SECURITIES | 2026-10-30

California’s §25102(f) Limited-Offering Exemption: How Startups Raise Capital Without Qualifying the Offering

Every sale of a security in California must be qualified under Corporations Code §25110 unless an exemption applies. For private placements, the workhorse is the §25102(f) limited-offering exemption — but it has strict conditions on the number and sophistication of purchasers, the absence of advertising, and a notice filing. Miss them and the sale is unqualified, exposing the issuer to rescission under §25503.

In California, the sale of a security must be qualified with the Department of Financial Protection and Innovation under Corporations Code §25110 — unless the transaction fits an exemption . Because full qualification is costly and slow, nearly every startup and private company that raises capital i

A company raising money by selling stock, LLC interests, convertible notes, or other securities in California faces a threshold legal requirement that founders often overlook: the sale must be qualified with the state unless it is exempt. This guide explains the qualification requirement, the §25102(f) limited-offering exemption that most private placements rely on, its specific conditions, how it fits with federal law, and what happens when the conditions are not met.

The Qualification Requirement Under §25110

Corporations Code §25110 makes it unlawful to offer or sell a security in California in an issuer transaction unless the sale has been qualified by the Department of Financial Protection and Innovation (DFPI) or the transaction (or the security) is exempt. Qualification is a formal review process requiring detailed disclosure, and for an early-stage company it is generally impractical. The entire private-capital market in California therefore runs on exemptions — transactions structured to fall within a statutory provision that excuses qualification. Determining whether an interest is even a security in the first place is the predicate question; once it is, §25110 applies and the company must find an exemption or qualify.

The Limited-Offering Exemption: §25102(f)

Corporations Code §25102(f) exempts an offer or sale of a security in a transaction that meets four core conditions: (1) sales are made to no more than 35 purchasers (with certain purchasers excluded from the count); (2) each purchaser either has a preexisting personal or business relationship with the issuer or its controlling persons, or by reason of their own business or financial experience (or that of their professional adviser) can be reasonably assumed to have the capacity to protect their own interests; (3) each purchaser is buying for their own account and not with a view to resale (an investment-intent requirement); and (4) the offer and sale are not accompanied by publication of any advertisement. An issuer that satisfies these conditions may sell securities without qualifying the offering.

Counting the 35 Purchasers

The numerical limit is 35 purchasers, but the count is not a simple headcount. The implementing regulations exclude certain purchasers from the 35 — for example, specified institutional and high-capacity investors — so that the exemption can accommodate a round that includes both a limited number of individuals and certain excluded investors. The count also focuses on purchasers (those who actually buy), and relationships among purchasers (such as spouses or entities and their owners) can be treated as a single purchaser under the rules. Because miscounting can blow the exemption, issuers should track precisely who is being offered and who buys, and apply the regulatory exclusions carefully rather than assuming a loose headcount.

The Relationship-or-Sophistication Condition

The second condition protects purchasers who lack the means to fend for themselves. It is satisfied if either (a) the purchaser has a preexisting personal or business relationship with the issuer or its directors, officers, or controlling persons — a relationship of some duration that would let the purchaser be aware of the character and general business circumstances of the person with whom they are dealing — or (b) the purchaser (alone or with a professional adviser) has sufficient business or financial experience to protect their own interests. The condition is the heart of the exemption’s investor-protection rationale: the state excuses qualification because the limited, informed group of purchasers does not need the protection of a full disclosure review.

The No-Advertising Condition

The exemption is unavailable if the offer or sale is accompanied by the publication of any advertisement. This prohibits general solicitation and general advertising — mass emails to strangers, public social-media solicitations, press advertisements, or open investment seminars — because such methods are inconsistent with a limited, relationship-based offering. Founders who publicize a raise to the general public risk destroying the §25102(f) exemption even if they ultimately sell to only a few people. Where general solicitation is desired, a different exemption framework (such as the federal Rule 506(c) regime, discussed below) must be used and coordinated carefully with state law.

The Notice Filing

An issuer relying on §25102(f) must file a notice with the DFPI (the limited-offering exemption notice), generally within a short period after the first sale, accompanied by the required fee. The filing is a notice, not an application for review — the DFPI does not pass on the merits — but it is a condition of the exemption as administered, and a failure to file on time can jeopardize the exemption or invite enforcement. Issuers should calendar the deadline at the first closing and file promptly, keeping proof of the filing in the company’s records alongside the subscription documents that establish the other conditions.

Coordinating With Federal Law: Regulation D

A securities offering must comply with both federal and state law. At the federal level, most private placements rely on Regulation D — commonly Rule 506(b) (no general solicitation; unlimited accredited investors plus up to 35 non-accredited but sophisticated purchasers) or Rule 506(c) (general solicitation permitted, but all purchasers must be verified accredited investors). A Rule 506 offering is a covered security that preempts state qualification, so California cannot require qualification — but the state may still require a notice filing and fee. An issuer must therefore map its offering to a federal exemption and satisfy the corresponding state notice requirement, taking care that a decision to use general solicitation under Rule 506(c) does not collide with §25102(f)’s no-advertising condition if the issuer is relying on the state exemption rather than federal preemption.

Consequences of an Unqualified Sale

If a sale is neither qualified nor exempt, it violates §25110, and the consequences are serious. Under Corporations Code §25503, a purchaser in an unqualified sale may sue to rescind — to recover the consideration paid plus interest, upon tender of the security, or damages if they no longer own it. The remedy is powerful for investors because it does not require proof of fraud; the mere failure to qualify or fit an exemption can support rescission. In addition, controlling persons and certain participants can face joint and several liability, and the state can pursue enforcement. An issuer that discovers a defect sometimes must consider a rescission offer to limit exposure. The cost of a missed exemption can thus exceed the amount raised.

Why the Exemption Matters to Founders and Investors

For founders, §25102(f) is the practical gateway to raising seed and early-stage capital in California without the burden of qualification — but only if the round is structured within its limits from the outset. For investors, the same provisions define rights: an investor who bought in an offering that failed to qualify or fit an exemption holds a rescission right that can be valuable if the investment sours. Both sides benefit from attention to the exemption’s conditions before money changes hands, because the structure cannot easily be fixed after the fact and the rescission clock and enforcement risk begin at the sale.

Documentation That Supports the Exemption

Because the exemption depends on facts about each purchaser and the manner of offering, the issuer’s records are what prove compliance later. A well-run §25102(f) round maintains subscription agreements with investor representations establishing the relationship or sophistication condition and investment intent; an investor list showing the count and the regulatory exclusions applied; evidence that the offering was not advertised; and proof of the timely notice filing. This file is the issuer’s defense if the DFPI inquires or an investor later asserts the sale was unqualified. Assembling it contemporaneously — not reconstructing it under the pressure of a dispute — is the discipline that separates a defensible private placement from a vulnerable one.

Frequently Asked Questions

When does California require a securities offering to be qualified?

Corporations Code §25110 requires qualification for an issuer’s offer or sale of a security in California unless the transaction or security is exempt. Because qualification is burdensome, most private companies rely on an exemption such as §25102(f).

What is the §25102(f) limited-offering exemption?

It exempts a sale made to no more than 35 purchasers (with certain purchasers excluded from the count), where each purchaser has a preexisting relationship with the issuer or is sophisticated, each buys for their own account, and the offering is not advertised, provided the issuer files the required notice.

How are the 35 purchasers counted?

The limit is 35 purchasers, but the regulations exclude certain investors from the count and can treat related purchasers as one. Because miscounting can destroy the exemption, issuers should track offerees and purchasers precisely and apply the exclusions carefully.

What does the relationship-or-sophistication condition require?

Each purchaser must either have a preexisting personal or business relationship with the issuer or its controlling persons, or have enough business or financial experience (alone or with an adviser) to protect their own interests. This is the investor-protection basis for excusing qualification.

Can I advertise a §25102(f) offering?

No. The exemption is unavailable if the offer or sale is accompanied by the publication of any advertisement, which bars general solicitation and advertising. If you want to solicit publicly, you must use a different framework, such as federal Rule 506(c), and coordinate it with state law.

How does §25102(f) interact with federal Regulation D?

An offering must satisfy both federal and state law. Rule 506 offerings are covered securities that preempt state qualification, though California may still require a notice filing and fee. Issuers map the offering to a federal exemption and satisfy the corresponding state notice, avoiding conflicts such as using general solicitation where a no-advertising exemption is relied on.

What happens if I sell securities without qualifying or fitting an exemption?

The sale violates §25110, and under §25503 the purchaser may rescind — recovering the consideration paid plus interest on tender of the security, or damages. Rescission does not require proof of fraud, and controlling persons and participants can face liability, so the cost of a missed exemption can exceed the amount raised.

Do I need to file anything with the state?

Yes. A §25102(f) issuer must file a limited-offering exemption notice with the DFPI, generally shortly after the first sale, with the required fee. It is a notice, not a merits review, but filing it on time is treated as a condition, so calendar the deadline at the first closing.

Common Mistakes That Destroy the Exemption

Several recurring errors cost companies the §25102(f) exemption. The most common is general solicitation — a founder posts the raise on social media or emails a broad list, unknowingly publishing an “advertisement” that defeats the exemption. Others include selling to too many purchasers after miscounting, selling to purchasers who lack both a preexisting relationship and sophistication, treating convertible notes or SAFEs as if they were not securities (they generally are), and forgetting the notice filing. Each of these can convert a seemingly routine seed round into a series of unqualified sales, each carrying its own rescission right. Because the defects are easy to avoid at the outset and hard to cure afterward, the time to get the structure right is before the first dollar is accepted.

The Relationship to the Threshold “Security” Question

Everything in this analysis assumes the interest being sold is a security — and that threshold question, governed by the investment-contract test and California’s broad statutory definition, is itself where some companies go wrong. A founder who believes an LLC “membership” or a profit-sharing arrangement is not a security may skip the qualification analysis entirely, only to learn later that the interest was a security all along, that no exemption was perfected, and that §25503 rescission rights accrued at each sale. The safest course is to treat the two questions in sequence: first determine whether the interest is a security, and if it is, immediately plan the qualification or exemption strategy — with §25102(f) the usual answer for a limited, relationship-based private placement — and document compliance from the first closing forward.

Integration of Multiple Offerings

A company that raises capital in several rounds must consider the integration doctrine, which can treat what look like separate offerings as a single offering for purposes of counting purchasers and testing the manner of offering. If two closely spaced raises are integrated, the 35-purchaser ceiling and the no-advertising condition are measured across both, and a later round conducted by general solicitation could retroactively taint an earlier §25102(f) placement. Integration analysis looks at factors such as the timing of the offerings, whether they are part of a single plan of financing, the type of securities offered, and the purpose of the proceeds. Companies that raise frequently should map their rounds with integration in mind — leaving appropriate gaps, or ensuring each round independently satisfies an exemption — so that the structure of one offering does not destroy the exemption claimed for another.

Resale Restrictions on §25102(f) Securities

Securities sold under §25102(f) are not freely tradable. Because the exemption rests on a limited, relationship-based sale to purchasers buying for their own account, the securities are effectively restricted, and a purchaser who resells into the public could trigger a qualification or registration problem and undermine the issuer’s exemption. Issuers ordinarily impose contractual transfer restrictions, place legends on the certificates or in the records, and require investors to represent their investment intent, precisely to preserve the exemption and prevent a disqualifying distribution. Investors, in turn, must understand that a §25102(f) security is an illiquid holding that cannot be sold except in a later registered or exempt transaction — a limitation that is part of why the exemption is reserved for purchasers able to protect their own interests.

Curing a Defective Offering

When an issuer discovers that a sale may have fallen outside §25102(f) — a missed notice filing, an advertising misstep, or an over-count of purchasers — it should act promptly rather than hope the problem never surfaces. Depending on the facts, options may include making a late notice filing, restructuring or unwinding problematic sales, or extending a rescission offer that gives affected investors their money back and limits the window of exposure. Because the rescission right under §25503 and the risk of enforcement both begin at the sale, a defect left unaddressed only grows as more sales are made on the same flawed basis. Early consultation with securities counsel to diagnose and cure a defect is almost always cheaper than litigating a rescission claim after the investment has soured.

Related Guides

For related reading, see our guide on the Howey test and what counts as a security and our securities and governance practice overview. Whether an interest is a security determines whether §25110 applies, and §25102(f) is the exemption most private placements depend on.

Speak With a California Securities Attorney

If you are raising capital in California, structuring the round within the §25102(f) limited-offering exemption — and coordinating it with federal Regulation D — protects you from rescission and enforcement. Trembach Law Firm advises issuers and investors on qualification, exemptions, notice filings, and the defense of claims under the Corporate Securities Law. Call (818) 514-7680 for a consultation. Anatolii Trembach holds an LL.M. and is admitted to the California Bar.

This article provides general information about California securities law and is not legal advice. Exemption compliance is fact-specific and depends on the structure of the offering. Consult a qualified attorney about your particular situation.

Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.

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