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California Securities Laws

Each state has its own securities laws. The following are selected sections of the California securities laws that are generally applicable in FINRA arbitrations.


10 CCR 260.140.01 (2010)

§ 260.140.01. Suitability of Investors

(a) If a limited offering qualification is approved pursuant to a condition imposed by the Commissioner, or a representation by the applicant, confining the sale of securities under the qualification to persons meeting specified standards of experience, financial responsibility, tax status or other specification, any sale of such securities pursuant to the qualification to persons not meeting such specified standards is a violation of the terms and conditions of qualification.

(b) The responsibility for assuring that sales of securities are limited to persons meeting the suitability standards applicable to an offering is upon the issuer and upon each person, including broker-dealers and agents, who participates in the distribution of the securities. Issuers and participating broker-dealers should adopt reasonable procedures to assure (i) that persons charged with selling the securities are familiar with the suitability standards, (ii) that appropriate means are at hand to obtain the information required to comply with such standards, (iii) reasonable steps are taken to assure that persons selling the securities comply with the limitations imposed under the suitability standards; provided that nothing herein contained is a limitation upon liability under Section 25503 of the Code (or under Section 25504 insofar as it pertains to Section 25503).

(c) Adherence to a suitability standard imposed in connection with a qualification, by condition or otherwise, shall not relieve a broker-dealer from compliance with Section 260.218.2 of these rules or Rule 15b10-3 under the Securities Exchange Act of 1934.

(d) Any prospectus used in connection with an offering on which suitability standards are imposed under the terms and conditions of qualification shall include a description of such suitability standards. (See Sections and of these rules.)

(e) Where the issuer is a small business issuer and the proposed maximum aggregate offering price for all the securities to be sold in the offering anywhere does not exceed $ 5,000,000, Sections 260.140.05 (except for subsection (c) of that rule), 260.140.31 and 260.140.50 (except for the requirement that the initial offering price shall not be less than $ 2.00 per share) shall be waived, if the issuer seeks a limited offering or open qualification (depending on the class of prospective investors) to sell its securities only:

(1) to investors each of whom

(A) has a minimum net worth of at least $ 75,000 and had minimum gross income of $ 50,000 during the last tax year and will have (based on a good faith estimate) minimum gross income of $ 50,000 during the current tax year, or

(B) in the alternative, has a minimum net worth of $ 150,000, provided that in either case the investment shall not exceed 10 percent of the net worth of the investor; or

(2) to a “small investor” who, including the proposed purchase, has not

(A) purchased more than $ 2,500 of securities issued or proposed to be issued by the small business issuer in the 12 months preceding the proposed sale, or

(B) in the case of a small investor that is an individual retirement plan of an individual and an individual retirement account of an individual, such small investor shall not have purchased more than $ 2,500 of securities issued by the small business issuer or any affiliate of the small business issuer during the 12 months preceding the proposed sale, unless the small business issuer is registered under Section 12 of the Securities Exchange Act of 1934 (in which case, the suitability standard in clause (1) of subsection (e) of this rule applies); or

(3) to both (1) and (2).

Net worth shall be determined exclusive of homes, home furnishings and automobiles. Assets included in the computation of net worth shall be valued at not more than fair market value. Higher suitability standards may be imposed as a condition of any qualification where the issuer substantially fails to comply with other rules of the Commissioner. For the purpose of this subsection, “small investor” means either: an individual (which includes both a husband and wife counted as a single individual); or a self-employed individual retirement plan of an individual or an individual retirement account of an individual.


10 CCR 260.238 (2010)

§ 260.238. Investment Advisers: Fair, Equitable and Ethical Principles

The following activities do not promote “fair, equitable or ethical principles,” as that phrase is used in Section 25238 of the Code:

(a) Recommending to a client to whom investment supervisory, management or consulting services are provided the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client after reasonable inquiry concerning the client’s investment objectives, financial situation and needs, and any other information known or acquired by the adviser after reasonable examination of such of the client’s records as may be provided to the adviser.

(b) Placing an order to purchase or sell a security for the account of a client without authority to do so.

(c) Placing an order to purchase or sell a security for the account of a client upon instruction of a third party without first having obtained a written third-party trading authorization from the client.

(d) Exercising any discretionary power, including any power of attorney, in placing an order for the purchase or sale of securities without first obtaining written discretionary authority, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both.

(e) Inducing trading in a client’s account that is excessive in size and frequency in view of the financial resources, investment objectives and character of the account.

If you have questions about a state securities law, The White Law Group may be able to help. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at https://whitesecuritieslaw.com.

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