BILL NUMBER: SB 1155 ENROLLED
BILL TEXT
PASSED THE SENATE AUGUST 19, 2010
PASSED THE ASSEMBLY AUGUST 12, 2010
AMENDED IN ASSEMBLY AUGUST 2, 2010
AMENDED IN SENATE APRIL 12, 2010
AMENDED IN SENATE MARCH 22, 2010
INTRODUCED BY Senators Dutton and Price
FEBRUARY 18, 2010
An act to amend Sections 25102, 28047, 28100, 28152, 28154, 28400,
and 28404 of, to add Sections 28047.1 and 28111 to, to repeal
Sections 28401, 28402, and 28403 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, 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
or substantially 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, and that a violation of those federal
regulations would constitute a violation of this act.
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 person with a specified
relationship or connection with the 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 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.
Existing law makes it unlawful for any person to offer or sell in
this state any security in an issuer transaction unless the sale has
been qualified or unless the security or transaction is exempt or not
subject to qualification, as specified. Under existing law, an offer
or sale of nonredeemable securities to accredited investors by a
person licensed pursuant to the Capital Access Company Law is exempt
from these qualification requirements.
This bill would maintain that exemption provided that all
purchasers either have a preexisting personal or business
relationship with the offeror, as specified, or by reason of their
business or financial experience or the business or financial
experience of their specified professional advisers could be
reasonably assumed to have the capacity to protect their own
interests in connection with the transaction. The bill would specify
that this exemption is not available under certain circumstances.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 25102 of the Corporations Code is amended to
read:
25102. The following transactions are exempted from the
provisions of Section 25110:
(a) Any offer (but not a sale) not involving any public offering
and the execution and delivery of any agreement for the sale of
securities pursuant to the offer if (1) the agreement contains
substantially the following provision: "The sale of the securities
that are the subject of this agreement has not been qualified with
the Commissioner of Corporations of the State of California and the
issuance of the securities or the payment or receipt of any part of
the consideration therefor prior to the qualification is unlawful,
unless the sale of securities is exempt from the qualification by
Section 25100, 25102, or 25105 of the California Corporations Code.
The rights of all parties to this agreement are expressly conditioned
upon the qualification being obtained, unless the sale is so exempt"
; and (2) no part of the purchase price is paid or received and none
of the securities are issued until the sale of the securities is
qualified under this law unless the sale of securities is exempt from
the qualification by this section, Section 25100, or 25105.
(b) Any offer (but not a sale) of a security for which a
registration statement has been filed under the Securities Act of
1933 but has not yet become effective, or for which an offering
statement under Regulation A has been filed but has not yet been
qualified, if no stop order or refusal order is in effect and no
public proceeding or examination looking towards an order is pending
under Section 8 of the act and no order under Section 25140 or
subdivision (a) of Section 25143 is in effect under this law.
(c) Any offer (but not a sale) and the execution and delivery of
any agreement for the sale of securities pursuant to the offer as may
be permitted by the commissioner upon application. Any negotiating
permit under this subdivision shall be conditioned to the effect that
none of the securities may be issued and none of the consideration
therefor may be received or accepted until the sale of the securities
is qualified under this law.
(d) Any transaction or agreement between the issuer and an
underwriter or among underwriters if the sale of the securities is
qualified, or exempt from qualification, at the time of distribution
thereof in this state, if any.
(e) Any offer or sale of any evidence of indebtedness, whether
secured or unsecured, and any guarantee thereof, in a transaction not
involving any public offering.
(f) Any offer or sale of any security in a transaction (other than
an offer or sale to a pension or profit-sharing trust of the issuer)
that meets each of the following criteria:
(1) Sales of the security are not made to more than 35 persons,
including persons not in this state.
(2) All purchasers either have a preexisting personal or business
relationship with the offeror or any of its partners, officers,
directors or controlling persons, or managers (as appointed or
elected by the members) if the offeror is a limited liability
company, or by reason of their business or financial experience or
the business or financial experience of their professional advisers
who are unaffiliated with and who are not compensated by the issuer
or any affiliate or selling agent of the issuer, directly or
indirectly, could be reasonably assumed to have the capacity to
protect their own interests in connection with the transaction.
(3) Each purchaser represents that the purchaser is purchasing for
the purchaser's own account (or a trust account if the purchaser is
a trustee) and not with a view to or for sale in connection with any
distribution of the security.
(4) The offer and sale of the security is not accomplished by the
publication of any advertisement. The number of purchasers referred
to above is exclusive of any described in subdivision (i), any
officer, director, or affiliate of the issuer, or manager (as
appointed or elected by the members) if the issuer is a limited
liability company, and any other purchaser who the commissioner
designates by rule. For purposes of this section, a husband and wife
(together with any custodian or trustee acting for the account of
their minor children) are counted as one person and a partnership,
corporation, or other organization that was not specifically formed
for the purpose of purchasing the security offered in reliance upon
this exemption, is counted as one person. The commissioner may by
rule require the issuer to file a notice of transactions under this
subdivision.
The failure to file the notice or the failure to file the notice
within the time specified by the rule of the commissioner shall not
affect the availability of this exemption. An issuer who fails to
file the notice as provided by rule of the commissioner shall, within
15 business days after discovery of the failure to file the notice
or after demand by the commissioner, whichever occurs first, file the
notice and pay to the commissioner a fee equal to the fee payable
had the transaction been qualified under Section 25110.
(g) Any offer or sale of conditional sale agreements, equipment
trust certificates, or certificates of interest or participation
therein or partial assignments thereof, covering the purchase of
railroad rolling stock or equipment or the purchase of motor
vehicles, aircraft, or parts thereof, in a transaction not involving
any public offering.
(h) Any offer or sale of voting common stock by a corporation
incorporated in any state if, immediately after the proposed sale and
issuance, there will be only one class of stock of the corporation
outstanding that is owned beneficially by no more than 35 persons,
provided all of the following requirements have been met:
(1) The offer and sale of the stock is not accompanied by the
publication of any advertisement, and no selling expenses have been
given, paid, or incurred in connection therewith.
(2) The consideration to be received by the issuer for the stock
to be issued consists of any of the following:
(A) Only assets (which may include cash) of an existing business
enterprise transferred to the issuer upon its initial organization,
of which all of the persons who are to receive the stock to be issued
pursuant to this exemption were owners during, and the enterprise
was operated for, a period of not less than one year immediately
preceding the proposed issuance, and the ownership of the enterprise
immediately prior to the proposed issuance was in the same
proportions as the shares of stock are to be issued.
(B) Only cash or cancellation of indebtedness for money borrowed,
or both, upon the initial organization of the issuer, provided all of
the stock is issued for the same price per share.
(C) Only cash, provided the sale is approved in writing by each of
the existing shareholders and the purchaser or purchasers are
existing shareholders.
(D) In a case where after the proposed issuance there will be only
one owner of the stock of the issuer, only any legal consideration.
(3) No promotional consideration has been given, paid, or incurred
in connection with the issuance. Promotional consideration means any
consideration paid directly or indirectly to a person who, acting
alone or in conjunction with one or more other persons, takes the
initiative in founding and organizing the business or enterprise of
an issuer for services rendered in connection with the founding or
organizing.
(4) A notice in a form prescribed by rule of the commissioner,
signed by an active member of the State Bar of California, is filed
with or mailed for filing to the commissioner not later than 10
business days after receipt of consideration for the securities by
the issuer. That notice shall contain an opinion of the member of the
State Bar of California that the exemption provided by this
subdivision is available for the offer and sale of the securities.
The failure to file the notice as required by this subdivision and
the rules of the commissioner shall not affect the availability of
this exemption. An issuer who fails to file the notice within the
time specified by this subdivision shall, within 15 business days
after discovery of the failure to file the notice or after demand by
the commissioner, whichever occurs first, file the notice and pay to
the commissioner a fee equal to the fee payable had the transaction
been qualified under Section 25110. The notice, except when filed on
behalf of a California corporation, shall be accompanied by an
irrevocable consent, in the form that the commissioner by rule
prescribes, appointing the commissioner or his or her successor in
office to be the issuer's attorney to receive service of any lawful
process in any noncriminal suit, action, or proceeding against it or
its successor that arises under this law or any rule or order
hereunder after the consent has been filed, with the same force and
validity as if served personally on the issuer. An issuer on whose
behalf a consent has been filed in connection with a previous
qualification or exemption from qualification under this law (or
application for a permit under any prior law if the application or
notice under this law states that the consent is still effective)
need not file another. Service may be made by leaving a copy of the
process in the office of the commissioner, but it is not effective
unless (A) the plaintiff, who may be the commissioner in a suit,
action, or proceeding instituted by him or her, forthwith sends
notice of the service and a copy of the process by registered or
certified mail to the defendant or respondent at its last address on
file with the commissioner, and (B) the plaintiff's affidavit of
compliance with this section is filed in the case on or before the
return day of the process, if any, or within the further time as the
court allows.
(5) Each purchaser represents that the purchaser is purchasing for
the purchaser's own account, or a trust account if the purchaser is
a trustee, and not with a view to or for sale in connection with any
distribution of the stock.
For the purposes of this subdivision, all securities held by a
husband and wife, whether or not jointly, shall be considered to be
owned by one person, and all securities held by a corporation that
has issued stock pursuant to this exemption shall be considered to be
held by the shareholders to whom it has issued the stock.
All stock issued by a corporation pursuant to this subdivision as
it existed prior to the effective date of the amendments to this
section made during the 1996 portion of the 1995-96 Regular Session
that required the issuer to have stamped or printed prominently on
the face of the stock certificate a legend in a form prescribed by
rule of the commissioner restricting transfer of the stock in a
manner provided for by that rule shall not be subject to the transfer
restriction legend requirement and, by operation of law, the
corporation is authorized to remove that transfer restriction legend
from the certificates of those shares of stock issued by the
corporation pursuant to this subdivision as it existed prior to the
effective date of the amendments to this section made during the 1996
portion of the 1995-96 Regular Session.
(i) Any offer or sale (1) to a bank, savings and loan association,
trust company, insurance company, investment company registered
under the Investment Company Act of 1940, pension or profit-sharing
trust (other than a pension or profit-sharing trust of the issuer, a
self-employed individual retirement plan, or individual retirement
account), or other institutional investor or governmental agency or
instrumentality that the commissioner may designate by rule, whether
the purchaser is acting for itself or as trustee, or (2) to any
corporation with outstanding securities registered under Section 12
of the Securities Exchange Act of 1934 or any wholly owned subsidiary
of the corporation that after the offer and sale will own directly
or indirectly 100 percent of the outstanding capital stock of the
issuer, provided the purchaser represents that it is purchasing for
its own account (or for the trust account) for investment and not
with a view to or for sale in connection with any distribution of the
security.
(j) Any offer or sale of any certificate of interest or
participation in an oil or gas title or lease (including subsurface
gas storage and payments out of production) if either of the
following apply:
(1) All of the purchasers meet one of the following requirements:
(A) Are and have been during the preceding two years engaged
primarily in the business of drilling for, producing, or refining oil
or gas (or whose corporate predecessor, in the case of a
corporation, has been so engaged).
(B) Are persons described in paragraph (1) of subdivision (i).
(C) Have been found by the commissioner upon written application
to be substantially engaged in the business of drilling for,
producing, or refining oil or gas so as not to require the protection
provided by this law (which finding shall be effective until
rescinded).
(2) The security is concurrently hypothecated to a bank in the
ordinary course of business to secure a loan made by the bank,
provided that each purchaser represents that it is purchasing for its
own account for investment and not with a view to or for sale in
connection with any distribution of the security.
(k) Any offer or sale of any security under, or pursuant to, a
plan of reorganization under Chapter 11 of the federal bankruptcy law
that has been confirmed or is subject to confirmation by the decree
or order of a court of competent jurisdiction.
( l ) Any offer or sale of an option, warrant, put,
call, or straddle, and any guarantee of any of these securities, by a
person who is not the issuer of the security subject to the right,
if the transaction, had it involved an offer or sale of the security
subject to the right by the person, would not have violated Section
25110 or 25130.
(m) Any offer or sale of a stock to a pension, profit-sharing,
stock bonus, or employee stock ownership plan, provided that (1) the
plan meets the requirements for qualification under Section 401 of
the Internal Revenue Code, and (2) the employees are not required or
permitted individually to make any contributions to the plan. The
exemption provided by this subdivision shall not be affected by
whether the stock is contributed to the plan, purchased from the
issuer with contributions by the issuer or an affiliate of the
issuer, or purchased from the issuer with funds borrowed from the
issuer, an affiliate of the issuer, or any other lender.
(n) Any offer or sale of any security in a transaction, other than
an offer or sale of a security in a rollup transaction, that meets
all of the following criteria:
(1) The issuer is (A) a California corporation or foreign
corporation that, at the time of the filing of the notice required
under this subdivision, is subject to Section 2115, or (B) any other
form of business entity, including without limitation a partnership
or trust organized under the laws of this state. The exemption
provided by this subdivision is not available to a "blind pool"
issuer, as that term is defined by the commissioner, or to an
investment company subject to the Investment Company Act of 1940.
(2) Sales of securities are made only to qualified purchasers or
other persons the issuer reasonably believes, after reasonable
inquiry, to be qualified purchasers. A corporation, partnership, or
other organization specifically formed for the purpose of acquiring
the securities offered by the issuer in reliance upon this exemption
may be a qualified purchaser if each of the equity owners of the
corporation, partnership, or other organization is a qualified
purchaser. Qualified purchasers include the following:
(A) A person designated in Section 260.102.13 of Title 10 of the
California Code of Regulations.
(B) A person designated in subdivision (i) or any rule of the
commissioner adopted thereunder.
(C) A pension or profit-sharing trust of the issuer, a
self-employed individual retirement plan, or an individual retirement
account, if the investment decisions made on behalf of the trust,
plan, or account are made solely by persons who are qualified
purchasers.
(D) An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, each with total assets in excess of five million
dollars ($5,000,000) according to its most recent audited financial
statements.
(E) With respect to the offer and sale of one class of voting
common stock of an issuer or of preferred stock of an issuer
entitling the holder thereof to at least the same voting rights as
the issuer's one class of voting common stock, provided that the
issuer has only one-class voting common stock outstanding upon
consummation of the offer and sale, a natural person who, either
individually or jointly with the person's spouse, (i) has a minimum
net worth of two hundred fifty thousand dollars ($250,000) and had,
during the immediately preceding tax year, gross income in excess of
one hundred thousand dollars ($100,000) and reasonably expects gross
income in excess of one hundred thousand dollars ($100,000) during
the current tax year or (ii) has a minimum net worth of five hundred
thousand dollars ($500,000). "Net worth" shall be determined
exclusive of home, home furnishings, and automobiles. Other assets
included in the computation of net worth may be valued at fair market
value.
Each natural person specified above, by reason of his or her
business or financial experience, or the business or financial
experience of his or her professional adviser, who is unaffiliated
with and who is not compensated, directly or indirectly, by the
issuer or any affiliate or selling agent of the issuer, can be
reasonably assumed to have the capacity to protect his or her
interests in connection with the transaction. The amount of the
investment of each natural person shall not exceed 10 percent of the
net worth, as determined by this subparagraph, of that natural
person.
(F) Any other purchaser designated as qualified by rule of the
commissioner.
(3) Each purchaser represents that the purchaser is purchasing for
the purchaser's own account (or trust account, if the purchaser is a
trustee) and not with a view to or for sale in connection with a
distribution of the security.
(4) Each natural person purchaser, including a corporation,
partnership, or other organization specifically formed by natural
persons for the purpose of acquiring the securities offered by the
issuer, receives, at least five business days before securities are
sold to, or a commitment to purchase is accepted from, the purchaser,
a written offering disclosure statement that shall meet the
disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.),
and any other information as may be prescribed by rule of the
commissioner, provided that the issuer shall not be obligated
pursuant to this paragraph to provide this disclosure statement to a
natural person qualified under Section 260.102.13 of Title 10 of the
California Code of Regulations. The offer or sale of securities
pursuant to a disclosure statement required by this paragraph that is
in violation of Section 25401, or that fails to meet the disclosure
requirements of Regulation D (17 C.F.R. 230.501 et seq.), shall not
render unavailable to the issuer the claim of an exemption from
Section 25110 afforded by this subdivision. This paragraph does not
impose, directly or indirectly, any additional disclosure obligation
with respect to any other exemption from qualification available
under any other provision of this section.
(5) (A) A general announcement of proposed offering may be
published by written document only, provided that the general
announcement of proposed offering sets forth the following required
information:
(i) The name of the issuer of the securities.
(ii) The full title of the security to be issued.
(iii) The anticipated suitability standards for prospective
purchasers.
(iv) A statement that (I) no money or other consideration is being
solicited or will be accepted, (II) an indication of interest made
by a prospective purchaser involves no obligation or commitment of
any kind, and, if the issuer is required by paragraph (4) to deliver
a disclosure statement to prospective purchasers, (III) no sales will
be made or commitment to purchase accepted until five business days
after delivery of a disclosure statement and subscription information
to the prospective purchaser in accordance with the requirements of
this subdivision.
(v) Any other information required by rule of the commissioner.
(vi) The following legend: "For more complete information about
(Name of Issuer) and (Full Title of Security), send for additional
information from (Name and Address) by sending this coupon or calling
(Telephone Number)."
(B) The general announcement of proposed offering referred to in
subparagraph (A) may also set forth the following information:
(i) A brief description of the business of the issuer.
(ii) The geographic location of the issuer and its business.
(iii) The price of the security to be issued, or, if the price is
not known, the method of its determination or the probable price
range as specified by the issuer, and the aggregate offering price.
(C) The general announcement of proposed offering shall contain
only the information that is set forth in this paragraph.
(D) Dissemination of the general announcement of proposed offering
to persons who are not qualified purchasers, without more, shall not
disqualify the issuer from claiming the exemption under this
subdivision.
(6) No telephone solicitation shall be permitted until the issuer
has determined that the prospective purchaser to be solicited is a
qualified purchaser.
(7) The issuer files a notice of transaction under this
subdivision both (A) concurrent with the publication of a general
announcement of proposed offering or at the time of the initial offer
of the securities, whichever occurs first, accompanied by a filing
fee, and (B) within 10 business days following the close or
abandonment of the offering, but in no case more than 210 days from
the date of filing the first notice. The first notice of transaction
under subparagraph (A) shall contain an undertaking, in a form
acceptable to the commissioner, to deliver any disclosure statement
required by paragraph (4) to be delivered to prospective purchasers,
and any supplement thereto, to the commissioner within 10 days of the
commissioner's request for the information. The exemption from
qualification afforded by this subdivision is unavailable if an
issuer fails to file the first notice required under subparagraph (A)
or to pay the filing fee. The commissioner has the authority to
assess an administrative penalty of up to one thousand dollars
($1,000) against an issuer that fails to deliver the disclosure
statement required to be delivered to the commissioner upon the
commissioner's request within the time period set forth above.
Neither the filing of the disclosure statement nor the failure by the
commissioner to comment thereon precludes the commissioner from
taking any action deemed necessary or appropriate under this division
with respect to the offer and sale of the securities.
(o) An offer or sale of any security issued by a corporation or
limited liability company pursuant to a purchase plan or agreement,
or issued pursuant to an option plan or agreement, where the security
at the time of issuance or grant is exempt from registration under
the Securities Act of 1933, as amended, pursuant to Rule 701 adopted
pursuant to that act (17 C.F.R. 230.701), the provisions of which are
hereby incorporated by reference into this section, provided that
(1) the terms of any purchase plan or agreement shall comply with
Sections 260.140.42, 260.140.45, and 260.140.46 of Title 10 of the
California Code of Regulations, (2) the terms of any option plan or
agreement shall comply with Sections 260.140.41, 260.140.45, and
260.140.46 of Title 10 of the California Code of Regulations, and (3)
the issuer files a notice of transaction in accordance with rules
adopted by the commissioner no later than 30 days after the initial
issuance of any security under that plan, accompanied by a filing fee
as prescribed by subdivision (y) of Section 25608. The failure to
file the notice of transaction within the time specified in this
subdivision shall not affect the availability of this exemption. An
issuer that fails to file the notice shall, within 15 business days
after discovery of the failure to file the notice or after demand by
the commissioner, whichever occurs first, file the notice and pay the
commissioner a fee equal to the maximum aggregate fee payable had
the transaction been qualified under Section 25110.
Offers and sales exempt pursuant to this subdivision shall be
deemed to be part of a single, discrete offering and are not subject
to integration with any other offering or sale, whether qualified
under Chapter 2 (commencing with Section 25110), or otherwise exempt,
or not subject to qualification.
(p) An offer or sale of nonredeemable securities to accredited
investors (Section 28031) by a person licensed under the Capital
Access Company Law (Division 3 (commencing with Section 28000) of
Title 4), provided that all purchasers either (1) have a preexisting
personal or business relationship with the offeror or any of its
partners, officers, directors, controlling persons, or managers (as
appointed or elected by the members), or (2) by reason of their
business or financial experience or the business or financial
experience of their professional advisers who are unaffiliated with
and who are not compensated by the issuer or any affiliate or selling
agent of the issuer, directly or indirectly, could be reasonably
assumed to have the capacity to protect their own interests in
connection with the transaction. All nonredeemable securities shall
be evidenced by certificates that shall have stamped or printed
prominently on their face a legend in a form to be prescribed by rule
or order of the commissioner restricting transfer of the securities
in the manner as the rule or order provides. The exemption under this
subdivision shall not be available for any offering that is exempt
or asserted to be exempt pursuant to Section 3(a)(11) of the
Securities Act of 1933 (15 U.S.C. Sec. 77c(a)(11)) or Rule 147 (17
C.F.R. Sec. 230.147) thereunder or otherwise is conducted by means of
any form of general solicitation or general
advertising.
(q) Any offer or sale of any viatical or life settlement contract
or fractionalized or pooled interest therein in a transaction that
meets all of the following criteria:
(1) Sales of securities described in this subdivision are made
only to qualified purchasers or other persons the issuer reasonably
believes, after reasonable inquiry, to be qualified purchasers. A
corporation, partnership, or other organization specifically formed
for the purpose of acquiring the securities offered by the issuer in
reliance upon this exemption may be a qualified purchaser only if
each of the equity owners of the corporation, partnership, or other
organization is a qualified purchaser. Qualified purchasers include
the following:
(A) A person designated in Section 260.102.13 of Title 10 of the
California Code of Regulations.
(B) A person designated in subdivision (i) or any rule of the
commissioner adopted thereunder.
(C) A pension or profit-sharing trust of the issuer, a
self-employed individual retirement plan, or an individual retirement
account, if the investment decisions made on behalf of the trust,
plan, or account are made solely by persons who are qualified
purchasers.
(D) An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, each with total assets in excess of five million
dollars ($5,000,000) according to its most recent audited financial
statements.
(E) A natural person who, either individually or jointly with the
person's spouse, (i) has a minimum net worth of one hundred fifty
thousand dollars ($150,000) and had, during the immediately preceding
tax year, gross income in excess of one hundred thousand dollars
($100,000) and reasonably expects gross income in excess of one
hundred thousand dollars ($100,000) during the current tax year or
(ii) has a minimum net worth of two hundred fifty thousand dollars
($250,000). "Net worth" shall be determined exclusive of home, home
furnishings, and automobiles. Other assets included in the
computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her
business or financial experience, or the business or financial
experience of his or her professional adviser, who is unaffiliated
with and who is not compensated, directly or indirectly, by the
issuer or any affiliate or selling agent of the issuer, can be
reasonably assumed to have the capacity to protect his or her
interests in connection with the transaction.
The amount of the investment of each natural person shall not
exceed 10 percent of the net worth, as determined by this
subdivision, of that natural person.
(F) Any other purchaser designated as qualified by rule of the
commissioner.
(2) Each purchaser represents that the purchaser is purchasing for
the purchaser's own account (or trust account, if the purchaser is a
trustee) and not with a view to or for sale in connection with a
distribution of the security.
(3) Each natural person purchaser, including a corporation,
partnership, or other organization specifically formed by natural
persons for the purpose of acquiring the securities offered by the
issuer, receives, at least five business days before securities
described in this subdivision are sold to, or a commitment to
purchase is accepted from, the purchaser, the following information
in writing:
(A) The name, principal business and mailing address, and
telephone number of the issuer.
(B) The suitability standards for prospective purchasers as set
forth in paragraph (1) of this subdivision.
(C) A description of the issuer's type of business organization
and the state in which the issuer is organized or incorporated.
(D) A brief description of the business of the issuer.
(E) If the issuer retains ownership or becomes the beneficiary of
the insurance policy, an audit report of an independent certified
public accountant together with a balance sheet and related
statements of income, retained earnings, and cashflows that reflect
the issuer's financial position, the results of the issuer's
operations, and the issuer's cashflows as of a date within 15 months
before the date of the initial issuance of the securities described
in this subdivision. The financial statements listed in this
subparagraph shall be prepared in conformity with generally accepted
accounting principles. If the date of the audit report is more than
120 days before the date of the initial issuance of the securities
described in this subdivision, the issuer shall provide unaudited
interim financial statements.
(F) The names of all directors, officers, partners, members, or
trustees of the issuer.
(G) A description of any order, judgment, or decree that is final
as to the issuing entity of any state, federal, or foreign country
governmental agency or administrator, or of any state, federal or
foreign country court of competent jurisdiction (i) revoking,
suspending, denying, or censuring for cause any license, permit, or
other authority of the issuer or of any director, officer, partner,
member, trustee, or person owning or controlling, directly or
indirectly, 10 percent or more of the outstanding interest or equity
securities of the issuer, to engage in the securities, commodities,
franchise, insurance, real estate, or lending business or in the
offer or sale of securities, commodities, franchises, insurance, real
estate, or loans, (ii) permanently restraining, enjoining, barring,
suspending, or censuring any such person from engaging in or
continuing any conduct, practice, or employment in connection with
the offer or sale of securities, commodities, franchises, insurance,
real estate, or loans, (iii) convicting any such person of, or
pleading nolo contendere by any such person to, any felony or
misdemeanor involving a security, commodity, franchise, insurance,
real estate, or loan, or any aspect of the securities, commodities,
franchise, insurance, real estate, or lending business, or involving
dishonesty, fraud, deceit, embezzlement, fraudulent conversion, or
misappropriation of property, or (iv) holding any such person liable
in a civil action involving breach of a fiduciary duty, fraud,
deceit, embezzlement, fraudulent conversion, or misappropriation of
property. This subparagraph does not apply to any order, judgment, or
decree that has been vacated, overturned, or is more than 10 years
old.
(H) Notice of the purchaser's right to rescind or cancel the
investment and receive a refund pursuant to Section 25508.5.
(I) The name, address, and telephone number of the issuing
insurance company, and the name, address, and telephone number of the
state or foreign country regulator of the insurance company.
(J) The total face value of the insurance policy and the
percentage of the insurance policy the purchaser will own.
(K) The insurance policy number, issue date, and type.
(L) If a group insurance policy, the name, address, and telephone
number of the group, and, if applicable, the material terms and
conditions of converting the policy to an individual policy,
including the amount of increased premiums.
(M) If a term insurance policy, the term and the name, address,
and telephone number of the person who will be responsible for
renewing the policy if necessary.
(N) That the insurance policy is beyond the state statute for
contestability and the reason therefor.
(O) The insurance policy premiums and terms of premium payments.
(P) The amount of the purchaser's moneys that will be set aside to
pay premiums.
(Q) The name, address, and telephone number of the person who will
be the insurance policy owner and the person who will be responsible
for paying premiums.
(R) The date on which the purchaser will be required to pay
premiums and the amount of the premium, if known.
(S) A statement to the effect that any projected rate of return to
the purchaser from the purchase of a viatical or life settlement
contract or a fractionalized or pooled interest therein is based on
an estimated life expectancy for the person insured under the life
insurance policy; that the return on the purchase may vary
substantially from the expected rate of return based upon the actual
life expectancy of the insured that may be less than, equal to, or
may greatly exceed the estimated life expectancy; and that the rate
of return would be higher if the actual life expectancy were less
than, and lower if the actual life expectancy were greater than the
estimated life expectancy of the insured at the time the viatical or
life settlement contract was closed.
(T) A statement that the purchaser should consult with his or her
tax adviser regarding the tax consequences of the purchase of the
viatical or life settlement contract or fractionalized or pooled
interest therein and, if the purchaser is using retirement funds or
accounts for that purchase, whether or not any adverse tax
consequences might result from the use of those funds for the
purchase of that investment.
(U) Any other information as may be prescribed by rule of the
commissioner.
SEC. 2. Section 28047 of the Corporations Code is amended to read:
28047. "Small 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 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. (a) 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 commissioner may by rule or order provide that a licensee
in compliance with those federal regulations shall be deemed to be in
compliance with 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).
(b) A violation by a licensee of any regulation promulgated by the
Small Business Administration that the commissioner has by rule or
order deemed to be consistent with the regulatory requirements under
this division shall constitute a violation of this division. The
commissioner shall have all of the powers granted in this division to
enforce those federal regulations against a licensee.
SEC. 6. 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 none of the following persons are 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:
(1) A person who is or will be a controlling person of the
applicant.
(2) A person who makes or will make recommendations with respect
to the investment of funds of the applicant.
(3) A person who is or will be a partner, principal executive
officer, manager, or director of the applicant.
(4) A person who occupies or will occupy a similar status or who
performs or will perform similar functions to those listed above in
paragraphs (1) to (3), inclusive.
(5) An employee who materially aids or assists or will materially
aid or assist in the applicant's investment-related functions.
(6) A broker-dealer or agent who materially aids or assists or
will materially aid or assist in the sale or distribution of any
securities of the applicant.
(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. 7. Section 28154 of the Corporations Code is amended to read:
28154. Except pursuant to Section 28551, no license shall be
transferable or assignable.
SEC. 8. 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 or
substantially in this state.
SEC. 9. Section 28401 of the Corporations Code is repealed.
SEC. 10. Section 28402 of the Corporations Code is repealed.
SEC. 11. Section 28403 of the Corporations Code is repealed.
SEC. 12. Section 28404 of the Corporations Code is amended to
read:
28404. No licensee shall provide financing assistance to any
small business firm for the purpose of evading the requirements of
this division.
SEC. 13. Article 2 (commencing with Section 28820) of Chapter 12
of Division 3 of Title 4 of the Corporations Code is repealed.
SEC. 14. 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 provide financial or managerial
assistance to, or for the benefit of, any person to the detriment 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.