BILL ANALYSIS Ó
AB 667
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ASSEMBLY THIRD READING
AB
667 (Wagner)
As Amended April 6, 2015
Majority vote
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|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 | |
| | | | |
| | | | |
AB 667
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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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