BILL NUMBER: AB 169 CHAPTERED 08/02/03 CHAPTER 163 FILED WITH SECRETARY OF STATE AUGUST 2, 2003 APPROVED BY GOVERNOR AUGUST 2, 2003 PASSED THE ASSEMBLY JULY 17, 2003 PASSED THE SENATE JUNE 24, 2003 AMENDED IN SENATE JUNE 9, 2003 AMENDED IN ASSEMBLY APRIL 21, 2003 AMENDED IN ASSEMBLY FEBRUARY 24, 2003 INTRODUCED BY Assembly Member Chavez JANUARY 23, 2003 An act to add Section 22062 to the Financial Code, relating to finance lending. LEGISLATIVE COUNSEL'S DIGEST AB 169, Chavez. Finance lending. Existing law, the California Finance Lenders Law, provides for regulation by the Department of Corporations of finance lenders engaged in the business of making consumer or commercial loans. Existing law exempts certain persons from the provisions regulating finance lenders. This bill would define a venture capital company, an operating company, and a commercial bridge loan. The bill would exempt from these provisions a commercial bridge loan made by a venture capital company to an operating company. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 22062 is added to the Financial Code, to read: 22062. (a) This division does not apply to a commercial bridge loan made by a venture capital company to an operating company. (b) For purposes of this section: (1) "Venture capital company" means a person other than an individual or sole proprietorship that meets all of the following: (A) Engages primarily in the business of promoting economic, business, or industrial development through venture capital investments or the provision of financial or management assistance to operating companies. (B) At all times maintains at least 50 percent of its assets in venture capital investments or commitments to make venture capital investments, and maintains or, assuming consummation of the equity investment to which the commercial bridge loan relates, will maintain a material equity interest in the operating company. (C) Approves each loan made to an operating company through the venture capital company's board of directors, executive committee, or similar policy body, based on a reasonable belief that the loan is appropriate for the operating company after reasonable inquiry concerning the operating company's financing objectives and financial situation. (D) Complies, when making the loan, with all applicable federal and state laws and rules or orders governing securities transactions including, but not limited to, the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Corporate Securities Law of 1968. (2) "Operating company" means a person that meets all of the following: (A) Primarily engages, wholly or substantially, directly or indirectly through a majority owned subsidiary or subsidiaries, in the production or sale, or the research or development, of a product or service other than the management or investment of capital. This shall not include any of the following: (i) A person that is either an individual or a sole proprietorship. (ii) A person that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies or other entity or person. (B) Uses all of the proceeds of the commercial bridge loan for the operations of its business. (C) Approves each commercial bridge loan through its board of directors, executive committee, or similar policy board, in the exercise of its fiduciary duty, based on a reasonable belief that the loan is appropriate for the operating company after reasonable inquiry concerning the operating company's financing objectives and financial situation. (3) "Commercial bridge loan" means a loan that meets all of the following criteria: (A) A loan of a principal amount of five thousand dollars ($5,000) or more, or any loan under an open-end credit program, whether secured by personal property or unsecured, the proceeds of which are intended by the operating company for use primarily for other than personal, family, or household purposes. (B) Is made with a maturity date not to exceed one year, and in connection with or in bona fide contemplation of, an equity investment in the operating company. (C) Is secured, if at all, solely by the operating company's business assets, exclusive of any real property. (D) Is subject to the implied covenant of good faith and fair dealing under Section 1655 of the Civil Code. (4) For purposes of paragraph (1), "venture capital investment" is an acquisition of securities in an operating company that a person, an investment adviser of the person, or an affiliated person of either, has or obtains management rights to. (c) For purposes of paragraph (3) of subdivision (b), for the purposes of determining whether a loan is a commercial bridge loan, a venture capital company may rely on any written statement of intended purposes signed by the operating company. The statement may be a separate statement signed by the operating company or may be contained in another document signed by the operating company, but in each case it shall be approved by its board of directors, executive committee, or similar policy body. The venture capital company may not be required to ascertain that the proceeds of the loan are used in accordance with the statement of intended purposes. (d) For purposes of subparagraph (A) of paragraph (3) of subdivision (b), the principles set forth in Section 22551 shall be used to determine whether the specified amount of a commercial bridge loan is a bona fide principal amount. (e) This section shall apply only to a commercial bridge loan made by a venture capital company to an operating company on or after January 1, 2004. (f) Nothing in this section is intended to abrogate or diminish the application of any other laws that are designed to protect borrowers, including, but not limited to, laws pertaining to licensing, unfair competition, usury, and conflicts of interest. SEC. 2. The Legislature finds and declares it is not necessary or appropriate in the public interest or for the protection of borrowers to regulate commercial bridge loans made by venture capital companies to operating companies under the limited circumstances described in Section 1 of this act.