BILL ANALYSIS Ó
AB 667
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Date of Hearing: April 20, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 667
Wagner - As Amended April 6, 2015
SUBJECT: Broker-dealers: finders
SUMMARY: Creates an exemption for "finders" under the Corporate
Securities Law of 1968. Specifically, this bill:
1)Defines a "finder" as an individual who introduces or refers
one or more accredited investors to an issuer or an issuer to
one or more accredited investors, solely for the purpose of a
potential sale of securities of the issuer.
2)Prohibits a "finder" from:
a) Providing services to an issuer for a transaction or a
series of related transactions for the offer or sale of
securities exceeding a securities purchase price of
$15,000,000 in the aggregate;
b) Negotiating any of the terms of the securities
transaction;
c) Advising any party to the securities transaction
regarding the value of the securities or the advisability
of investing in, purchasing, or selling the securities;
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d) Conducting any due diligence on the part of any party to
the transaction;
e) Selling or offering to sell in connection with the
issuer transaction any securities of the issuer that are
owned, directly or indirectly, by the finder;
f) Receiving directly or indirectly, possession or custody
of any funds in connection with the issuer transaction;
g) Knowingly receive compensation in connection with any
offer or sale of securities unless the sale is qualified or
unless the security or the transaction is exempt or not
otherwise subject to qualification; and,
h) Making any disclosure to a potential purchaser other
than:
i) The name, address, and contact information of the
issuer;
ii) The name, type, price, and aggregate amount of any
securities being offered in the issuer transaction; and,
iii) The issuer's industry, location, and years in
business.
3)Requires the "finder" to file an initial statement of
information (SOI) (created by the Department of Business
Oversight (DBO)) with the DBO prior to engaging in any
activities that includes the following:
a) The name and complete business or residential address of
the finder; and,
b) The mailing address of the finder, if different from the
business or residential address.
4)Requires the "finder" to pay a filing fee of $300 to DBO with
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the SOI.
5)Requires the "finder" to file within 30 days of the
anniversary of the finder's initial SOI and annually
thereafter a renewal SOI with the DBO that includes all of the
following:
a) Representations that:
i) The finder has complied and will continue to comply
with (2, a-h) listed above;
ii) The finder has not performed any acts or satisfied
any circumstances prohibited by Corporations Code Section
25212 or been sanctioned by the commissioner; and,
iii) The finder has obtained the written agreement with
respect to each transaction in which the finder has
participated in the prior 12 months.
b) An indication by the finder as to whether the finder has
received transaction-based compensation that is subject to
the actual sale of securities by the issuer in any
transaction in which the finder participated in the prior
12 months.
6)Requires a filing fee of $275 with the renewal SOI.
7)Requires the finder with each introduction to obtain the
informed written consent of each person introduced or referred
by the finder to an issuer. The written agreement must be
signed by the finder, the issuer, and the person introduced or
referred disclosing the following:
a) The type and amount of compensation that has been or
will be paid to the finder and the conditions for the
payment of that compensation;
b) That the finder is not providing advice to the issuer or
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any person introduced or referred by the finder to an
issuer as to the value of the securities;
c) Whether the finder is also an owner, directly or
indirectly of the securities being offered or sold;
d) Any actual and potential conflict of interest in
connection with the finder's activities related to the
issuer transaction;
e) That the parties to the agreement shall have the right
to pursue any available remedies at law or otherwise for
any breach of the agreement; and,
f) Requires representation that the person introduced in an
accredited investor.
8)Requires the "finder" to maintain and preserve for 5 years
from the date of the filing of the notice, a copy of the
notice, the written consent and all other records relating to
any securities transaction in connection with which the finder
receives compensation.
9)Provides that if a natural person does not meet the definition
of finder, any person introduced or referred by that natural
person to an issue shall have the right to pursue any
applicable remedy afforded under state law.
EXISTING FEDERAL LAW:
1)Establishes the federal Securities Exchange Act of 1934 which
prohibits any broker or dealer from effecting, inducing, or
attempting to induce the purchase or sale of any security
unless such person is registered with the Securities and
Exchange Commission (SEC). (Section 15 (a) (1)
2)Defines "accredited investor," as:(17 C.F.R 230.501 (a))
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a) Any natural person whose individual net worth, or joint
net worth with that person's spouse, exceeds $1 million at
the time of their purchase of securities, exclusive of
their primary residence; or,
b) 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.
EXISTING STATE LAW:
1)Provides a broker licensed by the Real Estate Commissioner is
exempt from the provisions of Section 25210 when engaged in
transactions in any interest in any general or limited
partnership, joint venture, unincorporated association, or
similar organization (but not a corporation) owned
beneficially by no more than 100 persons and formed for the
sole purpose of, and engaged solely in, investment in or gain
from an interest in real property, including, but not limited
to, a sale, exchange, trade, or development. An interest held
by a husband and wife shall be considered held by one person
for the purposes of this section. [Corporations Code, Section
25206]
2)Defines a "broker-dealer" as any person engaged in the
business of effecting transactions in securities in this state
for the account of others or for his own account. A
broker-dealer also includes a person engaged in the regular
business of issuing or guaranteeing options with regard to
securities not of his own issue. [Corporations Code, Section
25004]
3)Requires a broker-dealer to apply and obtain a certificate
from the DBO to as a broker-dealer in California.
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[Corporations Code, Section 25210]
4)Defines "issuer" as any person who issues or proposes to issue
any security, with exceptions. [Corporations Code, Section
25010]
5)Provides that "broker-dealer" does not include several
persons, including, among others, banks; trust companies;
savings and loan companies; real estate brokers; options
exchanges certified by DBO; individuals who trade for their
own accounts or in some fiduciary capacity, but not as part of
a regular business; issuers; and agents, when they are
employees of broker-dealers or issuers. [Corporations Code,
Section 25004]
6)Authorizes DBO to pursue the following types of enforcement
actions against persons who are not licensed as
broker-dealers, but who are acting in a manner that requires
such licensure. DBO may:
a) Issue an order to desist and refrain from the activity
or activities that warrant licensure, until the required
license is obtained. [Corporations Code, Section 25532]
b) Levy an administrative penalty of up to $5,000 for a
first violation, up to $10,000 for a second violation, and
up to $15,000 for a third and subsequent violation (Section
25252), and include in the administrative action imposing
such penalty a claim for ancillary relief, including but
not limited to a claim for restitution or disgorgement or
damages on behalf of persons injured by the act or practice
giving rise to the action. [Corporations Code, Section
25254]
c) Take possession of the property, business, and assets of
such person. [Corporations Code, Section 25253]
d) Bring an action in the name of the people of the State
of California in Superior Court to enjoin the acts or
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practices of the person violating the law and enforce
compliance, and, if the commissioner determines it is in
the public interest, to include in that action a claim for
ancillary relief, including but not limited to a claim for
restitution or disgorgement or damages on behalf of persons
injured by the act or practice constituting the subject
matter of the action. [Corporations Code, Section 25530]
7)Provides that a person who purchases a security from or sells
a security to a broker-dealer that is required to be licensed
and who has not, at the time of the sale or purchase, applied
for and secured from the commissioner a certificate in effect
at the time of sale or purchase, may bring an action for
rescission of the sale or purchase, or, if the plaintiff or
the defendant no longer owns the security, for damages, as
specified. [Corporations Code, Section 25501.5]
FISCAL EFFECT: Unknown.
COMMENTS:
Currently, California does not have a clear statutory regime
surrounding finders. About the only protection a purchaser has
against an unregistered broker-dealer is Corporations Code,
Section 25501.5, stated above. AB 667 puts in statute,
regulations regarding finders whom lurk in a grey area of
securities law. AB 667 will exempt from certain broker-dealer
requirements those persons who satisfy the statutory definition
of finder and act in compliance with certain requirements. The
requirements consist of: filing initial and subsequent
statements of information and paying related filing fees as set
by DBO, obtaining the informed written consent of each investor;
and, maintaining certain records. AB 667 defines a finder, in
order to meet the definition of finder, investors introduced by
the finder must be accredited investors, and the finder must not
participate in negotiating any terms of the investment, advise
any party regarding the investment, or sell any securities owned
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by the finder.
Need for the bill:
According to the sponsor, the Corporations Committee of the
Business Law Section of the State Bar of California, "Finders
are often critical to the success of capital-raising efforts by
start-up companies and other small to mid-sized companies that
would otherwise be unable to engage a broker-dealer or access
needed capital. Indeed, it is widely acknowledged that many
individuals act as finders in the State of California and that
this is the method by which a vast majority of capital is raised
to fund early stage businesses. Under current law, however, the
scope of permitted activities for a finder is poorly defined,
often resulting in inadvertent violations of broker-dealer
registration requirements. In fact, there is no statutory
definition of finder, nor is there any regulation of finders.
This lack of clear guidance puts finders and the businesses that
rely upon them for crucial funding in jeopardy. It also impedes
the State's ability to regulate finders and to hold them
accountable. "
Finders
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Currently, both federally and at the state level, the law is
vague on the issue of "finders." Finders do not fall within the
definition of broker-dealer because they are limited to certain
activities. "Finders" is a common term used in the securities
environment as an unlicensed individual who introduces an
accredited investor to an issuer. In exchange for bringing in a
potential accredited investor, the finder receives compensation.
The only role of a finder in a securities transaction is the
introduction; therefore, finders are not required to register as
a broker-dealer. Questions that should be considered when
determining whether or not a finder should register as a broker-
dealer include:
Is the finder planning on being involved in the negotiations
for the sale of securities? The more involved the finder, the
more likely the finder should register as a broker-dealer.
Is the finder intending to discuss with potential accredited
investors the details of the securities sold, or otherwise
make any recommendations? If yes, the finder should register
as a broker-dealer.
Will the finder be compensated by a transaction-based
compensation with the respect to a securities transaction? If
yes, the finder should register as a broker-dealer.
Has the finder previously been involved with effecting
securities transactions? Any previous compensation or other
evidence of previous involvement in effecting securities
transaction increases the likelihood that a finder should
register as a broker-dealer.
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Finders fall in a gray area of the law, which increases the
liability of using one and potentially unnecessary litigation.
A finder, if found to act as an unregistered broker-dealer could
come with grave consequences such as: investor rescission
right, the issuer could be found as an aider and abettor,
negative publicity, as well as, be subject to criminal
penalties, fines, suspension and disbarment.
Federal Regulations
Section 15(a) of the Securities Exchange Act (The Act) of 1934
requires that persons engaged in broker or dealer activity must
register with the SEC pursuant to Section 15(b) of the e Act
unless an applicable exemption is available. In general,
federally, a "broker" is any person "engaged in the business of
effecting transactions in securities for the account of others"
and a "dealer" is any person "engaged in the business of buying
and selling securities for such person's own account." Although
the Act and the rules promulgated thereunder do not specifically
define "effecting transactions" or "engaged in the business,"
the SEC has taken a very expansive view of the scope of those
terms. Based on no-action guidance from the SEC, activities that
may be deemed (alone or in combination) to confer "broker"
status include, among other things:
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Soliciting investors to enter into securities transactions;
Assisting issuers in structuring prospective securities
transactions or helping issuers to identify potential
purchasers of securities;
Participating in the negotiating process or otherwise bringing
buyers and sellers of securities together; and;
Receiving compensation contingent on the success of a
securities transaction or based on the amount or value of a
securities transaction.
Activities that have been identified (alone or in combination)
by the SEC as indicators of "dealer" status include, among other
things:
Participating in a selling group, underwriting securities or
purchasing or selling securities as principal from or to
customers rather than from or to only brokers or dealers;
Carrying a dealer inventory (positions intended to be used
directly or indirectly to trade with customers) or holding
oneself out as a dealer or market-maker or as otherwise
willing to buy or sell particular securities on a continuous
basis;
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Obtaining a regular clientele of customers, issuing or
originating securities or rendering incidental investment
advice to others; and,
Engaging in trading transactions for the benefit of others
(including for an affiliate or for an affiliate's customers),
rather than consistently with one's own judgment and
investment and liquidity objectives.
On April 5, 2013, the SEC addressed the potential application of
the broker-dealer registration requirements under Section 15(a)
of the Act in the context of fundraising activities and other
services for private funds. The SEC has observed that certain
private fund advisers are paying transaction-based compensation
to their personnel for selling interests in a fund and private
fund advisers, their personnel and/or their affiliates are
receiving transaction-based compensation "for purported
investment banking or other broker activities relating to one or
more of the fund's portfolio companies." The SEC has
consistently viewed transaction-based compensation as
broker-dealer activity. The SEC cautioned that the receipt of
transaction-based compensation coupled with the types of
activities being performed may trigger the requirement to
register with the SEC as broker-dealers.
In the early 1990s, the SEC granted no-action relief to an
individual whose involvement in securities transactions was
limited to one instance of providing a list of names and
telephone numbers of potential investors and receiving a success
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fee for doing so. This no-action position gave rise to the
notion that a so-called "finder's exemption" exists in the law.
Nonetheless, despite this very limited fact pattern, the SEC has
subsequently indicated its disapproval of this no-action
position, and has in fact stated that even one instance of
transaction-based compensation may be enough for a finding that
a person was "engaged in the business" of broker activity, and
thus subject to registration. Notably, while the SEC has taken
an extremely expansive view of the concept of being "engaged in
the business," some courts have been more lenient in this
regard, finding that something more than just transaction-based
compensation is necessary to require broker registration.
Other States
Three other states have enacted finder legislation, Texas,
Michigan and Minnesota.
Michigan requires a "finder" (as defined under Michigan law) to
register as an investment adviser and finder activities are
limited to "locating, introducing, or referring potential
purchasers or sellers."
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The Texas State Securities Board adopted regulations to provide
for a restricted registration system for finders (as defined by
regulation). A finder would be limited to introducing only
accredited investors and would not be permitted to negotiate the
terms of any investment or give any advice about entering the
investment. Securities examination requirements would be waived
for finders.
In adopting the Uniform Securities Act of 2002, Minnesota
included a non-standard provision, which exempted private
placement broker-dealers representing issuers in connection with
any exempt transaction from registering as agents. Minnesota
conditioned the availability on the absence of any disciplinary
history, prohibited the handling or possession of funds and
securities, and required a notice filing and consent to service
of process. Minnesota's provision permits a private placement
broker-dealer to register only once with the state securities
regulator but allows the private placement broker-dealer to
represent multiple issuers.
Previous Legislation:
AB 713 (Wagner) 2013-2014 Legislative Year. Would have provided
that any person who meets the definition of a finder, and who
satisfies all of the conditions established for finders, is
deemed to be a finder and not a broker-dealer. Died in Senate
Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION:
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Support
California State Bar (Sponsor)
Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081