BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 667


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          667 (Wagner)


          As Amended  July 8, 2015


          Majority vote


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          |ASSEMBLY:  |76-0  |(June 2, 2015) |SENATE: | 39-0 |(September 8,    |
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          Original Committee Reference:  B. & F.




          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  








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               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;


             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  








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            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  
                 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:









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             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; 


             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 five 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.


          10)Allows the commissioner to make, amend and rescind such rules  
            forms and orders as are necessary to carry out the provisions,  
            including rules and forms governing applications and reports,  
            and defining any terms, whether or not used in the law,  








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            insofar as the definitions are not inconsistent with the  
            existing law.  


          11)Provides that 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.


          The Senate amendments:


          1)Expand the authority of the commissioner to make, amend and  
            rescind such rules forms and orders as are necessary to carry  
            out the provisions.


          2)Provide that 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.


          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))


             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,








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          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.


          EXISTING STATE LAW:  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]


          1)Defines a "broker-dealer" as any person engaged in the  
            business 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]
          2)Requires a broker-dealer to apply and obtain a certificate  
            from the DBO to as a broker-dealer in California.   
            [Corporations Code Section 25210]


          3)Defines "issuer" as any person who issues or proposes to issue  
            any security, with exceptions.  [Corporations Code Section  
            25010]


          4)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  








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            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]


          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. [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 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]


          6)Provides that a person who purchases a security from or sells  








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            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]



          FISCAL EFFECT:  According to the Senate 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 the  
          finder.  


          Finders 


          Currently, both federally and at the state level, the law is  








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          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  
            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  








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          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;


          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:








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          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  
          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.










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          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. 


          Analysis Prepared by:                                             
                          Mark Farouk / B. & F. / (916) 319-3081  FN:  
          0001653