BILL NUMBER: SB 1155	INTRODUCED
	BILL TEXT


INTRODUCED BY   Senators Dutton and Price

                        FEBRUARY 18, 2010

   An act to amend Sections 28047, 28100, 28152, 28154, 28200, 28400,
and 28551 of, to add Sections 28047.1 and 28111 to, to repeal
Sections 28002, 28151, 28401, 28402, 28403, and 28404 of, and to
repeal and add Article 2 (commencing with Section 28820) of Chapter
12 of Division 3 of Title 4 of, the Corporations Code, relating to
capital access companies.



	LEGISLATIVE COUNSEL'S DIGEST


   SB 1155, as introduced, Dutton. Capital access companies.
   Existing law, the Capital Access Company Law, provides for the
licensure and regulation by the Commissioner of Corporations of
capital access companies to enable those entities to provide risk
capital and management assistance to small businesses in the state,
exempt from the requirements of the federal Investment Company Act of
1940.
   Under existing law, a capital access company is only authorized to
engage in the business of providing financing assistance through the
purchase of securities of small business firms doing business or
proposing to do business wholly or substantially in this state, and
providing managerial and technical assistance to these firms, subject
to certain exceptions. Existing law defines a "small business firm"
as a person meeting specified criteria, including, without
limitation, having fewer than 500 employees.
   This bill would redefine a small business firm as a person that,
together with its affiliates, has a net worth of not more than
$18,000,000 and average net income after federal income taxes, as
specified, no greater than $6,000,000. The bill would also define a
"smaller business firm" as a person that, together with its
affiliates, has a net worth of not more than $6,000,000 and average
net income after federal income taxes, as specified, no greater than
$2,000,000, and would require that at least 20% of all financing
assistance provided by a licensee shall be through the purchase of
securities of smaller business firms proposing to do business wholly
in this state.
   Existing federal law provides for licensure and regulation of
small business investment companies by the Small Business
Administration.
   This bill would provide that, if a capital access company becomes
a small business investment company, specified federal regulations
shall supersede regulatory requirements under the Corporations Code,
except as specified.
   Existing law requires, as a condition of licensure of a capital
access company, that a person who makes recommendations with respect
to the investment of funds of the company be an investment adviser,
as specified, and not be subject to specified acts and omissions,
convictions, and other legal actions.
   This bill would instead require that no controlling person of an
applicant be subject to those acts, omissions, convictions, or other
legal actions.
   This bill would also revise and recast provisions of the Capital
Access Company Law relating to conflicts of interest.
   Existing law specifies the activities a capital access company is
authorized to conduct, prohibits it from issuing redeemable
securities, and specifies limitations on the sale of its securities
and on securities it may purchase. Existing law also provides that
the Corporate Securities Law of 1968, that regulates securities
offerings in this state, applies to capital access companies.
   This bill would eliminate the latter provision.
   Existing law prohibits the transfer or assignment of a capital
access company.
   This bill would permit those transactions, if approved by the
commissioner.
   Existing state law requires a capital access company to use its
best efforts to provide financing assistance to small business firms
doing business or proposing to do business wholly or substantially in
this state, and makes related prohibitions and exceptions to
providing services to persons out of state. Existing state law also
prohibits a capital access company from providing financing
assistance to a small business firm whose primary business is
providing financing assistance. Existing federal law requires a
California capital access company to state in its organizational
documents that its activities are limited to providing financial or
managerial services to enterprises doing business, or proposing to do
business, in this state.
   This bill would eliminate those state law prohibitions.
   Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  Section 28002 of the Corporations Code is repealed.

   28002.  The provisions of the Corporate Securities Law of 1968
(Division 1 (commencing with Section 25000) of Title 4) shall apply
to licensees. 
  SEC. 2.  Section 28047 of the Corporations Code is amended to read:

   28047.  "Small business firm" means a person that  : (a)
 proposes to transact, or transacts, business on a regular
and continuous basis in California  ; (b) has fewer than 500
employees; (c) is (1) a California corporation, (2) a foreign
corporation, which is either (A) subject to Section 2115 without
regard to the filing requirement under Section 2108 or (B) not
subject to Section 2115, but by applying the three-factor test set
forth in subdivision (a) of Section 2115, has an average property
factor, payroll factor, and sales factor of not less than 25 percent
during the latest full income year, provided that the payroll factor
for the same period is at least 50 percent, and has a percentage of
outstanding voting securities held of record, as of the last record
date for a shareholder's meeting, by persons having addresses in this
state of at least 25 percent, or (3) a limited partnership, limited
liability company, or other form of business entity organized under
the laws of the State of California; (d) is not an investment company
subject to the Investment Company Act of 1940; and (e) is not a
person that either (1) has no specific business plan or purpose or
(2) has indicated that its business plan is to engage in mergers or
acquisitions with unidentified companies or other entities. 
 and, together with its affiliates, has a net worth of not more
than eighteen million dollars ($18,000,000) and average net income
after federal income taxes, excluding any carryover losses, for the
preceding two years no greater than six million dollars ($6,000,000).

  SEC. 3.  Section 28047.1 is added to the Corporations Code, to
read:
   28047.1.  "Smaller business firm" means a person that proposes to
transact, or transacts, business on a regular and continuous basis in
California and, together with its affiliates, has a net worth of not
more than six million dollars ($6,000,000), and average net income
after federal income taxes, excluding any carryover losses, for the
preceding two years no greater than two million dollars ($2,000,000).

  SEC. 4.  Section 28100 of the Corporations Code is amended to read:

   28100.  The commissioner shall administer and enforce the
provisions of this division  in a manner that facilitates the
legislative purposes set forth in Section 28004, consistent with
protection of investors  .
  SEC. 5.  Section 28111 is added to the Corporations Code, to read:
   28111.  If a licensee becomes licensed as a small business
investment company and is subject to regulation by the Small Business
Administration under the federal Small Business Investment Act of
1958, the regulations under that act shall supersede all of the
regulatory requirements under this division except those provisions
required to exempt licensees from regulation under the federal
Investment Company Act of 1940, and the provisions of Chapter 8
(commencing with Section 28550), Chapter 9 (commencing with Section
28600), Chapter 10 (commencing with Section 28650), Chapter 11
(commencing with Section 28700), Chapter 12 (commencing with Section
28800), Chapter 13 (commencing with Section 28900), and Chapter 14
(commencing with Section 28950).
  SEC. 6.  Section 28151 of the Corporations Code is repealed.

   28151.  No person other than a person who meets the definition of
a licensee may be issued a license under this division. 
  SEC. 7.  Section 28152 of the Corporations Code is amended to read:

   28152.  If the commissioner finds all of the following with
respect to an application for a license, the commissioner shall
approve the application:
   (a) That the applicant has a tangible net worth, exclusive of the
funds to invest under subdivision (b), in an amount that is not less
than two hundred fifty thousand dollars ($250,000) and that the
tangible net worth is adequate for the applicant to transact business
as a capital access company.
   (b) That the applicant has funds to invest in an amount that is
not less than five million dollars ($5,000,000).
   (c) That the applicant has, in addition to the requirements of
subdivisions (a) and (b), financial resources in an amount that is
adequate for the applicant to pay its expenses in transacting
business as a capital access company for a period of not less than
three years from the date of licensure.
   (d) That the directors, officers, and controlling persons of the
applicant are each of good character and sound financial standing,
that the directors and officers of the applicant are each competent
to perform their functions with respect to the applicant, and that
the directors and officers of the applicant are collectively adequate
to manage the business of the applicant as a capital access company.
For purposes of this subdivision, the commissioner shall accord
weight to the prior or current successful operation of a commercial
or investment enterprise.
   (e) That  any   no controlling  person
 who makes recommendations with respect to the investment of
funds of the company is an investment adviser, either registered
under the Investment Adviser Act of 1940 or licensed as an investment
adviser under the Corporate Securities Law of 1968, or exempt from
registration or licensure, and that the person is not  
of the applicant is  subject to any act or omission enumerated
in subdivision (a), (e), (f), or (g) of Section 25212, or has been
convicted of, or pled nolo contendere to, any offense or been held
liable in any civil action specified in subdivision (b) of Section
25212, or is enjoined from any act, conduct, or practice specified in
subdivision (c) of Section 25212, or is subject to any order
specified in subdivision (d) of Section 25212.
   (f) That it is reasonable to believe that the applicant, if
licensed, will comply with the provisions of Section 6(a)(5) of the
Investment Company Act of 1940, the applicable provisions of the
Corporate Securities Law of 1968, this division, and of any
regulation adopted or order issued under this division.
   If, after notice and a hearing, the commissioner finds otherwise,
the commissioner shall deny the application.
  SEC. 8.  Section 28154 of the Corporations Code is amended to read:

   28154.  No license shall be transferable or assignable 
without the approval of the commissioner  .
  SEC. 9.  Section 28200 of the Corporations Code is amended to read:

   28200.  The organizational documents of the licensee shall include
the following statement:
   (a) The activities of the licensee are limited to the promotion of
economic, business, or industrial development in the State of
California through the provision of financial or managerial
assistance primarily to small business firms and to other activities
that are incidental or necessary to carry out that purpose.
   (b) The licensee will not engage in the business of issuing
redeemable securities.
   (c) The security holders of the licensee are limited, on a
class-by-class basis, to persons who reside in the State of
California, or who have a substantial business presence in the State
of California, and who hold not less than 80 percent of the licensee'
s securities.
   (d) The securities of the licensee will be sold solely to
accredited investors (Section 28031) and the licensee will not
purchase any securities issued by an investment company as defined in
Section 3 of the Investment Company Act of 1940 or issued by any
company that would be an investment company except for the exclusions
from that definition under paragraph (1) or (7) of Section 3(a) of
that act, other than (1) any debt security that is rated investment
grade by not less than one nationally recognized statistical rating
organization or (2) any security issued by a registered open-end
investment company that is required by its investment policies to
invest not less than 65 percent of its total assets in securities
described in paragraph (1) or securities that are determined by that
registered open-end investment company to be comparable in quality to
securities described in paragraph (1).
   (e) The licensee will engage in the transaction of business
pursuant to the exemption from registration under the Investment
Company Act of 1940 afforded to economic, business, and industrial
development companies as provided for by Section 6(a)(5) of the
Investment Company Act of 1940, as amended (15 U.S.C. Sec. 80a-6(a)),
and a license pursuant to the Capital Access Company Law (Division 3
(commencing with Section 28000)).
   (f) The investment of funds by the licensee will be limited by and
subject to the provisions of Section 6(a)(5) of the Investment
Company Act of 1940  , the Corporate Securities Law of 1968,
 and the Capital Access Company Law.
  SEC. 10.  Section 28400 of the Corporations Code is amended to
read:
   28400.  No licensee shall engage in any business other than the
following:
   (a) The business of providing financing assistance through the
purchase of securities of small business firms  or smaller
business firms  doing business or proposing to do business
wholly or substantially in this state.
   (b) The business of providing managerial assistance (including
managerial and technical assistance) to small business firms  or
smaller business firms  doing business or proposing to do
business wholly or substantially in this state. 
   (c) At least 20 percent of all financing assistance provided by
the licensee shall be through purchase of securities of smaller
business firms doing business or proposing to do business wholly in
this state. 
  SEC. 11.  Section 28401 of the Corporations Code is repealed.

   28401.  Each licensee shall use its best efforts to provide
financing assistance to small business firms doing business or
proposing to do business wholly or substantially in this state.

  SEC. 12.  Section 28402 of the Corporations Code is repealed.

   28402.  (a) Except as provided in subdivision (b), no licensee
shall provide financing assistance to any person other than a small
business firm in this state.
   (b) (1) If a licensee provides financing assistance to a small
business firm in this state that is a franchisor, the licensee may
also provide financing assistance to any small business firm in
another state that is a franchisee of the franchisor.
   (2) If a licensee provides financing assistance to a small
business firm in this state that is a franchisee of a franchisor, the
licensee may also provide financing assistance to any small business
firm in another state that is a franchisee of the franchisor.

  SEC. 13.  Section 28403 of the Corporations Code is repealed.

   28403.  Except as otherwise provided in subdivision (b) of Section
28402, no licensee shall provide financing assistance or management
assistance for use primarily outside this state. 
  SEC. 14.  Section 28404 of the Corporations Code is repealed.

   28404.  (a) No licensee shall provide financing assistance to any
small business firm the primary business of which is to provide
financing assistance.
   (b) No licensee shall provide financing assistance to any small
business firm for the purpose of evading the requirements of this
division. 
  SEC. 15.  Section 28551 of the Corporations Code is amended to
read:
   28551.  The commissioner shall approve an application for approval
to acquire control of a licensee only if, after notice and a
hearing, the commissioner finds  all of the following:

    (a)     That 
 that  the applicant and the directors and officers of the
applicant  are of good character and sound financial
standing.   shall all be subject to the same conditions
required of an original applicant.  
   (b) That it is reasonable to believe that, if the applicant
acquires control of the licensee, the applicant will comply with all
applicable provisions of this division and of any regulation or order
issued under this division.  
   (c) That the applicant's plans, if any, to make any major change
in the business, corporate structure, or management of the licensee
are not detrimental to the safety and soundness of the licensee or
the accredited investors of the licensee, or to the public
convenience and advantage. 
  SEC. 16.  Article 2 (commencing with Section 28820) of Chapter 12
of Division 3 of Title 4 of the Corporations Code is repealed.
  SEC. 17.  Article 2 (commencing with Section 28820) is added to
Chapter 12 of Division 3 of Title 4 of the Corporations Code, to
read:

      Article 2.  Conflicts of Interest


   28820.  In this article, unless the context otherwise requires:
   (a) (1) "Associate," when used with respect to a licensee, means
all of the following:
   (A) Any principal shareholder, director, officer, manager, agent,
or adviser of the licensee.
   (B) Any director, officer, partner, general manager, agent,
employer, or employee of any person referred to in subparagraph (A).
   (C) Any person who controls, is controlled by, or is under common
control with, any person referred to in subparagraph (A), directly or
indirectly, through one or more intermediaries.
   (D) Any close relative of any person referred to in subparagraph
(A).
   (E) Any person of whom any person referred to in subparagraphs (A)
to (D), inclusive, is a director or officer.
   (F) Any person in whom any person referred to in subparagraphs (A)
to (D), inclusive, or any combination of persons acting in concert
owns or controls, directly or indirectly, a 10-percent or greater
equity interest.
   (2) For purposes of this subdivision, any person who is in any of
the relationships referred to in subparagraphs (A) to (F), inclusive,
of paragraph (1) within six months before or after a licensee
provides financing assistance shall be deemed to be in the
relationship as of the date when the licensee provides the financing
assistance.
   (3) For purposes of this subdivision, if a licensee, in order to
protect its interests, designates any person to serve as a director
of, officer of, or in any capacity in the management of, a small
business firm to which the licensee provides financing assistance,
the person shall not, on that account, be deemed to have any
relationship with the small business firm. However, this paragraph
shall not apply in any case where the person has, directly or
indirectly, any other financial interest in the small business firm
or where the person, at any time before the licensee provides the
financing assistance, served as a director of, officer of, or in any
other capacity in the management of, the small business firm for a
period of 30 days or more.
   (b) "Close relative" means ancestor, lineal descendant, brother or
sister and lineal descendants of either, spouse, father-in-law,
mother-in-law, son-in-law, brother-in-law, daughter-in-law, or
sister-in-law.
   28821.  (a) A licensee shall not self-deal to the prejudice of a
small business firm or smaller business firm, the licensee, its
shareholders, or partners. Unless a licensee obtains a prior written
exemption from the commissioner for special instances in which
providing financial assistance may further the purposes of this
division despite presenting a conflict of interest, a licensee shall
not directly or indirectly do any of the following:
   (1) Provide financial assistance to any of the licensee's
associates.
   (2) Provide financial assistance to an associate of another
licensee, if one of the licensee's associates has received or will
receive any direct or indirect financial assistance or a commitment
from that licensee or a third licensee, including financial
assistance or commitments received under any understanding,
agreement, or cross dealing, reciprocal or circular arrangement.
   (3) Borrow money from any of the following:
   (A) A small business firm or smaller business firm to which the
licensee has provided financial assistance.
   (B) An officer, director, or owner of at least a 10-percent equity
interest in the business.
   (C) A close relative of a person described in subparagraph (B).
   (4) Provide financial assistance to a small business firm or
smaller business firm to discharge an obligation to a licensee's
associate or to make other funds available to pay the obligation,
except if the obligation is to an associate lending institution and
is a line of credit or other obligation incurred in the normal course
of business.
   (5) Provide financial assistance to a small business firm or
smaller business firm for the purpose of purchasing property from a
licensee's associate.
   (b) Without the commissioner's prior written approval, a licensee'
s associates shall not, directly or indirectly, do either of the
following:
   (1) Borrow money from any person described in paragraph (3) of
subdivision (a).
   (2) Receive from a small business firm or smaller business firm
any compensation in connection with any financial assistance a
licensee provides or anything of value for procuring, attempting to
procure, or influencing a licensee's action with respect to that
financial assistance.
   (c) (1) Without the commissioner's prior written approval, a
licensee shall not provide financial assistance to any business in
which the licensee's associate has either a voting equity interest,
or total equity interests, including potential interests, of at least
5 percent.
   (2) If a licensee and its associate provide financial assistance
to the same small business firm or smaller business firm, whether at
the same time or different times, a licensee shall demonstrate to the
commissioner's satisfaction that the terms and conditions are, or
were, fair and equitable to the licensee, taking into account any
differences in the timing of each party's financial transactions.
   (3) Financial assistance that meets either of the following
criteria is exempt from the prior approval requirement in paragraph
(1) and shall be presumed to be fair and equitable to the licensee
for the purposes of paragraph (2):
   (A) The licensee's associate is a lending institution that is
providing financing under a credit facility in order to meet the
operational needs of a small business firm or smaller business firm,
and the terms of that financing are usual and customary.
   (B) The licensee's associate invests in the small business firm or
smaller business firm on the same terms and conditions and at the
same time as the licensee.
   (d) To protect a licensee's investment, a licensee may designate
an associate to serve as an officer, director, or other participant
in the management of a small business firm or smaller business firm.
The licensee shall identify this associate in the licensee's records
maintained and made available for the commissioner's review. Without
the commissioner's prior written approval, the associate shall not do
any of the following:
   (1) Have any other direct or indirect financial interest in the
small business firm or smaller business firm that exceeds, or has the
potential to exceed, 5 percent of the firm's equity.
   (2) Have served for more than 30 days as an officer, director, or
other participant in the management of the small business firm or
smaller business firm before the licensee provided the financial
assistance.
   (3) Receive any income or anything of value from the small
business firm or smaller business firm unless it is for the licensee'
s benefit, with the exception of director's fees, expenses, and
distributions based upon the associate's ownership interest in the
small business firm or smaller business firm.