June 25, 2026

The Hedge | Brutal Honesty Over Hype Since 2008

Dysfunctional HOA boards — boards that mismanage association funds, ignore Davis-Stirling requirements, award contracts to board members’ companies, or simply refuse to fulfill their governance obligations — are unfortunately common in California. Understanding the mechanisms for removing board members and replacing dysfunctional boards is essential knowledge for homeowners in communities where governance has broken down.

The Member Recall Right

California Civil Code Section 5100 et seq. gives members the right to remove board members before the expiration of their terms through a recall vote. The process requires a petition signed by at least 5% of members (or the number specified in the governing documents, if higher) requesting a special member meeting to vote on recall. The recall vote uses the same secret ballot process required for regular elections. A director recalled by majority vote of members is removed from the board, and the remaining board members can appoint a replacement or call a special election depending on the governing documents’ provisions.

Grounds for Seeking Recall

While California law doesn’t require “cause” for a board member recall — members can vote to remove a board member for any reason or no stated reason — the most common situations that motivate recall efforts are: financial mismanagement or suspected misappropriation; systematic violation of Davis-Stirling requirements; board member conflict of interest (awarding contracts to their own businesses); failure to maintain common areas despite adequate reserves; and personal conduct toward members that violates the board’s duty of good faith. Document specific instances of the problematic conduct before beginning a recall effort — the documentation makes the case to fellow members who need to support the petition.

Organizing a Successful Recall

Recall efforts succeed when: the organizing members communicate specific, documented concerns rather than general dissatisfaction; the effort is broad-based rather than driven by one or two dissatisfied homeowners; members are given clear information about what specifically the recall seeks to address and what governance changes would follow; and the organizing group identifies replacement candidates who have the time and commitment to serve effectively. A recall that removes a dysfunctional board but replaces it with unprepared members who repeat the same mistakes accomplishes little. The goal is better governance, not just change.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.

The Hedge | Brutal Honesty Over Hype Since 2008

Most California entrepreneurs who need outside capital don’t qualify for institutional venture capital and aren’t ready for a public offering. The middle ground — raising money from private investors through exempt offerings — has specific federal and California securities law requirements that determine what you can do, to whom, and with what disclosures. Getting this wrong creates personal liability that survives the company.

Federal Exemptions: Regulation D

The most commonly used federal exemption for private capital raises is Regulation D, Rules 504, 506(b), and 506(c). Rule 506(b) allows raising unlimited capital from up to 35 non-accredited investors (with significant disclosure requirements) and unlimited accredited investors — but prohibits general solicitation. Rule 506(c) allows general solicitation and advertising but limits investors to verified accredited investors only. For most California entrepreneurs doing a friends-and-family raise or a small angel round, Rule 506(b) is the typical starting point. The exemption must be claimed by filing a Form D with the SEC within 15 days of the first sale.

California’s Blue Sky Requirements

Federal exemption from SEC registration does not exempt the offering from California securities law — you must separately comply with California’s corporate securities laws. California permits use of federal 506(b) and 506(c) exemptions with a notice filing to the Department of Financial Protection and Innovation (DFPI) and the required fee. California’s “merit review” authority — which historically allowed the DFPI to deny offerings deemed unfair to investors regardless of disclosure adequacy — has been narrowed by federal preemption for 506 offerings, but California can still impose specific disclosure requirements for intrastate offerings.

The Accredited Investor Definition

Accredited investors — those who can participate in most private offerings without the full disclosure package required for non-accredited investors — are defined by SEC rules. Individual accredited investors include: those with income over $200,000 ($300,000 joint) in each of the past two years with expectation of the same in the current year; those with net worth over $1 million excluding primary residence; and certain professional credentials (licensed Series 7, 65, or 82 holders). For venture capital and angel capital raises, understanding who qualifies as accredited before you approach them prevents technical violations that create securities law exposure.

The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.