BILL ANALYSIS Ó
AB 2178
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Date of Hearing: May 4, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
AB
2178 (Chiu) - As Amended April 18, 2016
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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 equity crowdfunding and sets up a
framework for regulating these offerings. In summary, the bill:
1)Defines the following conditions under which an applicant may
file for a "crowdfunding" permit:
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a) The applicant is a California corporation or a foreign
corporation, as specified.
b) The total offering of securities by the applicant to
be sold in a 12-month period is limited to $1 million.
c) The aggregate amount of securities sold to any
investor does not exceed $5,000 or 10% of the net worth of
that natural person (exclusive of home, home furnishings,
and automobiles) in any 12-month period, or such other
amounts the Commissioner of the Department of Business
Oversight (DBO) authorizes by rule of order.
d) Offers and sales cannot be integrated with prior
offers or sales of securities or subsequent offers of
sales or securities.
e) The applicant must take reasonable steps to ensure
that that each non-accredited investor has sufficient
knowledge and experience in financial business matters
that the investor is capable of evaluating the merits and
risks of a protective investment.
f) The applicant files with the Commissioner and provides
to investors a disclosure document, as defined, and a
Small Company offering Registration (SCOR) disclosure
document, no less than 10 business days prior to
commencement of the offering of securities.
g) The applicant or a third party does not engage in any
direct solicitation, including face-to-face and telephone
solicitations, and complies with advertising requirements,
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as specified.
h) The applicant sets 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.
i) The transaction is conducted through an intermediary
and through the intermediary's platform.
j) The applicant or any person selling an investment on
behalf of an applicant shall have a fiduciary obligation
to any investor or prospective investor.
2)Imposes a filing fee of $200 plus one fifth of 2 of the
aggregate value of the securities sought to be sold.
3)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.
4)Requires DBO to either issue or deny the permit within 60 days
of receipt of the application otherwise the applicant can
demand a hearing with DBO to explain why the permit has not
been granted.
FISCAL EFFECT:
1)Significant annual administrative costs in the range of $2
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million to DBO for attorneys to review applications, office
technicians for processing, and overhead expenses.
2)Unknown and possibly significant revenues from filing fees to
offset costs of administrating the program.
COMMENTS:
1)Purpose. According to the sponsor, Small Business California,
AB 2178 provides additional means for small businesses and
startups to access capital. 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 those securities to non-accredited
investors. The bill is similar to a previous bill advanced by
this sponsor to permit securities "crowdfunding" (AB 722
(Perea) in 2015).
2)Federal securities law 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 2015, the SEC adopted final rules under Title
III of the JOBS Act. The JOBS Act provided for a new exemption
under the Securities Act of 1933 that will permit
securities-based crowdfunding by private companies without
registering the offering with the SEC. The final rules become
effective in May 2016 except that the forms enabling funding
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portals to register with the SEC became effective on January
29, 2016. Additionally, the SEC staff must submit a report to
the SEC no later than three years following that effective
date on the impact of the regulation on capital formation and
investor protection.
3)Staff Comments. The goals of this bill are admirable, but two
important concerns were raised in the Assembly Committee on
Banking and Finance analysis of AB 2178:
a) Parallel federal action on crowdfunding may make efforts
to develop a statewide program premature. The SEC is
required to report the results of the federal regulations
in three years, and the committee may wish to wait until
there is more information on what works and doesn't work
with the federal framework.
b) There could be a prevalence of "regulation shopping,"
where issuers or applicants can determine whether to adhere
to federal regulations or state securities regulations
based on what is most advantageous to them. Under AB 2178,
California's program would offer stronger consumer
protections, which may result in applicants choosing to
engage with the federal program instead. For this reason,
it is hard to project participation in the California
program, which has implications for the kinds of fee
revenue that will go to DBO to support operations.
Analysis Prepared by:Luke Reidenbach / APPR. / (916)
319-2081
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