BILL ANALYSIS                                                                                                                                                                                                    


          |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.  


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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  

             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  

             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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          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  

          9. Repeals code sections believed to be duplicative and/or  


           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  

          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  
                                 potentially offset by fee revenue

          Audits                                       --unknown,  
          paid by licensees--                               Special*

          *Corporations Fund

           SUPPORT  :   (Verified  4/26/10)

          California Black Chamber of Commerce Foundation
          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  

          JJA:do 4/28/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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