Anytime a transaction involves the exchange of securities the parties must be aware that they are subjecting themselves to the full range of federal and state regulation governing such sales. For purposes of securities law, the term security is broadly defined to include, among other things, common stock, preferred stock, warrants, options, binds, debentures, and notes. Generally, securities law issues will arise under two federal statutes, the Securities Act of 1933 (the “Securities Act”) and the Securities and Exchange Act of 1934 (the “Exchange Act”). Although certain aspects of these laws pertain solely to transaction involving public companies, particular measures apply to all companies regardless of the public or private status of the entities involved. In accordance with the Securities Act, all sales of securities must be registered with the Securities and Exchange Commission (SEC) unless exempted from such registration by virtue of an exemption.
In California, securities offered as consideration of a transaction must be either qualified under the California Corporate Code or fall into an exemption. To qualify securities, the issuer must seek a permit from the California Department of Corporations or seek review through a fairness hearing. To account for federal preemption of state securities regulation, California included “covered securities” on its list of exemptions. Covered securities are those whose issuance is exempted from state regulations under federal securities law.
