BILL ANALYSIS Ó
AB 667
Page 1
Date of Hearing: May 13, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
667 (Wagner) - As Amended April 6, 2015
-----------------------------------------------------------------
|Policy |Banking and Finance |Vote:|11 - 1 |
|Committee: | | | |
| | | | |
| | | | |
-----------------------------------------------------------------
Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill creates a regulatory regime for securities "finders"
under the Corporate Securities Law of 1968 separate from the
regulation of securities brokers and dealers. Specifically,
this bill:
1)Defines a "finder" as an individual who introduces or refers
accredited investors to issuers solely for the purpose of a
potential sale of qualified or exempt securities of up to $15
million of the issuer subject to specific restrictions on the
manner of participation in the offering and finder disclosures
to potential investors.
AB 667
Page 2
2)Requires the finder to file an initial statement of
information (SOI) with the Department of Business Oversight
(DBO) and pay a $300 initial fee, and annually renew the SOI
with the DOB along with a $275 annual fee.
3)Establishes procedures for finders to make disclosures of
interests and obtain written consent from potential investors,
and establishes legal recourse for investors.
FISCAL EFFECT:
Administrative costs of approximately $155,000 annually to DBO,
depending on the number of individuals filing as finders,
including costs to establish program and develop regulations,
some of which may be recoverable through program fees.
COMMENTS:
1)Purpose. According to the sponsor, the Corporations Committee
of the Business Law Section of the State Bar of California,
finders play a critical role in capital raising efforts by
start-up and other small to mid-sized companies. The sponsor
believes there are many finders currently operating in
AB 667
Page 3
California, facilitating a majority of the capital raised for
early stage businesses. Under current law, the scope of
permitted activities for finders is not well defined, often
resulting in finders inadvertently violating broker-dealer
requirements. The sponsor asserts AB 667 is an effort to
regulate finders and finder activity, creating clear guidance
for finders and the businesses that rely on their services.
2)Broker-Dealers. Traditional intermediaries that facilitate
and effect securities transactions between issuers and
purchasers are regulated as broker-dealers. Broker-dealers
may effect transactions on behalf of clients (broking), or
their own account (dealing). Broker-dealers are commonly
involved in the distribution of securities in an offering, and
are regulated by the federal Securities and Exchange
Commission, the Financial Industry Regulatory Authority, and
in California, by DBO.
The penalty for engaging in broker-dealer activities without
the proper registration or license can be severe. Both the
state and federal law allow persons who purchased securities
from an unlicensed broker-dealer to rescind their sales and
seek any consequential damages, causing potentially
catastrophic losses to issuers. Unlicensed broker-dealers can
also be subject to substantial civil and criminal penalties.
3)Finders. Neither federal nor state law currently define
AB 667
Page 4
securities "finders" as a separate class of person or
regulated activity. "Finder" is a term commonly used in
securities offerings to refer to unlicensed individuals who
introduce investors to issuers in exchange for a fee. So long
as the finder does not participate in the actual sale or
transfer of securities, and is compensated for the
introduction only, it is usually not required to register as a
broker-dealer. Conversely, negotiating securities sales,
recommending offerings, and transaction-based compensation
will often require an individual to register as a
broker-dealer.
The SEC granted no-action relief in the 1990s to an individual
whose involvement in securities transactions was limited to an
instance of providing a list of names and telephone numbers to
potential investors for a fee. The no-action position gave
rise to the "finder's exemption" in federal securities law.
Since that time, the SEC has narrowly interpreted this
exemption, enforcing most facilitation activity under the
broker-dealer rules.
Three states, Texas, Michigan, and Minnesota, have each
enacted securities finder legislation similar to the type
proposed in AB 667.
4)Keepers? The central policy question in AB 667 is whether a
new regulatory structure for securities finders will bring
AB 667
Page 5
currently-unregulated activity within the control of DBO, or
whether it will incentivize current broker-dealers to
re-register as finders. The latter circumstance may be
problematic if broker-dealers re-register in order to avoid
fiduciary obligations, especially if those obligations are
strengthened in the near future. The Committee may wish to
consider whether the limited adoption of securities finder
laws, particularly at the federal level and the state of New
York, suggests sufficient apprehension over the policy among
the country's top securities regulators.
On the other hand, California leads the nation, and arguably
the world, in start-up company creation and innovation, and
this activity has been a major driver of the state's economic
performance and success as a magnet for talent. Capital
formation is a critical element enabling this activity, and
any incremental benefit to the state's capital market could
lead to a significant increase in that performance and
success.
5)Previous Legislation. AB 713 (Wagner) of 2013-2014 would have
established a similar finders program to that proposed here,
albeit with a lesser fee regime. AB 713 was held on the
Suspense File of the Senate Appropriations Committee.
AB 667
Page 6
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081