BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair


          SB 978 (Vargas) - Securities Transactions.
          
          Amended: May 15, 2012           Policy Vote: BF&I 6-0, BP&ED 8-0
          Urgency: No                     Mandate: No
          Hearing Date: May 24, 2012      Consultant: Maureen Ortiz
          
          SUSPENSE FILE.  AS PROPOSED TO BE AMENDED.
          
          
          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 the 
          need for 2 PYs to conduct regulatory examinations at a cost of 
          approximately $250,000.  These costs would be reimbursable under 
          Corporations Code Sec 25608(r).

          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 applicable to hard money lending, 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 any issuer that claims a securities 
               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.

             2)   Requires any issuer that claims a securities 
               qualification exemption, and that is principally engaged in 








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               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.

             3)   Requires the DOC to report annually on its Internet Web 
               site a summary of data collected from persons to which it 
               issues securities permits.

             4)   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.

             5)   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 
          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.

          Author's Amendments:  Proposed author's amendments make 
          technical and clarifying changes.









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