BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 978 (Vargas) - Securities Transactions.
Amended: April 19, 2012 Policy Vote: BF&I 6-0, BP&ED 8-0
Urgency: No Mandate: No
Hearing Date: May 7, 2012 Consultant: Maureen Ortiz
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 978 increases real estate investor protections
and requires the Department of Corporations (DOC) to focus
greater regulatory scrutiny on, and provide greater transparency
regarding the activities of, those who solicit investors in
connection with real estate investments.
Fiscal Impact: The Department of Corporations anticipates costs
of between $250,000 and $600,000 annually (Special Fund) as
follows:
2 PYs for administration, form development, rule-making and
reporting.
2-4 PYs for exam functions, likely reimbursable.
Background: Following investigative news reports in June 2011
relating to hard money fraud in Nevada County, the Senate
Banking and Financial Institutions and the Business,
Professions, and Economic Development Committees held a joint
informational hearing to investigate issues relating to items
such as a) the definition of "hard money" lending, b) the extent
of current regulations, c) whether existing regulatory functions
ensure adequate consumer protections, d) if the existing
regulatory structure allows the industry too much control over
whether it is regulated and by whom, and e) if any changes to
state law are necessary.
Proposed Law: SB 978 does the following:
1) Requires persons who engage in certain types of
transactions that are exempt from securities qualification
requirements to file a notice of transactions with the
Department of Corporations.
2) Requires any issuer that claims a securities
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qualification exemption for the offer or sale of securities
involving real property to provide additional information
regarding the nature of their proposed offering to DOC on a
form prescribed by the commissioner.
3) Requires any issuer that claims a securities
qualification exemption, and that is principally engaged in
the business of purchasing, selling, financing, or
brokering real estate to make reasonable efforts to ensure
all of the following: a) that all persons to whom
securities are sold can be reasonably assumed to have the
capacity to understand the fundamental aspects of the
investment by reason of their education, business, or
financial experience; b) that all persons to whom
securities are sold can bear the economic risk of the
investment; and c) that the investment in the security is
suitable and appropriate for each purchaser.
4) Requires the DOC to report annually on its Internet Web
site a summary of data collected from persons to which it
issues securities permits.
5) Authorizes the DOC to examine those persons to which it
issues permits, to review compliance with the conditions of
the permits and applicable state laws, and to disqualify an
offering permitted.
6) Adds specified requirements to the Real Estate Law
including requiring that every real estate broker that
solicits investors for privately-funded loans make every
reasonable effort to ensure that the persons to whom
securities are sold can be reasonably assumed to have the
capacity to understand the fundamental aspects of the
investment, can bear the economic risk, and that the
investment is appropriate for each purchaser.
Staff Comments: SB 978 will implement a series of
recommendations stemming from a joint informational hearing held
by the Senate Banking and Financial Institutions Committee and
the Senate Business, Professions and Economic Development
Committee on Hard Money Lending in January 2012. These changes
will increase real estate investor protections, and require the
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Department of Corporations to focus greater regulatory scrutiny
on, and provide greater transparency regarding, the activities
of those who solicit investors in connection with real estate
investments.