BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 667|
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THIRD READING
Bill No: AB 667
Author: Wagner (R)
Amended: 7/8/15 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 7/1/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/27/15
AYES: Lara, Bates, Beall, Hall, Leyva, Mendoza, Nielsen
ASSEMBLY FLOOR: 76-0, 6/2/15 - See last page for vote
SUBJECT: Broker-dealers: exemptions: finders
SOURCE: Corporations Committee of the Business Law Section of
the
California State Bar
DIGEST: This bill defines a finder, as specified, and exempts a
finder from the requirement to be licensed as a broker-dealer.
ANALYSIS:
Existing law:
1)Defines "broker-dealer" as any person engaged in the business
of effecting transactions in securities in California for the
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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, as specified (Corporations
Code Sections 25004, 25200, 25206, 25207, and 25208).
4)Authorizes the Department of Business Oversight (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
(Corporations Code 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
(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
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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).
5)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).
This bill:
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.
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.
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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 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.
4)Requires, concurrent with each introduction or referral of a
potential investor to an issuer, each finder to obtain the
informed, written consent of the person introduced or
referred, on an agreement that discloses information about the
type and amount of compensation that has been or will be paid
to the finder, and that contains information regarding actual
or potential conflicts of interest that may exist in
connection with the finder's activities.
5)Provides that a finder who satisfies all of the conditions
above is exempt from licensure as a broker-dealer.
6)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
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Section 25501.5.
Background
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. According to this bill's sponsor, "it is
widely recognized among business participants that many
individuals 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."
This bill's 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.
Comments
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
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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.
Prior Legislation
AB 713 (Wagner, 2014 ) was substantially similar to AB 667 but
imposed lower filing fees for finders than those contained in AB
667. AB 713 was held on the Senate Appropriations Committee
Suspense File.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee, AB 667 will
result in one-time moderate costs of $50,000 to $100,000 to the
State Corporations Fund to cover costs for DBO to promulgate
regulations. The bill will result in potentially significant
ongoing costs in the range of $155,000 to $300,000 annually to
the State Corporations Fund, partially offset by fee revenue, to
register and renew finders. At the specified registration fee
of $300 per finder, estimated revenue will not cover ongoing
costs based on an estimated 80 to 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.
SUPPORT: (Verified8/27/15)
Corporations Committee of the Business Law Section of the
California State Bar (source)
McConnell, Dunning & Barwick LLP
Law Offices of Douglas M. Wade PLC
OPPOSITION: (Verified8/27/15)
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None received
ARGUMENTS IN SUPPORT: 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."
McConnell, Dunning & Barwick LLP and the Law Offices of Douglas
M. Wade 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."
ASSEMBLY FLOOR: 76-0, 6/2/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd,
Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia,
Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray,
Hadley, Roger Hernández, Holden, Irwin, Jones, Kim, Lackey,
Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes,
McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte,
O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon,
Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Atkins
NO VOTE RECORDED: Chávez, Grove, Harper, Jones-Sawyer
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
AB 667
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8/31/15 15:45:58
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