BILL ANALYSIS Ó
AB 667
Page 1
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