The New California Blue-Sky Law

For a brief summary of these problems see testimony of former Commissioner Robert H. Volk, Meeting of the California Assembly Committee on Judiciary, Dec. 4, 1967, Transcript (unedited), pp. 3–7 (hereinafter cited as Hearing). References to sections of the California Corporations Code prior to Jan. 2, 1969, are referred to as “old law,” and references to sections of the California Corporations Code now in effect are referred to as “new law.”

Western Air Lines, Inc. v. Sobieski, 191 Cal. App. 2d. 399, 12 Cal. Rptr. 719 (1961).

The lack of direct control over secondary markets forced the Commissioner of Corporations to impose restrictions as a condition to permitting issuance. These restrictions, in the form of an escrow on the stock or the stamping of a restrictive legend on the stock certificates, were used to maintain indirect control over secondary sales. However, they had the unfortunate effects of unduly restricting transfers and creating unnecessary paperwork in the Commissioner's office when legitimate transfers were proposed to be made.

The committee was headed by Professor Harold Marsh, Jr., of the UCLA Law School.

Ogier v. Pacific Oil and Gas Development Corp., 135 Cal. App. 2d. 776, 288 P. 2d 101 (1955).

The new regulations (hereinafter cited as New Regs.) state that there is no public offering if the number of persons offered corporate securities is 25 or less (§260.102.1). Although there is no presumption that any offering exceeding that limit is a public offering, it would be dangerous to rely on one's judgment where the offering exceeds the limit. Thus, an advisory opinion from the Commissioner would have to be requested.

Where a negotiating permit would be necessary is in situations where the number of persons being offered securities exceed 25, but it was thought unnecessary to register the securities with the Securities and Exchange Commission.

For example, new law §25103(a) exempts negotiations and agreements prior to the general shareholder vote on mergers, sales, and other changes in shareholder rights which are subject to shareholder approval.

Hearings, p. 3.

Intro, to Oct. 9, 1967, draft of Corporate Securities Law of 1968, pp. ii–iii.

Old law §25100(a)–(b); new law §25100(a)–(b). The old law, however, did not specifically exempt Canadian governmental securities.

Old law §25100(c)–(d), (f)–(g); new law §25100(c), (d), (g).

Old law §25100(e), (h); new law §25100(e), (i).

In both the old and the new law, the exemption applies only to those organizations formed for educational, benevolent, fraternal, charitable, or reformatory purposes. In addition, however, the new law exempts chambers of commerce and trade and professional associations.

The term “risk capital” comes from Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811, 13 Cal. Rptr. 186 (1961), where membership proceeds were used to construct or acquire facilities for a new club.

New York Stock Exchange listing requirements are continuously being raised. The last such revision, in May 1968, requires a company applying for listing to have 2,000 stockholders, of whom 1,800 must own 100 or more shares. The company must have 1,000,000 shares outstanding, of which 8,000,000 must be held by the public, and the publicly held shares must have a market value in excess of $14 million. Demonstrated earning power before federal income taxes and under competitive conditions must have been $2.5 million for the latest fiscal year and $2.0 million for each of the preceding years. In addition, listing involves complying with the registration provisions of the Securities Exchange Act of 1934. New York Stock Exchange, Original Listing on the New York Stock Exchange, May 1968.

Eiteman Wilford J. Dice Charles A. Eiteman David K. , The Stock Market (4th ed.; New York: McGraw-Hill Book Company, 1966), pp. 220–223.

Certain institutional investors are specifically exempt, under new law §25102(i), e.g., banks, savings and loan associations, insurance companies. In addition, the Commissioner has broad discretionary power to name others by promulgating a rule to that effect. Under this power, the Commissioner has added private colleges and universities with endowments of at least $5,000,000; government agencies and instrumentalities, including public universities and colleges; and with respect to limited types of securities, corporations with net worths of $14,000,000 or more. See New Regs. §260.102.10.

The parent corporations so exempt under new law §25102(i) are those which are required to register with the SEC under §12 of the Securities Exchange Act of 1934. The present rule is that corporations must register if they are listed on a national exchange or if they have total assets of $1,000,000 or more and at least 500 stockholders.

A sale by underwriters of securities purchased under a firm commitment was not regarded under the old law as an issuer transaction. Non-California corporations could therefore avoid the California permit requirement by consummating the sale to underwriters outside of the state. However, California corporations had to obtain a permit to sell their securities to an underwriting syndicate. Under the new law, no national offering can escape California qualification if any portion of the securities are offered within the state, because the law regards sales by underwriters as sales by issuers (§25110).

New Regs. §260.112.

New Regs. §260.113.

Stock dividends are not technically “exempt” but are expressly excluded from the definitions of “offer” and “sale.”

Western Air Lines, Inc. v. Sobieski, 191 Cal. App. 2d. 399, 12 Cal. Rptr. 719 (1961).

Shares held in street names will not be counted.