BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1155
                                                                  Page  1

          Date of Hearing:   June 21, 2010

                                   Mike Eng, Chair
                    SB 1155 (Dutton) - As Amended:  April 12, 2010

           SENATE VOTE  :   34-0
          SUBJECT  :   Capital access companies

           SUMMARY  :   Makes changes to the Capital Access Company (CAC)  
          Law.  Specifically,  this bill  :   

          1)Changes the definition of a small business and adding a  
            definition for a smaller business, exempting CACs from the  
            Corporate Securities Law of 1968. 

          2)Exempts businesses from the CAC Law, if they are approved as  
            Small Business Investment Companies by the federal Small  
            Business Administration,

          3)Replaces 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.  

           EXISTING 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  


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            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 intended  
               to ensure that it invests its funds in a relatively safe  

          3)Provides for the 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  

             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  

             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  


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             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  

             f)   CACs must comply with specified conflict of interest  

          4)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 specified.   

           FISCAL EFFECT  :   According to the Senate Appropriations  
          Committee, costs will be offset by licensing fee revenue.

           COMMENTS  :   

          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.


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          No other states offer models that can be used by California 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.


          California Black Chamber of Commerce Foundation
          Petillon Hiraide Loomis Zagzebski & Zagzebski LLP
          The Optimize Group
          None on file.

           Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081