BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                       AB 667


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          ASSEMBLY THIRD READING


          AB  
          667 (Wagner)


          As Amended  April 6, 2015


          Majority vote


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                 |Noes                 |
          |                |      |                     |                     |
          |                |      |                     |                     |
          |----------------+------+---------------------+---------------------|
          |Banking         |11-1  |Dababneh, Achadjian, |Travis Allen         |
          |                |      |Brown, Chau, Gatto,  |                     |
          |                |      |Hadley, Kim, Low,    |                     |
          |                |      |Perea,               |                     |
          |                |      |Ridley-Thomas, Mark  |                     |
          |                |      |Stone                |                     |
          |                |      |                     |                     |
          |----------------+------+---------------------+---------------------|
          |Appropriations  |17-0  |Gomez, Bigelow,      |                     |
          |                |      |Bonta, Calderon,     |                     |
          |                |      |Chang, Daly, Eggman, |                     |
          |                |      |Gallagher,           |                     |
          |                |      |                     |                     |
          |                |      |                     |                     |
          |                |      |Eduardo Garcia,      |                     |
          |                |      |Gordon, Holden,      |                     |
          |                |      |Jones, Quirk,        |                     |
          |                |      |Rendon, Wagner,      |                     |
          |                |      |Weber, Wood          |                     |
          |                |      |                     |                     |
          |                |      |                     |                     |








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          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  
               million 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; 


             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;









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             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  
            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  








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                 with 2)a), to h), 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  
               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; 








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             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 STATE LAW:  


          1)Provides a broker licensed by the Real Estate Commissioner is  
            exempt from the provisions of Corporations Code 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  








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            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.  [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 (Corporate Code  
               Section 25252), and include in the administrative action  








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               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 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]
          EXISTING FEDERAL LAW: 


          1)Establishes the federal Securities Exchange Act of 1934 (Act)  
            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) of the Act)
          2)Defines "accredited investor," as:(17 Code of Federal  
            Regulations Section 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.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, 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:  


          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.  This bill puts in statute, regulations  
          regarding finders whom lurk in a grey area of securities law.   
          This bill 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.  This bill 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 by  








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          the finder.  


          Finders 


          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:


          1)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.


          2)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. 


          3)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.  


          4)Has the finder previously been involved with effecting  
            securities transactions?  Any previous compensation or other  
            evidence of previous involvement in effecting securities  








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            transaction increases the likelihood that a finder should  
            register as a broker-dealer. 


          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 Act requires that persons engaged in broker  
          or dealer activity must register with the SEC pursuant to Section  
          15(b) of the 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:


          1)Soliciting investors to enter into securities transactions;


          2)Assisting issuers in structuring prospective securities  
            transactions or helping issuers to identify potential purchasers  
            of securities;










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          3)Participating in the negotiating process or otherwise bringing  
            buyers and sellers of securities together; and;


          4)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:


          1)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;


          2)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;


          3)Obtaining a regular clientele of customers, issuing or  
            originating securities or rendering incidental investment advice  
            to others; and,


          4)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  








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          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 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  








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          register as an investment adviser and finder activities are  
          limited to "locating, introducing, or referring potential  
          purchasers or sellers." 


          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.




          Analysis Prepared by:                                               
                          Kathleen O'Malley / B. & F. / (916) 319-3081  FN:  
          0000562
















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