BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 667 (Wagner) - Broker-dealers: exemptions: finders ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: July 8, 2015 |Policy Vote: B. & F.I. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 17, 2015 |Consultant: Jolie Onodera | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 667 would establish a new regulatory framework to govern the activities and accountability of "finders," as defined, and exempt a finder from the requirement to be licensed as a broker-dealer, as specified. Fiscal Impact: One-time moderate costs of $50,000 to $100,000 (Special Fund*) to the Department of Business Oversight (DBO) to promulgate regulations. Potentially significant ongoing costs in the range of $155,000 to $300,000 (Special Fund*), partially offset by fee revenue, to register and renew finders. At the specified registration fee of $300 per finder, estimated revenues will not cover ongoing costs based on an estimated 80-150 finders to be registered and examined annually. First-year revenue would be $24,000 to $45,000, and annual ongoing offsetting fee revenue would be $22,000 to $41,250. AB 667 (Wagner) Page 1 of ? *State Corporations Fund Background: Existing law defines a "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. Broker-dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of his or her own issue. (Corporations Code (CC) § 25004.) Under existing law, no broker-dealer, unless otherwise exempt, may affect any transaction in the purchase or sale of any security in California unless that broker-dealer has first applied for and secured from the DBO Commissioner a certificate authorizing that person to act in that capacity. (CC § 25210.) Existing state law provides for 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, real estate brokers and financial institutions, under certain circumstances, and persons licensed under the Capital Access Company Law. (CC §§ 25200, 25206-25208.) Under federal law, Section 29 of the Securities Exchange Act requires that offers and sales of securities in the U.S. must be made by a registered broker-dealer or appropriately licensed individuals associated with a registered broker-dealer. An exemption often relied upon by many in the securities industry is the so-called "finders" exemption. If a "finder" assists in negotiations, participates in structuring the transaction, pricing the security or any other activity in the transaction other than introducing the parties, the finder may be deemed to be acting as a broker-dealer. When looking for additional capital, many companies consider working with finders who offer to find investors and to serve as an intermediary between the company as an issuer of securities and potential investors. Proposed Law: This bill would establish a new regulatory framework to govern the activities and accountability of "finders," as defined, and exempt a finder from the requirement to be licensed as a AB 667 (Wagner) Page 2 of ? broker-dealer, as specified. This bill: Defines a "finder" is a natural person who, for direct or indirect compensation, introduces or refers one or more accredited investors, as defined in federal law, 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 who does not do any of the following: § Provide services to an issuer for a transaction or a series of related transactions for the offer or sale of securities of the issuer that exceeds a securities purchase price of $15 million in the aggregate. § Participate in negotiating any of the terms of the offer or sale of the securities. § Advise any party to the transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities. § Conduct any due diligence on the part of any party to the transaction. § 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. § Receive, directly or indirectly, possession or custody of any funds in connection with the issuer transaction. § Knowingly receive compensation in connection with any offer or sale of securities unless the sale is qualified under this division or unless the security or the transaction is exempt or not otherwise subject to qualification. § Make any disclosure to a potential purchaser other than the following: o The name, address, and contact information of the issuer. o The name, type, price, and aggregate amount of any securities being offered in the issuer transaction. o The issuer's industry, location, and years in business. Provides that a finder who satisfies all of the following conditions is exempt from licensure as a broker-dealer. o Requires the finder to file with the commissioner before engaging in any activities, as AB 667 (Wagner) Page 3 of ? specified, on a form prescribed by the commissioner, an initial statement of information that shall include specified information. o A filing fee of $300 submitted to the DBO along with the initial statement of information required. Requires the finder to file with the commissioner within 30 days of the anniversary of the finder's initial statement of information, and annually thereafter, on a form prescribed by the commissioner, a renewal statement of information that includes specified information and a filing fee of $275 to accompany each renewal statement of information. Concurrently with each introduction, requires the finder to obtain the informed, written consent of each person introduced or referred by the finder to an issuer, in a written agreement signed by the finder, the issuer, and the person introduced or referred, disclosing the following: o 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. o 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 or as to the advisability of investing in, purchasing, or selling the securities. o Whether the finder is also an owner, directly or indirectly, of the securities being offered or sold. o Any actual and potential conflict of interest in connection with the finder's activities related to the issuer transaction. o 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. Requires the agreement to also include a representation by the person introduced or referred by the finder to the issuer that the person is an accredited investor, as defined, and that the person knowingly consents to the payment of the compensation described therein. Requires the finder to maintain and preserve, for a AB 667 (Wagner) Page 4 of ? period of five years from the date of filing of the notice as prescribed, a copy of the notice, the written agreement, and all other records relating to any offer or sale of securities in connection with which the finder receives compensation, as the commissioner may by rule require. The finder, upon written request of the commissioner, shall furnish to the commissioner any records required to be maintained and preserved under this subdivision. Provides that a natural person who is engaged in the business of effecting transactions in securities and is not otherwise exempt from Section 25210 shall be subject to the requirements of Section 25210, if the individual fails to meet the definition of "finder" set forth in subdivision (a), or does not satisfy all the conditions set forth in the bill. In the event a natural person does not meet the definition of "finder" set forth in subdivision (a) or does not satisfy all the conditions set forth in subdivisions (c) to (f), inclusive, any person introduced or referred by that natural person to an issuer, who purchases securities of that issuer in an issuer transaction following that introduction or referral, shall have the right to pursue any applicable remedy afforded under state law, including, without limitation, any applicable remedies. Authorizes the DBO commissioner to periodically make, amend, and rescind such rules, forms, and orders as are necessary to carry out the provisions of this section, 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 or her jurisdiction, and may prescribe different requirements for different classes. Related Legislation: AB 713 (Wagner) 2014 was substantially similar to this measure. This bill was held on the Suspense File of this Committee. AB 667 (Wagner) Page 5 of ? -- END --