BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 722


                                                                    Page  1





          Date of Hearing:  April 20, 2015


                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE


                               Matthew Dababneh, Chair


          AB 722  
          (Perea) - As Introduced February 25, 2015


          SUBJECT:  Securities transactions:  qualifications by permit:   
          liability


          SUMMARY:  Creates a new qualification by permit under  
          California's Corporate Securities Law of 1968.    Specifically,  
          this bill:  


          1)Provides that any offer or sale of any security that meets the  
            following criteria may be qualified by permit:


             a)   An applicant may file an application for a  
               "crowdfunding" permit if it meets the following conditions:


               i)     The applicant is a California corporation or a  
                 foreign corporation, as specified; the applicant is not  
                 issuing fractional undivided interests in oil and gas  
                 rights, or a similar interest in other mineral rights;  
                 the applicant is not an investment company subject to the  
                 Investment Company Act of 1940; and the applicant is not  
                 subject to the reporting requirements of as specified in  
                 the Securities Exchange Act of 1934. 









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               ii)    Provides that the total offering of securities by  
                 the applicant to be sold in a 12-month period, within or  
                 outside this state, is limited to $1,000,000, less the  
                 aggregate offering price for all securities sold within  
                 the 12 months before the start, and during the offering  
                 of the securities.  


               iii)   Offers and sales cannot be integrated with prior  
                 offers or sales of securities or subsequent offers or  
                 sale of securities, as specified.


               iv)    Prohibits the securities sold during a 12-month  
                 period to any investor from exceeding the lesser of  
                 $5,000 or 10% of the net worth of that natural person or  
                 such amount as the commissioner of the Department of  
                 Business Oversight (DBO) may provide by rule or order.


                  (1)       States "net worth" shall be determined  
                    exclusive of home, home furnishings, and automobiles.   
                    Other assets includes in the computation of net worth  
                    may be valued at the fair market value.  


               v)     Requires the issuer to take reasonable steps to  
                 ensure that each investor who is a natural person who is  
                 not an accredited investor has knowledge and experience  
                 in financial business matters that he or she is capable  
                 of evaluating the merits and risks of the prospective  
                 investment. 


               vi)    Requires the issuer to file with the commissioner  
                 and provide to investors a Small Company Offering  
                 Registration (SCOR) disclosure document on Form U-7,  
                 prior to the commencement of the offering of securities.   








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               vii)   Requires the issuer to set aside in a separate  
                 third-party escrow account all funds raised as part of  
                 the offering to be held in escrow until that time of  
                 minimum offering amount is reached.  The issuer shall  
                 return all funds if the minimum offering amount is not  
                 reached within one year.  


               viii)  Prohibits an issuer from conducting unsolicited  
                 telephone calls.


               ix)    Prohibits an issuer and others as specified from  
                 being disqualified as a "bad actor" under federal  
                 regulations.  


               x)     Any other requirement set forth by rule adopted by  
                 the commissioner of DBO. 


             b)   Provides that if the commissioner does not issue a stop  
               order then the qualification of the sale of the securities  
               become effective at noon of the 60th day after the filing  
               of the application.  


          2)Imposes a filing fee of $200 plus 1/5th of 2% of the aggregate  
            value of the securities sought to be sold in California for  
            qualification of the sale of securities by permit.  


          3)Allows an issuer to offer securities once an application has  
            been filed with the commissioner of DBO but has not yet become  
            approved.









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          4)Requires the court to award reasonable attorney's fees and  
            costs, and authorizes the award of treble and punitive  
            damages, to a prevailing purchaser in an action brought  
            against any person who violates conditions of qualification by  
            permit.  


          5)Provides that a plaintiff is not required to plead or prove  
            that the defendant acted with scienter. 


          EXISTING FEDERAL LAW:  


          1)Provide for the Securities Act of 1933, which establishes a  
            framework for regulating the offer and sale of securities and  
            ensuring the protection of investors that purchase those  
            securities.  Generally speaking, the Securities Act of 1933  
            requires the offer or 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 offer or  
            sale is covered by an exemption.  This federal act also require  
            those who offer (i.e., market) and sell securities to be licensed  
            as investment advisers or broker-dealers, unless either the  
            transaction or the activity being undertaken is exempt.
           
           2)Provides for Regulation D, one of the regulations promulgated by  
            the SEC to implement the Securities Act of 1933.  Regulation D  
            authorizes a series of exemptions from the registration  
            requirements of the Securities Act of 1933 and includes eight  
            rules, denoted Rules 501 through 508, which are codified as 17 CFR  
            230.501 through 230.508.   
           
              a)   Rule 501 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:








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                i)     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,
                
                ii)    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.
                
              b)   Rule 504 of Regulation D authorizes the offer and sale of up  
               to $1 million in securities by an issuer, as long as the offer  
               and sale are made: 
              
                i)     Exclusively in one or more states that provide for the  
                 registration of the securities, and require the public filing  
                 and delivery to investors of a substantive disclosure  
                 document before the sale of the securities (this is the  
                 provision of Rule 504 applicable to this bill);
                
                   (1)       In one or more states that have no provision for  
                    the registration of the securities or the public filing or  
                    delivery of a disclosure document before sale, if the  
                    securities have been registered in at least one state that  
                    does provide for such registration, public filing and  
                    delivery before sale, as specified; or,
                   
                   (2)       Exclusively according to state law exemptions from  
                    registration that permit general solicitation and general  
                    advertising, as long as sales are made only to accredited  
                    investors (this is the provision of Rule 504 that was  
                    applicable to prior bills sponsored by this bill's  
                    sponsor).  
                   
           3)Pursuant to the Jumpstart Our Business Startups (JOBS) Act (Public  
            Law 112-106), authorizes the use of general solicitation and  
            general advertising in certain circumstances not previously  








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            authorized.  Title II of the JOBS Act, operative September 23,  
            2013, lifted the restriction against use of general solicitation  
            and general advertising, when sales are made only to accredited  
            investors and other requirements are met.  Title III of the JOBS  
            Act, otherwise known as the CROWDFUND Act, will lift the  
            restriction against use of general solicitation and general  
            advertising to both accredited and non-accredited investors, once  
            the SEC promulgates final regulations implementing that title.  
           
           EXISTING STATE LAW:


          1)Provides that it is unlawful for any person to offer or sell  
            any security in this state, unless such offering or sale has  
            been qualified by the commissioner, as specified, or unless  
            the offering or sale is covered by an express exemption  
            (Corporations Code Section 25110).

          2)Authorizes the qualification by notification of any security  
            issued by a person that is the issuer of a security registered  
            under Section 12 of the Securities Exchange Act of 1934 or  
            issued by an investment company registered under the  
            Investment Company Act of 1940 (Section 25112).  

             a)   Requires an application for qualification by  
               notification to contain the maximum amount of securities  
               proposed to be offered in California; consent to service of  
               process; information about any adverse order, judgment, or  
               decree entered in connection with the offering by another  
               state regulator, the SEC, or a court (if applicable); and  
               any additional information required by rule of the  
               commissioner. 

             b)   Provides that if no stop order or other order postponing  
               or suspending the effectiveness of any qualification is in  
               effect, qualification of the sale of the securities  
               automatically becomes effective, and the securities may be  
               offered and sold in accordance with the application, on the  
               10th business day after the application is filed or last  








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               amended, or at an earlier time specified by the  
               commissioner.  

          3)Establishes "qualification by permit" which states all  
            securities, whether or not eligible for qualification by  
            coordination under Section 25111 or qualification by  
            notification under Section 25112, may be qualified by permit  
            under this section.  An application for a permit under this  
            section shall contain any information and be accompanied by  
            any documents as shall be required by rule of the  
            commissioner, in addition to the information specified in  
            Section 25160 and the consent to service of process required  
            by Section 25165. For this purpose, the commissioner may  
            classify issuers and types of securities. [Corporations Code,  
            Section 25113]

          4)Contains several exemptions from the requirement immediately  
            above.  While the number of exemptions is too numerous to  
            list, two of the most relevant exemptions for purposes of this  
            bill include Corporations Code Sections 25102(f) and 25102(n).

             a)   25102(f) provides an exemption for any offer or sale of  
               any security in a transaction that meets all of the  
               following criteria:  i) sales of the security are made to  
               an unlimited number of accredited investors and up to 35  
               other persons, who are not accredited investors; ii) all  
               purchasers either have a pre-existing personal or business  
               relationship with the offeror, or can reasonably be assumed  
               to have the capacity to protect their own interests in  
               connection with the transaction, by reason of their  
               business or financial experience, or the business or  
               financial experience of their professional advisers; iii)  
               each purchaser represents that he or she is purchasing for  
               his or her own account, and not with a view to or for sale  
               in connection with any distribution of the security; and  
               iv) the offer and sale of the security is not accomplished  
               through the publication of any advertisement.  

             According to the Department of Business Oversight (DBO),  








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               between 20,000 and 35,000 people file forms with DBO  
               annually, claiming exemptions pursuant to Section 25102(f).  
                In 2013, approximately 18,000 exemption filings were made  
               in connection with securities offerings of $1 million or  
               less.

             b)   25102(n) provides an exemption for any offer or sale of  
               any security in a transaction that meets all of the  
               following criteria:  i) the issuer is not a blind pool  
               issuer, as that term is defined by the commissioner; ii)  
               sales of securities are made only to qualified purchasers  
               or other persons the issuer reasonably believes to be  
               qualified purchasers; iii) each purchaser represents that  
               he or she is purchasing for his or her own account, and not  
               with a view to or for sale in connection with any  
               distribution of the security; iv) each natural person  
               purchaser is provided with a disclosure statement that  
               meets the disclosure requirements of federal Regulation D,  
               at least five business days before they purchase or commit  
               to purchase the security; v) the offer and sale of the  
               security is made by way of a general announcement, whose  
               content is strictly limited; and vi) telephone solicitation  
               by the issuer is not permitted, until and unless the issuer  
               determines that the prospective purchaser being solicited  
               is a qualified purchaser.  

             Qualified purchasers are those who meet one or more of  
               several criteria listed in subdivision (n).  Generally  
               speaking, these criteria describe persons with some degree  
               of financial sophistication, though the qualified purchaser  
               bar is lower than the accredited investor bar.  As an  
               example, an individual is a qualified purchaser if that  
               person individually, or jointly with their spouse, has a  
               minimum net worth of $250,000 and had, during the  
               immediately preceding tax year, gross income in excess of  
               $100,000, and reasonably expects gross income in excess of  
               $100,000 during the current tax year.  Alternately, the  
               term applies to individuals who have a minimum net worth of  
               $500,000, exclusive of their home, home furnishings, and  








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               automobiles.  Natural persons are limited to investing no  
               more than 10% of their net worth in any 25012(n)  
               investment.

             According to DBO, between 20 and 50 people file forms with  
               DBO annually, claiming exemptions pursuant to Section  
               25102(n).

          5)Provides a fee of $2,500 for filing an application for  
            qualification of the sale of securities by permit.   
            [Corporations Code, Section 25608]

          FISCAL EFFECT:  Unknown.


          COMMENTS:  





          This bill is sponsored by Small Business California, to allow  
          small businesses and start-ups to more readily access capital.  





          AB 722 is substantially similar to previous bills advanced by  
          the same sponsors but takes a different approach.  In previous  
          years, the sponsors attempted to secure an exemption from state  
          securities laws to authorize general solicitation and general  
          advertising to accredited investors.  Last year, the sponsors  
          attempted to secure a qualification by notification, under which  
          issuers can use general solicitation and general advertising to  
          attract both accredited and non-accredited investors.  This  
          year, through AB 722 the sponsors are attempting "qualification  
          by permit" under which issuers can use general solicitation and  
          general advertising (excluding unsolicited telephone calls) to  








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          attract both accredited and non-accredited investors.  In  
          addition, AB 722 attempts to use the term "crowdfunding" in the  
          measure.  Whether or not AB 722 is actually crowdfunding is  
          debatable.  





          Under existing law, there are only three ways to qualify a  
          securities offering, all of which require significant review of  
          the offering by either the SEC or DBO.  Those three ways include  
          coordination (Corporations Code Section 25211; involves  
          offerings registered under the Federal Securities Act of 1933);  
          notification (Section 25212; involves securities registered  
          under Section 12 of the Securities Exchange Act of 1934 or  
          investment companies registered under the Investment Company Act  
          of 1940); and permitting (a rigorous and often costly process in  
          which applicants apply to DBO for a permit that is good for one  
          year; Section 25213; according to DBO, only 130 permit  
          applications were filed with the DBO  in 2013).  





          AB 722 takes the third approach of permitting.  An applicant  
          turns in a permit application to offer securities.  According to  
          AB 722 once the application is filed, the issuer may begin to  
          offer.  The DBO has 60 days to approve the application, should  
          the review process take longer than 60 days, the offers  
          automatically become effective on the 60th day.  





          Crowdfunding: 









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          Crowdfunding is a collective cooperation of people who network  
          and pool their money and resources together, usually via the  
          internet, to support efforts initiated by other organizations.  
          Crowdfunding literally attracts a "crowd" of people, each of  
          whom takes a small stake in a business idea by contributing  
          towards an online funding target.  Crowdfunding has become a  
          popular and alternative method of raising finance for a  
          business, real estate investments, projects or ideas and has  
          become popularized online by sites such as Kickstarter,  
          Wefunder, Crowdfunder and RockthePost.





          Crowdfunding is a means to raise money by attracting relatively  
          small individual contributions from a large number of people. In  
          recent years, crowdfunding websites have proliferated to raise  
          funds for charities, artistic endeavors and businesses. These  
          sites did not offer securities, such as an ownership interest or  
          share of profits in a business; rather, money was contributed in  
          the form of donations, or in return for the product being made.   






          While the goal of this measure is admirable, providing increased  
          access to capital for small businesses, the risks associated  
          with the measure could be at the expense of those most  
          vulnerable, un-sophisticated non-accredited and accredited  
          investors.  AB 722 does have a cap of $5,000 which weakens the  
          ability for an issuer to take an investors lifesavings but small  
          business investments have even greater risk than normal.  About  








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          50 % of all small businesses fail within the first five years  
          according to a crowdfunding warning document issued by the North  
          American Securities Administrators Association (NASAA).   





          AB 722 does not provide for a platform or portal to solicit  
          accredited and non-accredited investors.  AB 722 does require  
          issuers to place the investment in a third-party escrow account  
          instead but the measure is vague on who the escrow holder would  
          be, what protections would exist and what disclosures would be  
          required by the escrow holder.  Since a platform is not used it  
          is not clear what method an issuer would use as far as general  
          solicitation and general advertising under AB 722.  Title III of  
          the JOBS Act along with AB 722 expands securities to  
          equity-based crowdfunding.  The public most often views  
          crowdfunding as donation based.  


          
          Chart below lays out important pieces of both Title III of the  
          Jobs Act and AB 722
          


           ------------------------------------------------------------------ 
          |                        | Title III of JOBS  |       AB 722       |
          |                        |        Act         |                    |
          |------------------------+--------------------+--------------------|
          |Nature of Authorization |Exemption from      |Qualification by    |
          |                        |registration        |Permit              |
          |                        |requirements of the |                    |
          |                        |Securities Act of   |                    |
          |                        |1933                |                    |
          |------------------------+--------------------+--------------------|
          |Maximum Total Value of  |$1 million per      |$1 million per      |
          |Securities That May Be  |12-month period     |12-month period     |








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          |Sold In Reliance on the |                    |                    |
          |Authorization           |                    |                    |
          |------------------------+--------------------+--------------------|
          |Maximum Aggregate Value |Investors with      |Non-accredited      |
          |of Securities That May  |annual income or    |investors:  $5,000  |
          |Be Sold to a Single     |net worth <$100K:   |or a greater amount |
          |Investor                |greater of $2K or   |as determined by    |
          |                        |5% of annual income |the commissioner.   |
          |                        |or net worth.       |                    |
          |                        |                    |Accredited          |
              |                        |Investors with      |investors:  No      |
          |                        |annual income or    |limit other than    |
          |                        |net worth of $100K  |the $1 million cap. |
          |                        |or more:  10% of    |                    |
          |                        |annual income or    |                    |
          |                        |net worth, not to   |                    |
          |                        |exceed $100K.       |                    |
          |------------------------+--------------------+--------------------|
          |Is An Intermediary      |Yes.  Transactions  |No                  |
          |Required?               |must be conducted   |                    |
          |                        |through a           |                    |
          |                        |registered broker   |                    |
          |                        |or a registered     |                    |
          |                        |funding portal.     |                    |
          |------------------------+--------------------+--------------------|
          |Requirements Applicable |Broker or portal    |N/A                 |
          |to Intermediaries       |must register with  |                    |
          |(these requirements     |the SEC and FINRA;  |                    |
          |will be clarified and   |provide specified   |                    |
          |may be augmented by the |disclosures to      |                    |
          |SEC when it finalizes   |investors; ensure   |                    |
          |its crowdfunding        |that each investor  |                    |
          |regulations)            |reviews specified   |                    |
          |                        |education           |                    |
          |                        |information that    |                    |
          |                        |will be established |                    |
          |                        |by the SEC by       |                    |
          |                        |regulation and      |                    |
          |                        |affirms that they   |                    |








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          |                        |understand the      |                    |
          |                        |risks of the        |                    |
          |                        |investment they are |                    |
          |                        |about to undertake; |                    |
          |                        |perform background  |                    |
          |                        |checks on persons   |                    |
          |                        |with key management |                    |
          |                        |roles in the        |                    |
          |                        |issuer's            |                    |
          |                        |organization; make  |                    |
          |                        |key information     |                    |
          |                        |provided by the     |                    |
          |                        |issuer available to |                    |
          |                        |investors; ensure   |                    |
          |                        |that all offering   |                    |
          |                        |proceeds are only   |                    |
          |                        |provided to the     |                    |
          |                        |issuer when the     |                    |
          |                        |aggregate capital   |                    |
          |                        |raised from all     |                    |
          |                        |investors is equal  |                    |
          |                        |to or greater than  |                    |
          |                        |a target offering   |                    |
          |                        |amount, and allow   |                    |
          |                        |investors to cancel |                    |
          |                        |their commitments   |                    |
          |                        |to invest in        |                    |
          |                        |accordance with     |                    |
          |                        |rules to be         |                    |
          |                        |promulgated by the  |                    |
          |                        |SEC; undertake      |                    |
          |                        |efforts to ensure   |                    |
          |                        |that no individual  |                    |
          |                        |investor exceeds    |                    |
          |                        |the maximum         |                    |
          |                        |allowable purchase  |                    |
          |                        |of crowdfunding     |                    |
          |                        |offerings; protect  |                    |
          |                        |the privacy of      |                    |








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          |                        |information         |                    |
          |                        |collected from      |                    |
          |                        |investors; refrain  |                    |
          |                        |from compensating   |                    |
          |                        |promoters, finders, |                    |
          |                        |or lead generators  |                    |
          |                        |for providing the   |                    |
          |                        |broker or funding   |                    |
          |                        |portal with         |                    |
          |                        |personal            |                    |
          |                        |identifying         |                    |
          |                        |information about   |                    |
          |                        |any potential       |                    |
          |                        |investors; and      |                    |
          |                        |prohibit its        |                    |
          |                        |directors,          |                    |
          |                        |officers, or        |                    |
          |                        |partners from       |                    |
          |                        |having any          |                    |
          |                        |financial interest  |                    |
          |                        |in an issuer using  |                    |
          |                        |its services.       |                    |
          |------------------------+--------------------+--------------------|
          |Requirements Applicable |Issuers must file   |Issuers must file   |
          |to Issuers              |with the SEC and    |with the            |
          |                        |provide to          |commissioner and    |
          |                        |investors and the   |provide to          |
          |                        |broker or funding   |investors a Small   |
          |                        |portal all of the   |Company Offering    |
          |                        |following: key      |Registration Form   |
          |                        |information about   |U-7.  The U-7 is a  |
          |                        |the identity of the |37-page document    |
          |                        |issuer, its key     |(not including      |
          |                        |owners and          |attachments) that   |
          |                        |management          |includes            |
          |                        |personnel, its      |information about   |
          |                        |business plan, a    |the issuer, its     |
          |                        |description of the  |management, and its |
          |                        |financial condition |business plan, and  |








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          |                        |of the issuer (see  |about the offering, |
          |                        |detail below); a    |including a         |
          |                        |description of the  |description of the  |
          |                        |stated purpose and  |purpose and         |
          |                        |intended use of the |intended use of the |
          |                        |proceeds of the     |proceeds of the     |
          |                        |offering; the       |offering.           |
          |                        |target offering     |According to this   |
          |                        |amount, deadline to |bill's sponsor, the |
          |                        |reach the target    |two key             |
          |                        |offering amount,    |requirements of the |
          |                        |and regular updates |U-7 that are not    |
          |                        |regarding the       |required by Title   |
          |                        |progress of the     |III of the JOBS Act |
          |                        |issuer in meeting   |are the requirement |
          |                        |the target          |that the issuer     |
          |                        |offering; the price |describe what it    |
          |                        |to the public of    |must do to meet key |
          |                        |the securities      |milestones and      |
          |                        |being offered; a    |describe how it     |
          |                        |description of the  |will use the        |
          |                        |ownership and       |offering proceeds   |
          |                        |capital structure   |if only the minimum |
          |                        |of the issuer, and  |offering amount is  |
          |                        |including a         |raised.             |
          |                        |description of      |                    |
          |                        |specified risks to  |Issuers must return |
          |                        |purchasers.         |all money raised    |
          |                        |                    |from investors, if  |
          |                        |Issuers are         |they do not raise   |
          |                        |prohibited from     |enough to meet      |
          |                        |advertising the     |their minimum       |
          |                        |terms of the        |offering amount.    |
          |                        |offering, except    |                    |
          |                        |through notices     |                    |
          |                        |that direct         |                    |
          |                        |investors to the    |                    |
          |                        |broker or funding   |                    |
          |                        |portal.  Direct     |                    |








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          |                        |solicitation of     |                    |
          |                        |investors is not    |                    |
          |                        |allowed.            |                    |
          |                        |                    |                    |
          |                        |Issuers are         |                    |
          |                        |prohibited from     |                    |
          |                        |compensating or     |                    |
          |                        |committing to       |                    |
          |                        |compensate,         |                    |
          |                        |directly or         |                    |
          |                        |indirectly, any     |                    |
          |                        |person to promote   |                    |
          |                        |its offerings       |                    |
          |                        |through             |                    |
          |                        |communication       |                    |
          |                        |channels provided   |                    |
          |                        |by a broker or      |                    |
          |                        |funding portal,     |                    |
          |                        |without taking      |                    |
          |                        |steps to ensure     |                    |
          |                        |that the person     |                    |
          |                        |clearly discloses   |                    |
          |                        |receipt, past or    |                    |
          |                        |prospective, of     |                    |
          |                        |such compensation.  |                    |
           ------------------------------------------------------------------ 
          



          General Solicitation & General Advertising:
           


           As their names imply, general solicitation and general  
          advertising are not targeted.  They reach an audience that  
          includes both accredited and non-accredited investors.   
          According to the SEC, general solicitation includes  
          advertisements published in newspapers and magazines, public  








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          websites, communications broadcasted over television and radio,  
          and seminars where attendees have been invited by general  
          solicitation or general advertising.  Use of an unrestricted,  
          and therefore publicly available, website also constitutes  
          general solicitation.  General advertising is general  
          solicitation made by means of an advertisement.  


          


          SCOR:



          California, under existing law, already has the SCOR program  
          which was established through legislation in 1986.  California  
          requires that SCOR offerings ($1 million or less) must be  
          qualified by the commissioner of DBO.  Applicants that satisfy  
          SCOR conditions can use the Form U-7 disclosure document from  
          the NASAA.  However, SCOR applicants must provide the financial  
          information required by the DBO rather than those required by  
          Form U-7.  The current SCOR program is perceived as time  
          consuming and burdensome and is looked upon as unsuccessful.   
          Over the years, DBO has received very few applications on an  
          annual basis. 





          AB 722, instead of working within the SCOR program and improving  
          the existing qualification by permit, AB 722 layers a new permit  
          application process on top of the SCOR program. The SCOR program  
          also only applies intrastate while AB 722 states "within or  
          outside the state."  


          








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          Background:


          


          On April 5, 2012, President Obama signed landmark legislation,  
          H.R. 3606, the Jumpstart Our Business Startups Act (the "JOBS  
          Act").  The JOBS Act makes it easier for startups and small  
          businesses to raise funds.  This legislation passed Congress  
          through a 73-26 Senate vote and a 380-41 House vote.  As far as,  
          AB 722 is concerned, Title III of the JOBS Act requires the SEC  
          to develop new rules permitting capital raising by  
          "crowdfunding."  SEC is still in the rule-making process and is  
          due to publish final regulations before non-SEC accredited  
          investors can start financing small businesses.  





          In October of 2013, the SEC issued the proposed crowdfunding  
          rules in a 585 page document.  The JOBS Act creates an exemption  
          from the registration requirements of the Securities Act of 1933  
          that provides for a form of securities crowdfunding.  The SEC  
          has not taken lightly the role of establishing a brand new type  
          of financial intermediary and a whole new regulatory process  
          which is why it is estimated the final rules will not be  
          released until October, 2015.  The SEC has struggled to create a  
          set of rules that respected the flexible and democratic nature  
          of crowdfunding (which makes it so appealing to very small and  
          early stage start-up companies) while also implementing  
          sufficient regulation to satisfy consumer and investor  
          protection critics who fear that investment crowdfunding is far  
          too open to abuse and fraud.  










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          Key features of the SEC's proposed rules:



           A company will only be able to raise a maximum aggregate  
            amount of $1 million through crowdfunding offerings per  
            12-month period.

           Companies raising less than $500,000 through crowdfunding  
            within any 12-month period will need to share financial  
            statements and income-tax returns with their investors and  
            those raising more than $500,000 will be obligated to provide  
            audited financial statements to investors.



           Investors with an annual income or net worth of less than  
            $100,000 will be permitted to invest a maximum of $2,000 or 5%  
            of their annual income or net worth (whichever is greater) per  
            12-month period.



           Investors with an annual income or net worth equal to or  
            greater than $100,000 will be permitted to invest up to 10% of  
            their annual income or net worth (whichever is greater) per  
            12-month period up to a total maximum of $100,000 in  
            securities.



           Companies conducting a crowdfunding offering will need to file  
            certain information with the SEC, the relevant intermediary  
            facilitating the crowdfunding offering and potential  
            investors.









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           Private crowdfunding offerings will be conducted exclusively  
            online through a registered broker or funding platform  
            (portal). Funding platforms will be required to register with  
            the SEC. Non-US crowdfunding platforms will be able to  
            register with the SEC, subject to an on-site examination.



           Registration rules for crowdfunding platforms, which were  
            developed in partnership with the Financial Industry  
            Regulatory Authority (FINRA).   FINRA released its set of  
            proposed rules, the Funding Portal Rules.





          According to the Small Business Administration, "The SEC  
          released the notice of proposed rulemaking for Title III of the  
          JOBS Act on November 5, 2013.  The proposal requested comments  
          on title definitions, investment limits, how income and net  
          worth are calculated for individuals, intermediaries, and many  
          other topics. The comment period closed February 3, 2014 after  
          receiving nearly 500 comments from individuals and  
          organizations.  The SEC has not finalized the equity-based  
          crowdfunding rule yet, but has set a date of October 2015 to  
          take final action.  This will provide prospective platforms,  
          investors, and small business entrepreneurs with the assurances  
          they need to go forward in planning for a future with  
          equity-based crowdfunding."





          NASAA









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          AB 722 requires an issuer to file with the administrator  
          (commissioner of DBO) a small company offering registration  
          disclosure document on Form U-7.  The form is found at the NASAA  
          website:   
          http://www.nasaa.org/industry-resources/corporation-finance/scor- 
          overview/scor-forms/.   The form goes into detail, among other  
          things, the type of investment, potential risks to the investor,  
          the offering amount, and the deadline to reach the offering. 





          Other States:


          


          A number of other states have enacted crowdfunding in a variety  
          of forms all only apply intrastate.  These states include:   
          Georgia, Kansas, Michigan, Idaho, Washington, Wisconsin and  
          Maine.  





          Federal Regulation A+:





          On March 24, 2015, the SEC adopted final rules to implement the  








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          rulemaking mandate of Title IV of the JOBS Act by adopting  
          amendments to Regulation A.  In December 2013, the SEC had  
          released a proposed rule that essentially retained the current  
          framework of Regulation A and expanded if for larger exempt  
          offerings.  Existing Regulation A provided an exemption from the  
          registration requirement of Section 5 for certain smaller  
          securities offering by private companies.  The securities sold  
          in Regulation A offering are not considered "restricted  
          securities" and are freely transferable.  The "New" Regulation A  
          provides an exemption for U.S. companies to raise up to  
          $50,000,000 in a 12-month period.  The final rules create two  
          tiers:  Tier 1 for smaller offerings raising up to $20,000,000  
          in any 12 month period and Tier 2 for offerings raising up to  
          $50,000,000.  Tier 1 will be subject to both SEC and state blue  
          sky pre-sale review.  





          The finalized rules of Regulation A+ will be very appealing to  
          small businesses.  


          


          Questions & Concerns:





          1)Should California enact intrastate crowdfunding or should the  
            Legislature wait until after the SEC finalizes the federal  
            crowdfunding rules in October, 2015?   The SEC proposed rules  
            have been touted as being too stringent which may hinder those  
            who actually use it.  Some would say this is intentional to  
            deter fraud and scams under this new framework.  Ultimately,  








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            the question is whether or not California needs to establish  
            its own crowdfunding framework which may be more lax and/or  
            conflict and if so, is that good?  AB 722 if enacted would  
            allow and promote "regulation shopping."  Issuers can  
            determine whether to register to adhere to federal regulations  
            or state securities regulations.  

          2)The economy is recovering, the unemployment rate is down, the  
            federal government acted, is there still a need to act on a  
            statewide level to produce more ways to raise capital?  In  
            addition, the U.S. Treasury just gave the California State  
            Treasurer $55,218,250 in federal funds from the JOBS Act to  
            provide access to capital to small businesses through the  
            California Pollution Control Financing Authority and the  
            California Infrastructure and Economic Development Bank.  This  
            is the second of three disbursements.  Are small businesses  
            capitalizing on these funds?





          3)As noted above in "other states," the states that have adopted  
            a crowdfunding framework are states that are desperately  
            trying to attract and lure in new businesses.  California is  
            known as the start-up epicenter.  According to a recent study  
            by Radius, a San Francisco technology company that collects  
            small business data in the U.S. of the top 12 places to  
            establish a start-up in 2014, California had three cities  
            which included:  San Diego as number 1, San Francisco as  
            number 6 and San Jose as number 12.  Are small businesses  
            really struggling to establish themselves in California?  The  
            small businesses that would need to use crowdfunding may be  
            the types of businesses that have exhausted all other options  
            and if so, are these the type of businesses we want  
                                                                                       established in California soliciting to potentially vulnerable  
            unsophisticated investors?

          4)AB 722 makes clear that the securities sold could be "within  








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            or outside California."  Wouldn't anything outside California  
            conflict with federal rules? Other states who have enacted  
            state crowdfunding proposals only apply intrastate.  How will  
            DBO be able to enforce?


          
          Previous Legislation:


          AB 2096 (Muratsuchi) (2014 Legislative Session) would have  
          created a new way in which a person seeking to offer or sell  
          securities could qualify their offering, by authorizing the  
          "qualification by notification" of offers or sales of securities  
          advertised by means of general solicitation and general  
          advertising, as specified.  Died in the Senate Appropriations  
          Committee.  


          AB 783 (Daly) (2013 Legislative Session) provides that an issuer  
          can offer or sell securities using any form of general  
          solicitation or general advertising.  Died in the Assembly  
          Banking and Finance Committee.





          AB 2081 (Allen) (2012 Legislative Session) provides that an  
          issuer can offer or sell securities using any form of general  
          solicitation or general advertising.  Died on the Senate Floor. 





          SB 875 (Price) (2010 Legislative Session) would have exempted   
          from qualification offerings or sales of securities using a  
          general solicitation or general advertising, provided the  








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          transaction meets specified requirements, including a  
          requirement that the sales are made  to accredited investors.   
          Died in Senate Banking and Financial Institutions. 





          AB 1644 (Campbell & Briggs) (2001 Legislative Session) would  
          have exempted from qualification offerings or sales of  
          securities using a general solicitation or general advertising,  
          provided the transaction meets specified requirements, including  
          a requirement that the sales are made to accredited investors.   
          Failed passage in Assembly Banking and Finance Committee.


          Double Referral





          This measure is double referred to the Assembly Judiciary  
          Committee. 





          Recommended Amendments:


          


          The committee recommends that the author delete the "test the  
          water" provisions in the measure which allows an issuer to offer  
          securities prior to approval from DBO.  









                                                                     AB 722


                                                                    Page  27









          On page 3, delete , " or (B) an application for qualification  
          under Section 25113.1 has been filed with the commissioner but  
          has not yet become effective; "



          On page 18, delete, "or (B) an application for qualification  
          under Section 25113.1 has been filed with the commissioner but  
          has not yet become effective; "



          Technical Amendments:


          


          Delete all references to "issuer" and insert "applicant"





          On page 21, line 10, line 17, line 23, line 27, line 29, line  
          32, line 34, line 35, line 38


          


          REGISTERED SUPPORT / OPPOSITION:











                                                                     AB 722


                                                                    Page  28






          Support


          California Asian Pacific Chamber of Commerce


          California Association of Competitive Telecommunications  
          Companies (CALTEL)


          California Association of Micro-economic Opportunity (CAMEO)


          California Black Chamber of Commerce


          California Disabled Veteran Business Alliance


          California Fence Contractors Association


          California Hispanic Chamber of Commerce


          California Metals Coalition (CMC)


          Coleman & Horowitt LLP


          Flasher Barricade Association


          Golden Gate Business Association


          Greater Geary Boulevard Merchants & Property Owners Association








                                                                     AB 722


                                                                    Page  29







          National Federation of Independent Business (NFIB)


          North East Mission Business Association (NEMBA)


          Northern California Independent Booksellers Association (NCIBA)


          Plumbing Heating Cooling Contractors of California (PHCC)


          San Francisco Builders Exchange


          San Francisco Chamber of Commerce


          San Francisco Council of District Merchants Association (SFCDMA)


          San Francisco Locally Owned Merchants Alliance


          San Francisco Small Business Network 


          Small Business California (SB-Cal)


          Small Business Majority


          South Bay Entrepreneurial Center (SBEC)


          SpanishOne Translations, Inc.








                                                                     AB 722


                                                                    Page  30










          Concerns


          


          Consumers Attorneys of California




          Opposition


          AARP


          Public Investors Arbitration Bar Association




          Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)  
          319-3081


















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