BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 1155|
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THIRD READING
Bill No: SB 1155
Author: Dutton (R) and Price (D)
Amended: 4/12/10
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 11-0, 4/7/10
AYES: Calderon, Cogdill, Correa, Cox, Florez, Kehoe, Liu,
Lowenthal, Padilla, Price, Runner
NO VOTE RECORDED: Vacancy
SENATE APPROPRIATIONS COMMITTEE : 9-0, 4/26/10
AYES: Kehoe, Cox, Alquist, Corbett, Denham, Leno, Price,
Wolk, Yee
NO VOTE RECORDED: Walters, Wyland
SUBJECT : Capital access companies
SOURCE : Author
DIGEST : This bill amends the Capital Access Company Law,
by changing the definition of a small business and adding a
definition for a smaller business, exempting Capital Access
Companies from the Corporate Securities Law of 1968,
exempting businesses from the Capital Access Company Law,
if they are approved as Small Business Investment Companies
by the federal Small Business Administration, replacing
existing law conflict of interest provisions with conflict
of interest provisions utilized by the federal Small
Business Administration for its licensees, and making
related changes, as specified.
CONTINUED
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ANALYSIS :
Existing federal law
1. Provides for Investment Company Act of 1940, which
requires investment companies with more than 100
shareholders to register with, and be regulated by, the
Securities and Exchange Commission (SEC).
2. Authorizes exemptions from the Investment Company Act of
1940, pursuant to changes added to that law by the
National Securities Markets Improvement Act of 1996.
Under Section 6(a)(5)(A) of the Investment Company Act,
an exemption is provided for "any company that is not
engaged in the business of issuing redeemable
securities, the operations of which are subject to
regulation by the State in which the company is
organized under a statute governing entities that
provide financial or managerial assistance to
enterprises doing business, or proposing to do business,
in that State." To be eligible for an exemption, the
company must also meet the following requirements:
A. The organizational documents must state that the
activities of the company are limited to the
promotion of economic, business, or industrial
development in the state through the provision of
financial or managerial assistance to enterprises
doing business or proposing to do business in that
state.
B. Immediately following each sale of securities of
the company, at least 80 percent of the securities
must be held by persons who reside in or who have a
substantial business presence in that state.
C. The securities must be sold only to accredited
investors, as that term is defined under the
Securities Act of 1933, or to other persons
approved by the SEC.
D. The company must comply with specified criteria
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intended to ensure that it invests its funds in a
relatively safe manner.
Existing law
1. Provides for the Capital Access Company (CAC) Law, which
is administered by the Department of Corporations (DOC),
and was formed for the express purpose of allowing
companies to operate in California under the exemption
described in Existing federal law number 2 above. Under
the CAC Law (Corporations Code Section 28000 et seq.):
A. A company seeking to become a CAC must submit an
application to DOC, and must be approved by DOC
before it may sell securities under the exemption
granted to specified companies under the Investment
Company Act of 1940.
B. A small business firm is defined as one that
proposes to transact, or transacts business on a
regular and continuous basis in California, has
fewer than 500 employees, and meets other
conditions, as specified.
C. A CAC is required 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.
D. CACs must comply with the Corporate Securities
Law of 1968, which authorizes the Commissioner of
Corporations to regulate securities offerings in
California.
E. CACs may not transfer or assign their licenses
to other entities.
F. CACs must comply with specified conflict of
interest provisions.
2. Exempts CACs from the requirement to obtain a permit
from DOC before selling non-redeemable securities
(Corporations Code Section 25102(p)), as long as the
securities are sold to accredited investors, as
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specified.
This bill amends the CAC Law as follows:
1. Redefines a "small business firm" as one that proposes
to transact, or transacts, business on a regular and
continuous basis in California and which, together with
its affiliates, has a net worth of not more than $18
million and average net income after federal income
taxes, and excluding any carryover losses, of no greater
than $6 million during the preceding two years.
2. Adds a definition for a "smaller business firm," defined
as one 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 $6 million and average net income, after
federal income taxes, and excluding any carryover
losses, of no greater than $2 million during the
preceding two years.
3. Exempts a business licensed under the CAC Law from the
Corporate Securities Law of 1968.
4. Provides that any person licensed under the CAC Law is
exempt from specified portions of that law, if it
becomes licensed as a Small Business Investment Company
subject to regulation by the Small Business
Administration. Generally speaking, businesses that
qualify for this exemption would still be subject to the
portions of the CAC Law that relate to acquisition of
control and to enforcement.
5. Requires at least 20 percent of the financing assistance
provided by each licensee under the CAC Law to be
provided through the purchase of securities of "smaller
business firms," as defined.
6. Authorizes the transfer or assignment of a CAC license,
subject to approval by the Commissioner.
7. Replaces the provisions of existing law intended to
prohibit conflicts of interest by CACs with conflict of
interest rules applied by the Small Business
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Administration to its licensees.
8. Allows for an offer or sale of nonredeemable securities
by a person licensed under the CAC law to accredited
investors 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.
9. Repeals code sections believed to be duplicative and/or
unnecessary.
Background
The logic behind the existing CAC Law is that small
businesses can better attract seed capital, if they can
approach a large number of investors. If a small business
is reliant on 100 or fewer investors for its capital needs,
it is likely to be harder to raise needed capital than if
that same business could seek out 1,000 investors. The
more investors a business can solicit the smaller amount
the business needs to request from each investor. Yet,
under existing law, a business that seeks out more than 100
investors must register with the SEC, a process that is
prohibitively expensive for most start-ups, especially for
small firms. Exemptions from the Investment Company Act of
1940 were created out of recognition that SEC registration
requirements could pose an insurmountable barrier to small
businesses.
The CAC Law was enacted in 1999, in an effort to utilize
one of the exemptions from the Investment Company Act of
1940, and provide a source of capital to small businesses.
However, to date, only one company has applied for
permission to become a CAC, and that company ultimately
withdrew its application. This bill is an attempt to take
a law that has been unused since its enactment and
encourage its usage.
No other states offer models that can be used by California
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when considering amendments to our law; according to the
primary proponent of this bill, no other states have
enacted laws similar to the CAC law.
Accredited Investors . Both existing law and this bill
limit CACs to soliciting investments from accredited
investors, a term which is defined in federal regulations.
Under Rule 501 of federal SEC Regulation D, the definition
of an accredited investor encompasses a number of entities,
including large, sophisticated firms, such as depository
institutions, trusts with assets in excess of $5 million,
certain large pension funds, and other large entities.
However, the definition also includes two classes of
individuals who may be less sophisticated. For example, an
accredited investor is also: (1) any natural person whose
individual net worth, or joint net worth with that person's
spouse, at the time of his securities purchase, exceeds $1
million (inclusive of homes, home furnishings, and
automobiles); and (2) any natural person with an individual
income in excess of $200,000 in each of the two most recent
years, or joint income with that person's spouse in excess
of $300,000 in each of those years, together with a
reasonable expectation of reaching the same income level in
the current year.
Because these two latter classes of individuals can include
senior citizens whose homes have appreciated in value since
their purchase, as well as small business owners who may
lack investment savvy, California has traditionally been
cautious in granting businesses broad flexibility to market
and sell securities to accredited investors. Many of the
amendments being offered by the author in Committee today
reflect an effort to ensure that CACs do not engage in
predatory marketing or other anti-consumer behavior.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee analysis:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12
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2012-13 Fund
Application process --unknown, likely less than
$100--
Special*
potentially offset by fee revenue
Audits --unknown,
paid by licensees-- Special*
*Corporations Fund
SUPPORT : (Verified 4/26/10)
California Black Chamber of Commerce Foundation
CONNECT
Lee Petillon, Petillon, Hiraide, Loomis, Zagzebski &
Zagzebski, LLP
The Optimize Group
Torrance Chamber of Commerce
ARGUMENTS IN SUPPORT : According to the author's office,
"The lack of access to early-stage capital for start-up
companies, and small, women, and minority-owned businesses
in particular, has been well documented. With national
credit markets reeling and California's economy mired in a
recession, capital investments are even harder to secure.
Capital Access Companies would help ease this credit crunch
by drawing in accredited investors through the
establishment of publicly-held venture funds aimed at
filling the gap between seed capital from friends and
family ($500,000) and venture capital funding ($5
million)."
JJA:do 4/28/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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