BILL ANALYSIS Ó
AB 722
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Date of Hearing: May 13, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
722 (Perea) - As Amended May 5, 2015
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill authorizes a new form of securities offering in
California to facilitate crowdfunding as an alternative to a
similar authorization in federal law under the JOBS Act.
Specifically, this bill allows any offer or sale of any security
to qualify by permit so long as:
1)The aggregate amount of securities sold in the offer does not
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exceed $1 million in any 12-month period.
2)The aggregate amount of securities sold to any investor does
not exceed $5,000 or 10% of the net worth of that natural
person (determined exclusive of home, home furnishings, and
automobiles) in any 12-month period, or such other amount as
the commissioner of the Department of Business Oversight (DBO)
authorizes by rule or order.
3)The issuer takes reasonable steps to ensure that each
investor, who is a natural person and is not an "accredited
investor" under current law, has sufficient knowledge and
experience in financial business matters that the investor is
capable of evaluating the merits and risks of the prospective
investment.
4)The issuer files with the commissioner, and provides investors
at least 10 business days prior to commencement of the offer,
a disclosure document meeting the requirements for
qualification by permit and the Small Company Offering
Registration requirements of Form U-7 adopted by the North
American Securities Administrators Association.
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5)The offer is not integrated with prior or subsequent offers or
sales of securities; investors are given 3 business days to
rescind any investment commitment made in the offer; the
issuer places all funds raised into a third-party escrow
account until the minimum offer amount is reached; and the
issuer returns all funds to investors if the minimum offer
amount is not reached within one year.
6)The issuer does not engage in any direct solicitation,
including face-to-face and telephone solicitations; the issuer
is not a "bad actor" under federal regulations; and the issuer
and other offer participants assume a fiduciary obligation to
any investor or prospective investor.
7)The issuer pays a filing fee of $200 plus 1/5 of 2% of the
aggregate value of securities sought in the offer.
The bill provides DBO with 60 days to approve the application.
If the review process take longer than 60 days, the offer
automatically becomes effective on the 60th day.
FISCAL EFFECT:
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Annual GF administrative costs to DBO of approximately $2.9
million for attorneys to review applications, office technicians
for processing, and overhead expenses, some of all of which
would likely be recoverable through filing fees.
COMMENTS:
1)Purpose. According to the sponsor, Small Business California,
AB 722 provides additional means for small businesses and
startups to access capital. The bill is similar to previous
bills advanced by this sponsor to permit securities
"crowdfunding" (for example, AB 2096 (Muratsuchi) in 2014),
however those efforts would have provided an exemption from
state securities laws. By contrast, this bill creates a
modified qualification process with DBO, under which issuers
may offer securities via general solicitation and general
advertising to the public, and may offer to non-accredited
investors. As a result, while the process of qualifying an
offering under AB 722 is more involved than in the previous
bills, the potential universe of investors, and the issuer's
ability to advertise to those investors, is significantly
greater.
2)Crowdfunding. Crowdfunding is an alternative means of raising
seed funding for startup companies, projects, or ideas that do
not yet have sufficient assets or cash flows to attract more
traditional funding, such as bank financing. It is an
alternative to the venture capital or angel investor funding
common in the high-tech and internet startup industries.
Crowdfunding investors typically provide small individual
contributions or investments in order to finance a new project
or company. One of the most common ways is to pre-order the
product or service that the startup company will eventually
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provide. Certain charitable organizations have also had
success by "crowdfunding" contributions from supporters for
particular projects. Crowdfunding has been popularized by
websites such as Kickstarter.
Another possible means of crowdfunding would be the sale of
equity securities, though the cost of compliance with existing
federal and state securities laws, which were enacted to
regulate much larger offerings, has previously been cost
prohibitive. AB 722 and forthcoming regulations promulgated
by the SEC will expand crowdfunding to include the issuance of
securities.
3)Overlap with federal securities laws and the JOBS Act. In
April 2012, President Obama signed the Jumpstart Our Business
Startups Act (JOBS Act), which was designed to make it easier
for startups and small businesses to raise capital, and
included a provision requiring the SEC to develop new rules
permitting capital raising by crowdfunding.
In October of 2013, the SEC issued the proposed crowdfunding
rules. The rules are extensive and will result in an entirely
new regulatory process for crowdfunded securities offerings.
In creating this set of rules, the SEC attempted to respect
the flexible and democratic nature of crowdfunding while
adhering to its core mandate of protecting investors from
fraud and abuse.
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Key features of the SEC's proposed rules include:
a) A maximum aggregate offering amount of $1 million in any
12-month period.
b) Disclosure of financial statements for companies raising
less than $500,000 and audited financial statements for
those raising more than $500,000, and filing with the SEC.
c) Limitations on the aggregate investments for individuals
over a 12-month period.
i) Investors with an annual income or net worth of less
than $100,000: a maximum of $2,000 or 5% of their annual
income or net worth, whichever is greater.
ii) Investors with an annual income or net worth equal
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to or greater than $100,000: a maximum of $100,000 or 10%
of their annual income or net worth, whichever is
greater.
d) Private crowdfunding offerings will be conducted
exclusively online through broker or funding platforms
developed in partnership with the Financial Industry
Regulatory Authority (FINRA) and registered with the SEC.
4)Staff comments. The author and committee may wish to consider
whether state regulation of crowdfunded securities offerings
remains premature given the current rulemaking in progress by
the SEC. In particular, the author and committee may wish to
consider the following:
a) This bill overlaps in many aspects, yet differs in
certain areas, relative to investor and investment
thresholds, disclosure requirements, and manner of offering
from the rules currently proposed by the SEC that could, in
many cases, make the regime proposed in AB 722 less
attractive to issuers than the SEC rules. AB 722 will also
be available only to offerings conducted exclusively in
California. As a result, issuers will very likely be
incentivized to rely upon the SEC rules to access a deeper
pool of capital and avoid the added restrictions and
disclosure requirements of AB 722, potentially undermining,
at least in part, the policy goals of the bill.
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b) This bill is sufficiently similar to the proposed SEC
rules that certain investors may be confused as to which
offering standard issuers are relying upon and may not be
aware that there are different investor standards and
different disclosure requirements between the two regimes.
This may be particularly true if online crowdfunded
offerings become common and take on an otherwise common
style and format in order to compete for investor interest.
As a result, California investors could inadvertently
violate investment limits or abstain from investing in
offerings for which they were otherwise eligible, not
realizing they had invested in multiple crowdfunded
offerings conducted under different rules.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081
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