Opinion on LLC's Reliance on Section 25102(n) Exemption for Membership Interests, Study notes of Law

Download Opinion on LLC's Reliance on Section 25102(n) Exemption for Membership Interests and more Study notes Law in PDF only on Docsity! VIS, Governor DEPARTMENT OF CORPORATIONS SACRAMENTO, CALIFORNIA IN REPLY REFER TO: FILE NO: OP 6763 COMMISSIONER'S OPINION 99/1C THIS LETTER IS NOT AN INTERPRETIVE OPINION FOR THE REASONS STATED BELOW Mr. Michael G. Fraunces Luce, Forward, Hamilton & Scripps LLP 600 West Broadway, Suite 2600 San Diego, California 92101 Re: Stephen W. Boney LLC Dear Mr. Fraunces: The Commissioner of Corporations ("Commissioner") has considered your request for an interpretive opinion contained in your letter dated August 12, 1999. Your letter requests an interpretive opinion with regard to whether a limited liability company may rely upon the exemption from qualification found in Corporations Code Section 25102(n) of the Corporate Securities Law of 1968 ("CSL") to offer and sell limited liability company ("LLC") membership interests to "qualified purchasers" as defined in subparagraph (E) of paragraph (2) of Section 25102(n). For the reasons stated below, we conclude that the exemption provided under Section 25102(n) cannot be relied upon by a LLC if the LLC offers or sells membership interests to "qualified purchasers" as defined in subparagraph (E) of paragraph (2) of Section 25102(n) of the CSL. You represent that Stephen W. Boney, an individual, intends to form a LLC ("Boney's LLC") under California law. Once formed, Boney's LLC will initiate an offering pursuant to the exemption from qualification provided in Section 25102(n) of the CSL with the goal of raising approximately $5,000,000. You represent that Boney's LLC will use the proceeds of the offering to develop and operate independent, natural foods grocery stores in southern California. You further represent that Boney's LLC will have one class of voting members only and that the membership interests will have voting rights equivalent to or better than holders of voting common stock of a California corporation. Additionally, the Manager or Managers of Boney's LOS ANGELES 90013-1 105 320 WEST FOURTH STREET (213) 579-7500 SACRAMENTO 95814-2724 980 NINTH STREET (916) 445-7205 SAN DIEGO 92101-3609 1350 FRONT STREET (619) 525-4233 SAN FRANCISCO 94102-5303 1390 MARKET STREET (415) 557-3787 Michael G. Fraunces 99/1C Page 2 LLC will have rights and duties similar to those of a Board of Directors of a California Corporation. Finally, Boney's LLC desires to sell membership interests to "qualified purchasers" as defined in subparagraph (E) of paragraph (2) of Section 25102(n). Section 25110 of the CSL provides that it is unlawful for any person to offer or sell in this state any security in an issuer transaction unless such sale has been qualified pursuant to Section 25111, 25112 or 25113 of the CSL or unless such security or transaction is exempted or not otherwise subject to qualification. Section 25102(n) provides an exemption for certain securities transactions from the qualification requirements of Section 25110. Specifically, the exemption specifies several detailed criteria for the limited offering of securities to sophisticated investors, including, among other things, the requirements that: (1) the issuer is a California corporation, or a foreign corporation that meets specified criteria, or any other business entity organized under the laws of this state (Section 25102(n)(1)); (2) the sales of securities are made only to qualified purchasers the issuer reasonably believes to be qualified (Section 25102(n)(2)); (3) each person receives a written offering disclosure statement before the securities are sold to the purchaser (Section 25102(n)(4)); (4) a general announcement with specified information is published by "written document only" (Section 25102(n)(5)); and (5) no telephone solicitations are allowed prior to the issuer determining that the potential investor is qualified (Section 25102(n) (6)). As indicated in paragraph (1) of Section 25102(n), any business entity, including an LLC, that is organized under the laws of this state may issue securities pursuant to this exemption provided that the other criteria of Section 25102(n) are met. Paragraph (2) of Section 25102(n) specifies the categories of qualified purchasers to whom issuers relying on this exemption may offer or sell securities. Subparagraph (E) of paragraph (2) of Section 25102(n) describes one particular category of qualified purchasers. Specifically, subparagraph (E) provides that qualified purchasers for purposes of Section 25102(n) may include individuals (and their spouses) that meet specified minimum net worth and income requirements as well as business or financial experience so that the individuals can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction. However, individuals (and their spouses) that meet the specified net worth requirements of subparagraph (E) will only be considered qualified purchasers for the purposes of Section 25102(n) if the transaction involves the offer and sale of one class of voting common stock of an issuer or of preferred stock of an issuer that entitles the holder thereof to at least the same voting rights as the issuer's one class of voting stock, provided that the issuer has only one-class of voting common stock, outstanding upon consummation of the offer and sale. By definition, the term "common stock" refers to securities which represent an ownership interest in a corporation and which have no preference over any other shares with respect to distribution of assets on liquidation or with respect to payment of dividends. (See Corporations Code Section 159 and Black's Law Dictionary pages 1415 - 1419, Sixth Edition (1990). 6763 LUCE, FORWARD, HAMILTON & SCRIPPS LLP ATTORNEYS AT LAW . FOUNDED 1873 MICHAEL G. FRAUNCES INTERNET ADDRESS: MPILAUNCHER LUCE.COM Direct Dial Number (619) 699-2479 Private Facsimile Number (619) 645-5312 August 12, 1999 DEPT OF CORPORATIONS 99 AUG 16 PM 3: 35OFFICE OF POLICYBY: FEDERAL EXPRESS RECEIVED Mr. Gary S. Mendoza Commissioner of Corporations c/o Office of Policy 980 9th St., Suite 500 Sacramento, CA 95814-2725 Re: Stephen W. Boney Dear Mr. Mendoza: This firm represents Stephen W. Boney, an individual, who intends to form a limited liability company under California law (the "Boney s LLC"). Once formed, the Boney's LLC will initiate a private placement offering pursuant to the exemption from qualification provided in $25102(n) of the California Corporate Securities Law (the "Law") with the goal of raising approximately Five Million Dollars ($5,000,000). The Boney's LLC will use the proceeds of the offering to develop and operate independent, natural foods grocery stores in Southern California. The Boney's LLC will have one class of voting members only. The membership interests will have voting rights equivalent to or better than holders of voting common stock of a California corporation. The Manager or Managers of Boney's LLC will have rights and duties similar to those of a Board of Directors of a California corporation. The Boney's LLC desires to sell membership interests to "qualified purchasers" as that term is defined in $25102(n)(2)(B) of the Law. This letter requests an interpretive opinion with regard to whether the Boney's LLC may rely upon the exemption from qualification found in $25102(n) of the Law to offer and sell securities to the subset of "qualified purchasers" defined in $25102(n)(2)(E). Under $25110 of the Law, all offers or sales of securities by issuers in California must be either qualified with the Commissioner or exempt from such qualification. $25102(n) of the Law provides an exemption for the offer and sale of securities in a limited public offering to certain "qualified purchasers," provided that the issuer meets certain criteria set forth in $25102(n). $25102(n)(2)(E) provides in pertinent part that such "qualified purchasers" include: 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 600 WEST BROADWAY, SUITE 2600 . SAN DIEGO, CALIFORNIA 92101 . TELEPHONE (619) 236-1414 . FACSIMILE (619) 232-831 1 SAN DIEGO . LA JOLLA . NEW YORK . LOS ANGELES . SAN FRANCISCO . CHICAGO LUCE, FORWARD, HAMILTON & SCRIPPS LLP ATTORNEYS AT LAW . FOUNDED 1873 Mr. Gary S. Mendoza August 12, 1999 Page 2 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 ($250,000) 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 five hundred thousand dollars ($500,000) . . . We believe the Legislature intended to allow a limited liability company to rely upon the $25102(n) exemption to offer and sell securities to the "qualified purchasers" listed in $25102(n)(2)(E). $25102(n)(1)(B) states that the $25102(n) exemption may be utilized by not only a corporation but also "any other form of business entity, including without limitation a partnership or trust organized under the laws of this state." The reference to "any other form of business entity" clearly demonstrates the Legislature's intention to make the $25102(n) exemption available for use by a limited liability company. Moreover, the Legislature's overriding goal in enacting the $25102(n) exemption was to facilitate the ability of small companies to raise capital and finance their growth. See 1994 Stats, Ch. 828, $3. One of the principal means by which the Legislature achieved this goal was to set the "qualified purchaser" standard in $25102(n)(2)(E) at a level significantly lower than the standard for "accredited investor" found in Rule 501 of Regulation D under the Securities Act of 1933 and "Excluded Purchaser" found in $260.102.13 of Chapter 3, Title 10 of the California Code of Regulations, thus greatly expanding the pool of investors available to small companies engaged in limited offerings of securities. Therefore, to prevent limited liability companies from offering securities to the "qualified purchasers" defined in $25102(n)(2)(E) would significantly limit such companies' access to investors, thereby defeating the fundamental purpose of the statute. The Legislature's specific references to "voting common stock" and "preferred stock" with voting rights at least the same as that of the issuer's voting common stock in $25102(n)(2)(E) arguably were intended to be generic in nature to describe voting equity securities in which the holders have similar and equal voting privileges. There exists no legislative history, committee report or other legal authority which supports a contrary view. The voting structure for members of the proposed Boney's LLC will provide equal voting rights among a single class of voting members. These members will have voting rights the same or better than those of common shareholders of a California corporation. With this structure, we believe the proposed voting membership interests of Boney's LLC satisfies the intent of the Legislature when the Legislature specifically designated "voting common stock" and "preferred stock," in $25102 (n)(2)(E). LUCE, FORWARD, HAMILTON & SCRIPPS LLP ATTORNEYS AT LAW . FOUNDED 1873 Mr. Gary S. Mendoza August 12, 1999 Page 3 In light of the foregoing, we respectfully request that the Commissioner issue an interpretive opinion confirming that the Boney's LLC may rely upon the $25102(n) exemption to offer and sell the type of voting membership interests described above to the subset of "qualified purchasers" defined in $25102(n)(2)(E), and provided further that all of the other conditions of $25102(n) are met. Sincerely yours, Michael G. Fraunces for Luce, Forward, Hamilton & Scripps LLP cc: Mr. Stephen W. Boney 1421239.2