BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AB 667 Hearing Date: July 1,
2015
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|Author: |Wagner |
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|Version: |April 6, 2015 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Broker-dealers: exemptions: finders.
SUMMARY Defines a finder, as specified, and exempts a finder from
the requirement to be licensed as a broker-dealer.
DESCRIPTION
1. Defines a finder as a natural person who, for direct or
indirect compensation, introduces or refers one or more
accredited investors, as defined, to an issuer, or an issuer
to one or more accredited investors, solely for the purpose
of a potential offer or sale of securities of the issuer in
an issuer transaction in this state, and as someone who does
not do any of the following:
a. Provide services to an issuer for a transaction or a
series of related transactions whose purchase price
exceeds $15 million in the aggregate.
b. Participate in negotiating any of the terms of the
offer or sale of the securities.
c. Advise any party to the transaction regarding the
value of the securities or the advisability of investing
in, purchasing, or selling the securities.
d. Conduct any due diligence on the part of any party
to the transaction.
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e. Sell or offer for sale in connection with the issuer
transaction any securities of the issuer that are owned,
directly or indirectly, by the finder.
f. Receive, 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 by the Commissioner of Business Oversight
(commissioner) or the security or transaction is exempt
or not otherwise subject to qualification.
h. Make any disclosure other than the following limited
disclosures: the name, address, and contact information
of the issuer; the name, type, price, and aggregate
amount of any securities being offered in the issuer
transaction; and the issuer's industry, location, and
years in business.
2. Requires each finder to submit a statement of information
about him or herself and pay a filing fee of $300 to the
Department of Business Oversight (DBO) before engaging in
any authorized finder activities.
3. Require each finder to submit a renewal statement of
information to DBO within 30 days of the anniversary of the
finder's initial statement of information, and annually,
thereafter, and to pay a fee of $275 when submitting each
renewal statement of information. In each of those
statements of information, the finder must affirmatively
represent that he or she has complied and will continue to
comply with the provisions described in Number 1 above, has
not performed any acts or satisfied any circumstances
prohibited by Corporations Code Section 25212 or Securities
and Exchange Commission Rule 506 (the so-called "bad boy"
provisions), has not been sanctioned by the commissioner
pursuant to Section 25212, and has obtained the informed,
written consent of each person introduced or referred by the
finder to an issuer during each transaction in which the
finder participated during the prior 12 months, as specified
below. Each renewal statement of information must also
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include an indication by the finder regarding whether he or
she has received transaction-based compensation during the
prior 12 months.
4. Concurrent with each introduction or referral of a
potential investor to an issuer, requires each finder to
obtain the informed, written consent of the person
introduced or referred, on an agreement that discloses all
of the following:
a. The type and amount of compensation that has been or
will be paid to the finder in connection with the
introduction or referral, and the conditions for 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 regarding the value of the securities or the
advisability of investing in, purchasing, or selling the
securities.
c. Whether the finder is also an owner, directly or
indirectly, of the securities being offered or sold.
d. Any actual or potential conflict of interest in
connection with the finder's activities related to the
issuer transaction.
e. That the parties to the agreement have the right to
pursue any available remedies at law or otherwise for any
breach of the agreement.
To satisfy the requirements of the bill, this signed,
written agreement must also contain a representation by the
potential investor that he or she is an accredited investor
and that he or she knowingly consents to the payment of the
compensation described in the agreement.
5. Requires each finder to maintain and preserve, for a period
of at least five years, all notices, agreements, and other
records relating to any offer or sale of securities in
connection with which the finder received compensation, and
requires each finder to furnish those documents to the
commissioner upon written request by the commissioner.
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6. Provides that a finder who satisfies all of the conditions
above is exempt from licensure as a broker-dealer
7. Provides that a natural person who is engaged in the
business of effecting transactions in securities and is not
otherwise exempt from the requirement to be licensed as a
broker-dealer is subject to licensure requirements, if that
individual fails to meet the definition of a finder as set
forth in the bill and or does not satisfy all of the
requirements applicable to finders, as set forth in the
bill.
8. Provides that in the event a natural person does not meet
the definition of a finder, as set forth in the bill, or
does not satisfy all of the requirements applicable to
finders, as set forth in the bill, an investor that is
introduced or referred by that natural person to an issuer,
and who purchases securities of that issuer following that
introduction or referral, shall have the right to pursue any
applicable remedy afforded under state law, including,
without limitation, any applicable remedies available
pursuant to Corporations Code Section 25501.5.
EXISTING FEDERAL LAW AND REGULATION
1. Provides for the Securities Act of 1933, and for its
implementing regulation, Regulation D, which provide a
regulatory framework for the qualification and sale of
securities and for the protection of investors that purchase
those securities. Generally speaking, the Securities Act of
1933 and Regulation D require the sale of all securities to be
registered with the Securities and Exchange Commission (SEC) and
to be structured as prescribed in federal law and regulation,
unless the solicitation is covered by an exemption. They also
require those who offer (i.e., market) and sell securities to be
licensed or registered as investment advisers or licensed as
broker-dealers, unless either the transaction or the activity
being undertaken is exempt.
2. Contains several exemptions from the requirement for securities
issuers to register the sale of their securities with the SEC,
and includes among those exemptions the sale of securities in
accordance with Regulation D, Rules 501 through 508. Rule 501
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of Regulation D defines accredited investors as, among other
things, financial institutions, securities broker-dealers, large
pension plans, corporate entities with assets in excess of $5
million, and other large, financially sophisticated entities.
An accredited investor also includes:
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.
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EXISTING LAW
1. Defines "broker-dealer" as any person engaged in the
business of effecting transactions in securities in
California for the account of others or for his or her own
account (Corporations Code Section 25004).
2. Provides that, unless otherwise exempted from the
requirement to obtain a certificate from the commissioner,
no broker-dealer may effect any transaction in or induce or
attempt to induce the purchase or sale of any security in
California unless that broker-dealer has first applied for
and secured from the commissioner a certificate authorizing
that person to act in that capacity (Corporations Code
Section 25210).
3. Authorizes several exemptions from the requirement to hold
a certificate as a broker-dealer, including persons without
a physical location in California, who sell only to
specified persons in California and only under specified
circumstances (Section 25200); real estate brokers and
financial institutions, under certain circumstances
(Sections 25206 and 25207); and persons licensed under the
Capital Access Company Law (Section 25208).
4. Further 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 (Section
25004).
5. 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 (Section 25532).
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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 (Section
25254).
c. Take possession of the property, business, and
assets of such person (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 (Section
25530).
6. 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 (Section 25501.5).
COMMENTS
1. Purpose: This bill is sponsored by the Corporations
Committee of the Business Law Section of the California
State Bar to promote and facilitate a regulatory framework
to govern the activities and accountability of finders,
provide statutory and regulatory certainty for finders and
the businesses that rely upon them, and protect investors.
2. Background: According to this bill's sponsor, "it is widely
recognized among business participants that many individuals
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and entities act as 'finders' in the State of California in
connection with securities transactions. Finders -
generally viewed under California law to mean persons who
introduce issuers and investors to each other without
negotiating on behalf of either party - 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. In fact, it is believed that this is the
method by which a vast majority of capital is raised to fund
early stage businesses."
The sponsor asserts that the vast majority of finders are not
registered as broker-dealers, often resulting in inadvertent
violations of broker-dealer registration requirements. By
relying on finders who could be engaged in illegal
broker-dealer conduct, companies risk severe consequences.
These risks are either not known or just ignored by issuers
and finders. The lack of certainty continues to jeopardize
finders and the businesses which rely upon them for crucial
funding, as well as other investors.
3. Discussion: This bill is intended to create regulatory
certainty for finders and the businesses which use them, by
codifying a set of activities that will be legal when
performed by persons without a broker-dealer license, who
meet the bill's definition of a finder, and who comply with
the bill's requirements for finders. This bill's sponsor
and supporters believe that by creating a bright-line which
clearly distinguishes allowable finder activities from those
which do not meet the bill's definition of finder
activities, the bill will encourage persons who act as
finders to comply with the bill's requirements. The value
of the bill to persons who follow it is the assurance that
they need not become licensed as broker-dealers. Persons
who do not meet the bill's finder definition may require
licensure as broker-dealers, depending on their activities.
This bill is substantially similar to AB 713 (Wagner) from 2014,
a measure which passed the Senate Banking and Financial
Institutions Committee but was held on the Senate
Appropriations Committee Suspense File. AB 667 authorizes
filing fees that are considerably higher than those
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authorized in AB 713, in an attempt to address the cost
concerns raised by DBO around AB 713.
4. Summary of Arguments in Support:
a. AB 667 is sponsored by the Corporations Committee of
the Business Law Section of the California State Bar and
supported by McConnell, Dunning & Barwick LLP and the Law
Offices of Douglas M. Wade. "The State Bar Corporations
Committee believes that there is a need for some form of
limited regulation of finders as an essential component
of an efficient capitals market. AB 667 effectively
addresses this need by creating a straightforward
definition of finder and clarifying the precise
activities in which a finder may or may not engage.
Moreover, we believe that the reporting and informed
consent requirements under AB 667 help ensure greater
accountability, investor protection, and regulatory
oversight."
The bill's supporters write, "AB 667 creates a
straightforward definition of a 'finder' and clarifies
the scope of capital securities fundraising activities in
which a finder may engage, including limiting the
investors the finder may introduce to 'accredited'
investors, and prohibiting the finder from taking custody
of funds. By providing clear guidance and establishing
meaningful reporting and other requirements for finders,
AB 667 will ensure better market transparency, proper
accountability, and additional investor protection while
at the same time facilitating capital formation for
business entities in California."
5. Summary of Arguments in Opposition: None received.
6. Amendments:
a. At the request of the Department of Business
Oversight, the author will be proposing the following
amendments in Committee:
Page 5, line 12, insert the following:
(h) The commissioner may from time to time make, amend, and
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rescind such rules, forms, and orders as are necessary to
carry out the provisions of this law, including rules and
forms governing applications and reports, and defining
any terms, whether or not used in this law, insofar as
the definitions are not inconsistent with the provisions
of this law. For the purpose of rules and forms, the
commissioner may classify securities, persons, and
matters within his jurisdiction, and may prescribe
different requirements for different classes.
7. Prior and Related Legislation:
a. AB 713 (Wagner), 2013-14 Legislative Session.
Substantially similar to AB 667. Held on the Senate
Appropriations Committee Suspense File.
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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Corporations Committee of the Business Law Section of the
California State Bar (sponsor)
McConnell, Dunning & Barwick LLP
Law Offices of Douglas M. Wade PLC
Opposition
None received
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