Legal Question in Securities Law in California

The format or model of two-tier interest on a business loan is legal and in fact is frequently used. The SEC and state financial regulators would consider the loan a security when the money is borrowed for business or investment purposes. Issuing securities can be done legally with or without registration, but if you don't register, you need to find and stick within an exemption from registration that fits your offering. For a small, closely-held business or where the investors are all "insiders," this is not too difficult.