Business Law

Selected Developments in Business Law — Financing and Protecting California Businesses

February 2022 Update

Federal and State Securities Law Amendments

New Rule 152 (17 CFR §230.152) was adopted by the SEC in 2020 to simplify the rules for determining whether multiple “offerings” should be integrated (i.e., considered part of a single offering). See Securities Act Release No. 33–10884 (Nov. 2, 2020). Before the adoption of new Rule 152, the integration framework consisted of a mixture of rules and SEC guidance that became increasingly difficult to apply. New Rule 152 consists of a general principle of integration and four safe harbors applicable to all securities offerings under the Securities Act, including both registered and exempt offerings. Prior SEC rules related to integration have been either eliminated (e.g., former Rule 155) or modified to cross-reference new Rule 152 (e.g., Rule 502(a), which had previously included a 6-month safe harbor and now simply directs readers to new Rule 152). See §§6.11–6.12, 19.2A, 19.11.

The SEC has adopted new Rule 148 (17 CFR §230.148), which provides that certain “demo day” communications are not general solicitations or general advertising. Under new Rule 148, a communication will not be deemed to constitute general solicitation or general advertising if made in connection with a seminar or meeting in which more than one issuer participates that is sponsored by an institution of higher education, a state or local government, a nonprofit organization, or an angel investor group, incubator, or accelerator, provided that the advertising for the seminar or meeting does not reference a specific offering of securities, and the event sponsor does not (1) make investment recommendations or provide investment advice to attendees, (2) engage in any investment negotiations between issuers and attendees, (3) charge attendees any fees (other than reasonable administrative fees), (4) receive any compensation for making introductions between attendees and issuers or for investment negotiations, or (5) receive any compensation with respect to the event that would require registration of the sponsor as a broker or a dealer under the Securities Exchange Act of 1934 (15 USC §§78a–78pp) or an investment adviser under the Investment Advisers Act of 1940 (15 USC §§ 80b–1—80b–21). See §6.14.

The SEC has adopted new Rule 241 (17 CFR §230.241), which allows an issuer to solicit indications of interest in an exempt offering orally or in writing before determining which exemption to utilize for the offering. Any communication under new Rule 241 must state that

•          The issuer is considering an offering of securities exempt from registration under the Securities Act, but has not determined a specific exemption from registration that the issuer intends to rely on for the subsequent offer and sale of the securities;

•          No money or other consideration is being solicited, and if sent will not be accepted;

•          No offer to buy the securities can be accepted and no part of the purchase price can be received until the issuer determines that the exemption under which the offering is intended to be conducted and, when applicable, the filing, disclosure, or qualification requirements of such exemption are met; and

•          A person’s indication of interest involves no obligation or commitment of any kind.

•          At a reasonable time before the sale of securities to any purchaser that is not an accredited investor in a transaction under Rule 506(b), the issuer must provide the purchaser with any written communication or broadcast script used under new Rule 241 within 30 days before that sale. See §§6.14, 19.26.

Rule 504 (17 CFR §230.504) provides an exemption under Securities Act §3(b) (15 USC §77c(b)) for certain offers and sales of securities by eligible issuers. The aggregate offering price for an offering of securities under Rule 504 cannot exceed $10 million, less the aggregate offering price of all securities sold within the 12 months before the start of, and during the offering of, securities under Rule 504 or in violation of §5(a) of the Securities Act (15 USC §§77c(b) and 77e(a)). The $10 million maximum is a recent increase from $5 million. See Securities Act Release No. 33–10884 (Nov. 2, 2020). See §§6.17, 19.54.

On February 10, 2021, the SEC adopted amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. These amendments included the deletion of Item 303(d) of Regulation S-K. Under Item 303(d), smaller reporting companies were required to provide management’s discussion and analysis (MD&A) disclosure addressing liquidity and capital resources of the issuer. Some commentators believe that smaller reporting companies should continue to provide this disclosure because excluding smaller reporting companies from the relevant discussion of liquidity and capital resources would be inconsistent with the objectives and requirements stated in amended Item 303(a); such disclosure may be necessary for an understanding of the issuer’s financial condition, cash flows, and other changes in financial condition and results of operations. See §6A.28.

Crowdfunding Amendments

Regulation Crowdfunding was significantly amended in 2021 to broaden its availability. See SEC Release Nos. 33–10884, 34–90300 (Jan. 14, 2021), available at See §6B.1.

A company may sell up to $5 million in any 12-month period to investors in an offering made under Regulation Crowdfunding, as amended in 2021. 17 CFR §227.100(a)(1). See §6B.2.

An offering made under Regulation Crowdfunding is subject to the same new Rule 152 (17 CFR §230.152) adopted by the SEC in 2020, concerning integration of multiple offerings. See Securities Act Release No. 33–10884 (Nov. 2, 2020). (For a detailed discussion of Rule 152, see §6.12.) See §6B.13.

At any time before the filing of Form C (see §6B.6), an equity crowdfunding issuer is allowed to communicate orally or in writing to determine whether there is any interest in a contemplated securities offering. These communications are deemed to be an offer of a security for sale for purposes of the antifraud provisions of the federal securities laws. However, no solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is allowed until the Form C is filed. The communications must

•          State that no money or other consideration is being solicited, and if sent in response, will not be accepted;

•          State that no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed, and only through an intermediary’s platform; and

•          State that a person’s indication of interest involves no obligation or commitment of any kind.

Any written communication may include a means by which a person may indicate interest in the potential offering. The issuer may require the name, address, telephone number, and e-mail address in any response form. 17 CFR §227.206. See §6B.14.

The 2020 crowdfunding amendments included a new rule Rule 3a–9 (17 CFR §270.3a–9) under the Investment Company Act of 1940 (15 USC §§80a–1—80a–64) to permit the use of certain special purpose vehicles—known as crowdfunding vehicles—that function as conduits for investors to facilitate investing in Regulation Crowdfunding issuers. See §6B.14A.

In October 7, 2021, Governor Newsom signed into law AB 511 (Stats 2021, ch 617), which, among other things, establishes a new exemption, codified at Corp C §25102(r), from qualification under state law for certain offers or sales of securities. The new exemption generally covers small intrastate crowdfunded offerings, and is intended to increase access to capital for small businesses in California. To qualify, the offering must be conducted in accordance with the federal requirements for intrastate offerings (see §§6.23, 19.44–63A) and also in accordance with the federal requirements for crowdfunded offerings, except that there is a limit of $300,000 on the amount of the current offering plus the aggregate amount of securities sold in the 12-month period preceding the current offering. See Corp C §25102(r) for additional requirements. A number of other states have similar exemptions for intrastate crowdfunded offerings. See See §6B.44A.

Direct Listing Amendments

Historically, a company could not issue any additional shares, and therefore could not raise any additional capital, as part of the direct listing process. On December 22, 2020, the SEC approved an amendment to the NYSE listing rules which permits a company to list and sell shares directly to investors for its own account (a “primary direct listing”), either alone or side-by-side with a direct listing in which existing shareholders sell shares (a “secondary direct listing”), if the company meets specified market valuation requirements described below in addition to satisfying all other applicable initial listing requirements. On May 19, 2021, the SEC approved an amendment to the Nasdaq listing rules to allow a company to raise capital on the NASDAQ Global Select Market as part of a primary direct listing on substantially the same terms as on the NYSE. To ensure a sufficiently liquid trading market in the absence of the pricing support and stabilization measures traditionally available in underwritten public offerings, both the NYSE and Nasdaq require a company seeking a direct listing to demonstrate a minimum aggregate market value of publicly-held shares. See §18.5A.

Other securities regulatory amendments

On November 2, 2020, the SEC amended Item 601(b)(10) of Regulation S-K (17 CFR §229.601(b)(10)) to provide that the issuer may, without submitting a confidential treatment request to the SEC, redact provisions of a required exhibit if the issuer customarily and actually treats the information as confidential and if the information is not material. The SEC retains the authority to review and require disclosure of any of the information redacted by registrants on a case-by-case basis. Item 601(b)(10)(iv) of Regulation S-K (17 CFR §229.601(b)(10)(iv)); Securities Act Release No. 33–10884 (Nov. 2, 2020), available at See §§18.56, 20.18.

On November 2, 2020, the SEC approved amendments to a number of rules governing exempt offerings to harmonize and simplify the exempt offering framework, including Regulation A, Regulation Crowdfunding, and Rule 504 of Regulation D. See Securities Act Release No. 33–10884 (Nov. 2, 2020), available at The principal amendments affecting Regulation A

•          Exclude issuers that are delinquent in filing their Exchange Act reports from relying on Regulation A (see amended Securities Act Rule 251(b)(7) (17 CFR §230.251(b)(7)); §19.13);

•          Raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million (see amended Securities Act Rule 251(a) (17 CFR §230.251(a)); §19.11);

•          Raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million (see amended Securities Act Rule 251(a) (17 CFR §230.251(a)); §19.11); and

•          Simplify certain technical requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings. See §19.4.

Under new Rule 241, at any time before making a determination as to the exemption from registration under which an offering of securities will be made, an issuer or any person authorized to act on behalf of an issuer may communicate orally or in writing to determine whether there is any interest in a contemplated offering of securities. Securities Act Rule 241 (17 CFR §230.241). Further, under Rule 255, at any time before the qualification of a Regulation A offering statement, including before the nonpublic submission or public filing of such offering statement, an issuer or any person authorized to act on behalf of an issuer may communicate orally or in writing to determine whether there is any interest in a contemplated securities offering. Securities Act Rule 255 (17 CFR §230.255). Communications under Rule 241 or Rule 255 must contain specified information. Any written communication or broadcast script used under the authorization of Rule 241 within 30 days of the initial filing of a Regulation A offering statement, and any written communication or broadcast script used under the authorization of Rule 255, must be filed as exhibits to the offering statement when the offering statement is submitted for nonpublic review or public filing. Item 17(13) of Form 1-A (17 CFR §239.90). See §§19.4, 19.64.

A special purpose acquisition company (SPAC) represents an increasingly popular alternative to a traditional initial public offering (IPO) for obtaining financing, providing liquidity to existing shareholders, or creating a public market for a company’s securities. Entities similar to SPACs, known variously as “blank check companies,” “reverse mergers,” and “public shells,” have been used since at least the 1950s. See §§19.91–19.94. Although the popularity of these techniques has ebbed and flowed over the decades, the number and size of SPAC financings have grown substantially since 2020. For a detailed discussion of SPACs, see new Chapter 19A.

On November 19, 2020, the SEC amended its rules to modernize and simplify MD&A and certain financial disclosures required by Regulation S-K. See Securities Act Release 33–10890 (Nov. 19, 2020), available at Among other things, the amendments eliminated Item 301 of Regulation S-K, which required selected financial data. Although registrants are no longer required to provide selected financial data, they are encouraged to consider whether they may need to present trend information within MD&A for periods earlier than those periods presented in the financial statements. See §20.13.

Loan Transactions

On March 5, 2021, the Financial Conduct Authority, the regulatory supervisor for the administrator of LIBOR, announced that the 1-week and 2-month tenors with respect to U.S. dollar (USD) LIBOR will permanently cease to be provided after December 31, 2021, and that all other tenors of USD LIBOR (overnight, 1-month, 3-month, 6-month and 12-month) will cease to be provided after June 30, 2023. See §8.16.

In Rund v Kirkland (In re EPD Inv. Co., LLC) (Bankr CD Cal Oct. 29, 2020, Nos. 2:10-bk-62208-ER, 2:12-ap-02424-ER) 2020 Bankr Lexis 3091, the court found that the bankruptcy trustee could avoid the filing of a financing statement with respect to an antecedent debt owed by the debtor that was operated as a Ponzi scheme as an actually fraudulent transfer. Although securing an antecedent debt is deemed to occur for value, and thus cannot be a constructively fraudulent transfer under either Bankr C §548(a)(1)(B) or CC §3439.04(a)(2), it can be an actually fraudulent transfer because all transfers in furtherance of a Ponzi scheme are presumptively intentionally fraudulent under Bankr C §548(a)(1)(A) and CC §3439.04(a)(1). See §8.20A.

Lenders that make loans to individuals secured by community property should make sure that the UCC-1 financing statement names both spouses as debtors. See In re Brace (9th Cir 2020) 979 F3d 1228, in which the court held that 100 percent of property held as community property becomes part of the bankruptcy estate of the debtor, even if only one spouse is the debtor in the bankruptcy proceeding. See §8.25.


In St. Mary & St. John Coptic Orthodox Church v SBC Ins. Servs. (2020) 57 CA5th 817, 834, the court stated that “[t]o be enforceable, any insurance provision that takes away or limits coverage reasonably expected by an insured must be ‘conspicuous, plain and clear.’ … Whether an exclusion or limitation is ‘conspicuous, plain and clear’ is a question of law.” See §11.14.

An insured must consider choice of law in assessing what constitutes a “loss” under a policy. For example in RSUI Indem. Co. v Murdock (Del 2021) 248 A3d 887, the insurer argued that “loss” under California law did not include amounts paid to settle claims of fraud. The Delaware Supreme Court held that Delaware law applied even though the insured was headquartered in California and many of the acts at issue allegedly took place in California. The court reasoned, in part, that “Delaware law governs the duties of the directors and officers of Delaware corporation to the corporation, its stockholders, and its investors. As such, corporations must assess their need for D&O coverage with reference to Delaware law aware of the issues raised by the particular policy.” 248 A3d at 900. The court held that under Delaware law, “certain conduct, including a director’s breach of loyalty sounding in fraud, is not uninsurable on public-policy grounds.” 248 A3d at 905. See §11.30C.

Intellectual Property; Cybersecurity

Generally, if an inventor assigns the inventor’s patent to another, the inventor is precluded from later challenging the validity of that patent. Minerva Surgical, Inc. v Hologic, Inc. (2021) ___ US ___, 141 S Ct 2298. Exceptions to this doctrine include instances when the inventor assigned rights as a condition of employment or when the patent is modified after the assignment. See §12.14A.

Additionally, underlying historical facts such as those depicted in books, plays, or movies are not protectable. Corbello v Valli (9th Cir 2020) 974 F3d 965 (author of biopic depicting Four Seasons band could not recover against producers of musical Jersey Boys for creating scenes in play that portrayed real life events similar to book). See §12.17.

The transformation of shopping from traditional brick and mortar stores to online marketplaces has significant implications for the question which parties may be liable for selling infringing products. At some of the most popular digital marketplaces (i.e.,, eBay, and Etsy), third parties sell their goods directly to consumers through the marketplace platform. In these cases, courts have typically not found the platform providers liable for goods sold through the platform. Tiffany (NJ) Inc. v eBay Inc. (2d Cir 2010) 600 F3d 93, 103. However, a company could be deemed an infringer if it is directly facilitating the use of a mark. Ohio State Univ. v Redbubble, Inc. (6th Cir 2021) 989 F3d 435, 440 (clothing manufacturer can be liable for offering print-on-demand service). Likewise, a property owner can be found liable for infringement if it is willfully blind to counterfeit sales of infringing product on its premises by others. Omega SA v 375 Canal, LLC (2d Cir 2021) 984 F3d 244. See §12.75A.

In Van Buren v U.S. (2021) ___ US ___, 141 S Ct 1648, the U.S. Supreme Court held that the term “exceeds authorized access” covered those who obtained information from particular areas in the computer, such as files, folders, or databases, to which their authorized computer access did not extend. However, it did not cover those who had improper motives for obtaining information that they were otherwise authorized to access. This case resolved a circuit split between the First, Fifth, Seventh, and Eleventh Circuits (which had answered “yes”) and the Second, Fourth, Sixth, and Ninth Circuits (which had answered “no”). See Cloudpath Networks v Securew2 B.V. (D Colo 2016) 157 F Supp 3d 961 (summarizing circuit split). See §13.19.

Use of cookies may implicate both Title I and Title II of the Electronic Communications Privacy Act of 1986 (ECPA) (18 USC §§2510–2522 and 2701–2713), as well as the Computer Fraud and Abuse Act (CFAA) (18 USC §1030). Internet users who have asserted violations of the ECPA or the CFAA based on the use of cookies have generally met with little success. However, in Davis v Facebook, Inc. (In re Facebook, Inc. Internet Tracking Litig.) (9th Cir 2020) 956 F3d 589, cert denied (2021) 141 S Ct 1684, the Ninth Circuit addressed whether Facebook’s placement of a persistent cookie on a Facebook user’s computer and the transmission of URLs and other data by that cookie violated the ECPA’s prohibition on the interception of electronic communications. Based on the technical nature of the transmission of information to Facebook, the court concluded that Facebook was not a party to the intercepted communication. As a result, the party exception to the ECPA did not apply and Facebook could be subject to liability under the ECPA. The Ninth Circuit reversed the dismissal of that claim, and remanded the case to the district court. See §13.28.

The Federal Bureau of Investigation (FBI) provides a mechanism for filing complaints regarding ransomware attacks, available at, and has issued a Public Service Announcement, available at, warning that ransomware attacks are becoming more targeted, sophisticated, and costly. Ransomware attacks constituted 81 percent of financial-based cyberattacks in 2020. See See §13.38.

Federal and State Taxation

For tax years beginning on or after December 31, 2017, and before January 1, 2026, the Tax Cuts and Jobs Act implemented a $10,000 limitation on the federal deduction for state and local taxes (SALT) paid by individuals who itemize their deductions. Internal Revenue Service Notice 2020–75, 2020–49 Int Rev Bull 1453 confirmed that the $10,000 federal SALT deduction cap does not apply to passthrough entities, including partnerships and S corporations. California created an entity-level election that operates as a workaround to the SALT cap for the entity’s owners. See AB 150 (Stats 2021, ch 82), Part 10.4, codified at Rev & T C §§19900–19906. The election allows qualified entities to pay an entity-level tax equal to 9.3 percent of the entity’s qualified net income or “QNI.” QNI is equal to the sum of the distributive share of an entity’s income. The qualified entity claims a deduction for this tax at the entity level, which is not limited by the $10,000 federal SALT deduction cap. Each of the qualified entity’s owners then receives their distributive share of QNI net of the entity-level tax. To offset the entity-level tax, each owner receives a credit on its California income tax return, which prevents double taxation because the entity has already paid tax on that income. For additional discussion, see §15.41A.

Limited partnerships doing business in California that file a certificate of limited partnership or register with California after January 1, 2021, and before January 1, 2024, are exempt from the $800 franchise tax for their first taxable year. Rev & T C §17935(f)(1). See §16.21. Limited liability companies are similarly exempt for their first taxable year. Rev & T C §17941(g)(1). See §16.22.

Board Diversity Requirements

In December 2020, Nasdaq proposed to require, subject to specified exceptions, all listed companies (1) to disclose board diversity statistics; and (2) to have, or to explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either Black or African-American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or as LBGTQ+. The timetable to meet the board composition rule is based on the company’s listing tier. See SEC Release No. 34–91286 (Mar. 10, 2021). The Nasdaq board diversity rule was approved by the SEC on August 6, 2021. See See §17.11.

Progressive state legislatures are increasingly seeking to require public companies to advance social and political policies. California has adopted legislation that amended Corp C §301.3 and added Corp C §§301.4 and 2115.6 to require each publicly held corporation that is incorporated in California or has its principal executive offices in California (1) to have (a) at least one female director by December 31, 2019, (b) at least two female directors by December 31, 2020, if it has five directors, and (c) at least three female directors by December 31, 2021, if it has six or more directors; and (2) to include at least one person from an “underrepresented community” on its board by the end of 2021, and two or three, depending on the size of the board, by the end of 2022. The latter defines a member of an underrepresented community as anyone “who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender.” See §17.26.

Colorado, Massachusetts, Illinois, and Pennsylvania have passed nonbinding resolutions encouraging companies to adopt policies and practices designed to increase gender diversity on their boards. Maryland and New York require certain corporations to report the number of female board members. Hawaii, Michigan, New Jersey, and Washington have introduced legislation mandating a certain number of women on corporate boards, and Illinois has adopted legislation that requires, no later than January 1, 2021, all public companies with their executive office in Illinois, whether incorporated in the state or elsewhere, to disclose in their annual reports the self-identified gender of each board member, state whether each member self-identifies as a minority person, and, if so, disclose the director’s race or ethnicity. See §17.26.

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