
needs Lo draw poLenLlal quallfled lnvesLors Lo Lhe lnvesLmenL opporLunlLy. AfLer a prospecLlve lnvesLor
submlLs a quesLlonnalre LhaL demonsLraLes lncome and/or asseL background such LhaL Lhe buslness can
reasonably belleve Lhe lnvesLor ls quallfled, Lhe full offerlng memorandum and oLher adverLlslng
maLerlals can be provlded.




3MENAB<>@

*@OECB>? 1EPQ<?ENE@BC &DOE?B<C<@R 1ECB?<SB<>@C >@
-ESQ?<B<EC

-3% 1Q;E HJTKUL up Lo 33 unaccredlLed
and unllmlLed
accredlLed
no publlc adverLlslng,
musL have a preexlsLlng
relaLlonshlp
8ule 144
-3% 1Q;E HJTKSL unllmlLed accredlLed
lnvesLors, offeror musL
deLermlne lnvesLor
sLaLus
unresLrlcLed publlc
adverLlslng and
sollclLaLlon permlLLed
8ule 144
%:;<=>?@<: F GHIJGK@L Cuallfled purchasers Cnly wrlLLen publlc
announcemenL. AfLer
lnvesLor lndlcaLes
lncome, general
sollclLaLlon permlLLed
MusL lndlcaLe
purchaslng securlLy for
own accounL









9
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