State Securities Law: California Registration Requirements: California Exemption: Section 25102(o)

Section 25102(o) Has Become More Flexible

To use 25102(o), until 2008, issuers needed to conform equity compensation plans to California’s mandated terms in 25102(o). In 2008, the California Corporations Commissioner approved changes to regulations underlying Section 25102(o) of the California Securities Law which removed many of these restrictive requirements.  In particular, California has eliminated many of the more onerous substantive restrictions on compensatory benefit plans that are exempt from registration under the Securities Act of 1933 pursuant to Rule 701. The key changes for California Section 25102(o) offerings that otherwise comply with Rule 701 and the Internal Revenue Code are as follows:

The restrictions on option exercise price have been eliminated.

Previously, the exercise price was not permitted to be less than 85% of the fair value of the underlying security on the grant date

The restrictions on vesting requirements have been eliminated

Previously, options were required to vest at the rate of at least 20% per year over five years

The list of employees, officers, directors, consultants and other advisors eligible to participate under a compensatory benefit plan has been expanded to conform to the eligibility requirements of Rule 701

The restriction limiting the total number of shares reserved for issuance under equity compensation plans has been eliminated

Previously, the number of securities issuable under the plan could not exceed 30% of the then outstanding number of shares, unless approved by a two-thirds shareholder vote

The restrictions on stock repurchase rights have been eliminated

Previously, any repurchase was generally required to be either for cash or cancellation of indebtedness within 90 days of termination of employment (or with respect to options exercised by an employee after termination, within 90 days of exercise) and the repurchase had to be at (1) not less than fair market value on the date of termination or (2) the original purchase price provided that the repurchase rights lapsed at the rate of at least 20% per year over five years

The restrictions on required voting rights have been eliminated

Previously, common stock and similar equity was generally required to have voting rights equal to those held by the issuer’s other common stock

The requirement that annual financial information be provided to security holders has been eliminated