BILL ANALYSIS Ó
AB 2751
Page 1
Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 2751
(Brown) - As Introduced February 19, 2016
SUBJECT: Securities: qualification: exemptions
SUMMARY: Authorizes three new securities permitting exemptions
under California's Corporate Securities Law of 1968.
Specifically, this bill:
1)Exempts from state securities permitting laws all of the
following:
a) Any offer or sale of any security that meets each of the
following criteria:
i) The aggregate amount of securities sold to all
purchasers by the issuer within any 12-month period does
not exceed $500,000.
ii) Sales to non-accredited investors are capped at
$1,000 in the aggregate during a 12-month period, or a
greater amount determined by the Commissioner of the
Department of Business Oversight (DBO).
iii) Sales to accredited investors are capped at 5% of
the investor's net worth in the aggregate during a 12
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month-period.
iv) Issuers may advertise the offering to California
investors only, unless the offering complies with the
securities laws of other jurisdictions. Issuers must
take steps to ensure that any public advertising
indicates that the offering is directed at California
residents, or that any solicitations made to nonresidents
of California comply with applicable laws of other
individual states and the United States.
v) Specifies that this exemption is unavailable if the
issuer fails to file the notice within a time period
determined by the Commissioner.
vi) The issuer provides to DBO and purchasers and makes
available to potential purchasers, all of the following:
(1) A cover sheet containing all of the following
statements, in bold typeface no smaller than 12-point
type: "Investment in a small business is often risky.
You should not invest any funds in this offering
unless you can afford to lose your entire investment.
Potential purchasers should review information about the
enterprise and offering, and consider the terms and
risks of this offering before investing. After
reviewing the financial information, description of
the business, activities, risk factors, and
development timeline, potential purchasers should
consider whether success of the enterprise is
realistic.
No government regulator is recommending these
securities. No government regulator has verified that
this document is accurate or determined that it is
adequate. No government regulator has recommended or
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given approval to, any person, security, or
transaction associated with this offering."
(2) The issuer's street address; telephone number;
person to contact with respect to the offering; type
of securities offered; financial terms of the
offering; the minimum amount the issuer is seeking to
raise; a description of the business of the issuer and
how the issuer plans to carry out its activities; a
budget for the use of proceeds of the offering; a list
of the factors the issuer considers to be the most
significant risks to an investor; and a description,
in chronological order, or the steps management
intends to take to achieve, maintain, or improve
profitability during the 36 months following receipt
of the offering proceeds.
(3) Income tax returns filed by the issuer for the
most recent completed year, if any.
(4) Specified financial statements of the issuer,
prepared in accordance with generally accepted
accounting principles, and certified by the principal
executive officer of the issuer to be true and
complete in all material respects.
(5) A written statement of information about any
material legal proceedings involving the company or
its officers and directors.
vii) Issuers may not utilize the exemption to raise funds
for an enterprise dependent on the creation of a product
or technology for which no fully functional prototype has
been made in advance of the public offering of
securities. Any fully functional prototype must be
demonstrated in person to any potential investor upon
request, as specified.
viii) Provides a "bad actor" disqualification.
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b) Any offer or sale of any security in a transaction that
meets each of the following criteria:
i) The aggregate amount of securities sold to all
purchasers by the issuer within any 12-month period does
not exceed $2 million.
ii) At least 75 percent of amounts raised through the
offering will be reserved or allocated to any of the
following for agricultural purposes: purchase of fee
title to real property, lease of 30 years or more of real
property, purchase of an easement on real property,
construction of real property, or improvement to real
property.
iii) The issuer is an agricultural enterprise that is
majority-controlled by one or more individuals who will
actively farm the agricultural land to be purchased,
leased, or improved and who plan to be actively engaged
in the agricultural enterprise, the issuer is a nonprofit
public benefit corporation, or the issuer is
majority-controlled by a nonprofit public benefit
corporation.
iv) Sales to non-accredited investors are capped at
either $2,000 or $5,000, depending on whether the
purchaser signs a statement verifying that they have a
minimum annual gross income of $100,000 or a minimum net
worth of $200,000, exclusive of home, home furnishings,
and automobiles. Sales to accredited investors are
capped at 5% of the investor's net worth. The
Commissioner of DBO is allowed to authorize greater
purchase amounts for non-accredited investors by rule or
order.
v) Issuers may advertise the offering to California
investors only, unless the offering complies with the
securities laws of other jurisdictions. Issuers must
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take steps to ensure that any public advertising
indicates that the offering is directed at California
residents, or that any solicitations made to nonresidents
of California comply with applicable laws of other
individual states and the United States.
vi) 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 the issuer has
entered into a contract to purchase a property, easement,
or equipment, or to lease land. If the issuer does not
enter into such a contract within 2 years of the
effective date of the offering, the issuer shall return
all funds to the purchasers. Only applies to the
purchase of farmland equipment or easements where the
cost does not exceed $100,000.
vii) The issuer provides to DBO and purchasers and makes
available to potential purchasers, all of the following:
(1) A cover sheet containing all of the following
statements, in bold typeface no smaller than 12-point
type: "Investment in a small business is often risky.
You should not invest any funds in this offering
unless you can afford to lose your entire investment.
Potential purchasers should review information about the
enterprise and offering, and consider the terms and
risks of this offering before investing. After
reviewing the financial information, description of
the business, activities, risk factors, and
development time line, potential purchasers should
consider whether success of the enterprise is
realistic.
No government regulator is recommending these
securities. No government regulator has verified that
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this document is accurate or determined that it is
adequate. No government regulation has recommended or
given approval to, any person, security, or
transaction associated with this offering."
If the issuer is conducting the offering to raise money
for the purchase of farmland, the cover sheet must
also state, "The company described in this disclosure
form is seeking to purchase farmland. If the sum of
the investment commitments received by the company
does not amount to a sum sufficient to purchase
farmland by [insert date two years after beginning of
offering], your investment in the company will be
returned to you after 60 days to the most recent
address provided."
(2) The issuer's street address, telephone number,
person to contact with respect to the offering, type
of securities offered, financial terms of the
offering, the minimum amount the issuer is seeking to
raise, a description of the business of the issuer and
how the issuer plans to carry out its activities, a
budget for the use of proceeds of the offering, a list
of the factors the issuer considers to be the most
significant risks to an investor, and a description,
in chronological order, or the steps management
intends to take to achieve, maintain, or improve
profitability during the 36 months following receipt
of the offering proceeds.
(3) If the intended use of proceeds of the
offering it to purchase real property, and the
particular property to be purchased has been
identified, a description and address of the property,
an appraisal completed within the last year, and a
description of all improvements to be made on the
property in order to make it viable for agricultural
use. If the property to be purchased has not been
identified, a description of the size, location,
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estimated costs, and characteristics of the property
the issuer is seeking.
(4) Income tax returns filed by the issuer for the
most recently completed year, if any.
(5) Specified financial statements of the issuer,
prepared in accordance with generally accepted
accounting principles, and certified by the principal
executive officer of the issuer to be true and
complete in all material respects.
(6) A written statement of information about any
material legal proceedings involving the company or
its officers and directors.
viii) Issuers may not utilize the exemption to raise funds
for an enterprise dependent on the creation of a product
or technology for which no fully functional prototype has
been made in advance of the public offering of
securities. Any fully functional prototype must be
demonstrated in person to any potential investor upon
request, as specified.
ix) Provides a "bad actor" disqualification.
c) Any offer or sale of any security in a transaction that
meets each of the following criteria:
i) At least 75 percent of amounts raised through the
offering will be reserved or allocated to the purchase of
solar photovoltaic panels, wind turbines, equipment
necessary for the generation, storage, and transmission
of energy generated by the solar panels or wind turbines,
or any labor necessary to install solar panels, wind
turbines, or any of the equipment necessary for the
generation, storage, and transmission of energy generated
by solar panels or wind turbines.
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ii) The issuer meets any of the following
qualifications:
(1) The issuer is a cooperative corporation or a
nonprofit mutual benefit corporation with the purpose
of developing and operating one or more facilities to
generate electricity for its members to install solar
panels or wind turbines for its members, either by
selling or leasing panels to members, or to arrange or
allocate net metering credits among members.
(2) The issuer is a nonprofit public benefit
corporation exempt from federal income taxation
pursuant to Sections 501(c)(3) or 501(c)(4) of the
Internal Revenue Code and is purchasing solar panels
or wind turbines primarily to meet the energy needs of
the corporation.
(3) The issuer is a cooperative corporation that
is operated on a cooperative basis in accordance with
Subchapter T of the Internal Revenue Code and the
issuer is purchasing solar panels or wind turbines
primarily to meet the energy needs of the corporation.
(4) The issuer is a California nonprofit public
benefit corporation, mutual benefit corporation, or
cooperative with the purpose of developing and
operating one or more facilities to generate
electricity in a single county and intended customers
within that county, or within a similarly limited
geographic area approved by the Commissioner.
(5) The issuer is an entity owned or entirely
controlled by tenants in multitenant housing, and the
issuer has entered into a contract with the owner of
the property to install solar panels on the property
on which the multitenant housing is located.
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iii) The aggregate amount of securities sold to all
purchasers by the issuer within any 12-month period does
not exceed $2 million.
iv) Issuers may advertise the offering to California
investors only, unless the offering complies with the
securities laws of other jurisdictions. Issuers must
take steps to ensure that any public advertising
indicates that the offering is directed at California
residents, or that any solicitations made to nonresidents
of California comply with applicable laws of other
individual states and the United States.
v) Sales to non-accredited investors are capped at
either $2,000 or $5,000, depending on whether the
purchaser signs a statement verifying that they have a
minimum annual gross income of $100,000 or a minimum net
worth of $200,000, exclusive of home, home furnishings,
and automobiles. Sales to accredited investors are
capped at 5% of the investor's net worth. The
Commissioner of DBO is authorized to authorize greater
purchase amounts by rule or order.
vi) The issuer provides to DBO and purchasers and makes
available to potential purchasers, all of the following:
(1) A cover sheet containing all of the following
statements, in bold typeface no smaller than 12-point
type: "Investment in a small business is often risky.
You should not invest any funds in this offering
unless you can afford to lose your entire investment.
Potential purchasers should review information about the
enterprise and offering, and consider the terms and
risks of this offering before investing. After
reviewing the financial information, description of
the business, activities, risk factors, and
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development time line, potential purchasers should
consider whether success of the enterprise is
realistic.
No government regulator is recommending these
securities. No government regulator has verified that
this document is accurate or determined that it is
adequate. No government regulator has or recommended
or given approval to, any person, security, or
transaction associated with this offering."
(2) The issuer's street address, telephone number,
person to contact with respect to the offering, type
of securities offered, financial terms of the
offering, the minimum amount the issuer is seeking to
raise, a description of the business of the issuer and
how the issuer plans to carry out its activities, a
budget for the use of proceeds of the offering, a list
of the factors the issuer considers to be the most
significant risks to an investor, and a description,
in chronological order, or the steps management
intends to take to achieve, maintain, or improve
profitability during the 36 months following receipt
of the offering proceeds.
(3) Specified financial statements of the issuer,
prepared in accordance with generally accepted
accounting principles, and certified by the principal
executive officer of the issuer to be true and
complete in all material respects.
vii) Issuers may not utilize the exemption to raise funds
for an enterprise dependent on the creation of a product
or technology for which no fully functional prototype has
been made in advance of the public offering of
securities. Any fully functional prototype must be
demonstrated in person to any potential investor upon
request, as specified.
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viii) Provides a "bad actor" disqualification.
2)Expands an existing exemption for nonprofit organizations to
include debt securities, not just equity securities.
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.
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:
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
b) Any natural person with an individual income in excess of
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$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.
3)Provides a "bad actor" disqualification that states no
exemption shall be available for a sale of securities if the
issuer; any predecessor of the issuer; any affiliated issuer;
any director, executive officer, other officer participating
in the offering, general partner or managing member of the
issuer; any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis
of voting power; any promoter connected with the issuer in any
capacity at the time of such sale; any investment manager of
an issuer that is a pooled investment fund; any person that
has been or will be paid (directly or indirectly) remuneration
for solicitation of purchasers in connection with such sale of
securities; any general partner or managing member of any such
investment manager or solicitor; or any director, executive
officer or other officer participating in the offering of any
such investment manager or solicitor or general partner or
managing member of such investment manager or solicitor:
a) Has been convicted, within ten years before such sale
(or five years, in the case of issuers, their predecessors
and affiliated issuers), of any felony or misdemeanor, as
specified;
b) Is subject to any order, judgment or decree of any court
of competent jurisdiction, entered within five years before
such sale that, at the time of such sale, restrains or
enjoins such person from engaging or continuing to engage
in any conduct or practice, as specified; or,
c) Is subject to a final order of a state securities
commission (or an agency or officer of a state performing
like functions); a state authority that supervises or
examines banks, savings associations, or credit unions; a
state insurance commission (or an agency or officer of a
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state performing like functions); an appropriate federal
banking agency; the U.S. Commodity Futures Trading
Commission; or the National Credit Union Administration
that, as specified. [Title 17 of Code of Federal
Regulations (CFR), Section 230.506, subdivision d]
4)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
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.
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)Provides under the Corporate Securities Law of 1968 exemptions
from qualification for certain securities transactions.
[Corporations Code, commencing with Section 25000]
3)Provides that the Commissioner of DBO shall approve all
securities offered or sold in California. [Corporation Code,
Section 25100]
4)Requires all purchasers to have either a preexisting personal
or business relationship with the offeror or any of its
partners, officers, directors or controlling persons, or
managers (as appointed or elected by the members) if the
offeror is a limited liability company, or by reason of their
business or financial experience or the business or financial
experience of their professional advisers who are unaffiliated
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with and who are not compensated by the issuer or any
affiliate or selling agent of the issuer, directly or
indirectly, could be reasonably assumed to have the capacity
to protect their own interests in connection with the
transaction.
[Corporations Code, Section 25102 (f)]
5)Defines "issuer" as any person who issues or proposes to issue
any security, except that:
a) With respect to certificates of deposit, voting trust
certificates or collateral-trust certificates, or with
respect to certificates of interest or shares in an
unincorporated investment trust not having a board of
directors or persons performing similar functions or of the
fixed, restricted management or unit type, "issuer" means
the person or persons performing the acts and assuming the
duties of depositor or manager pursuant to the provisions
of the trust or other agreement or instrument under which
the security is issued. However, with respect to
equipment-trust certificates or like securities, "issuer"
means the person by whom the equipment or property is to be
used.
b) With respect to certificates of interest or
participation in oil, gas or mining titles or leases or in
payments out of production under those titles or leases,
"issuer" means the person or persons in active control of
the exploration or development of the property who sell
those interests or participations or payments or any person
or persons who subdivide and sell those interests or
participations or payments. The determination of the person
or persons in active control of the exploration or
development of the property shall be made on the basis of
the actual relationship of the parties and not on the basis
of the legal designation of a person's interest.
c) With respect to a fractional or pooled interest in a
viatical or life settlement contract, "issuer" means the
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person who creates, for the purposes of sale, the
fractional or pooled interest. In the case of a viatical or
life settlement contract that is not fractionalized or
pooled, "issuer" means the person effecting the
transactions with the investors in those contracts.
d) In the case of an unincorporated association which
provides by its articles for limited liability of any or
all of its members, or in the case of a trust, committee,
or other legal entity, the trustees or members thereof
shall not be individually liable as issuers of any security
issued by the association, trust, committee, or other legal
entity. [Corporations Code, Section 25010]
6)Authorizes several exemptions from the requirement to obtain a
securities permit from DBO prior to offering or selling
securities in this state. 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.
b) 25102(n) provides an exemption for any offer or sale of
any security in a transaction that meets all of the
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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
automobiles. Natural persons are limited to investing no
more than 10% of their net worth in any 25012(n)
investment.
FISCAL EFFECT: Unknown.
COMMENTS:
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Need for the bill:
According to the sponsor, the Sustainable Economies Law Center,
"Investors are increasingly interested in putting their money in
local, community based enterprises instead of investing in the
stock market through distant financial institutions. However,
California securities law makes it very expensive and
time-consuming for a small business to obtain the permit
necessary to legally communicate about its investment needs to a
broad audience. AB 2751 will create modest exemptions from
those requirements for small businesses that comply with
reasonable disclosure requirements and restrictions on the
amount of money they can accept per year. We are especially
excited that the bill recognizes the need to develop more
small-scale farms and community-owned renewable energy
enterprises in California by designating unique exemptions
designed for those types of enterprises in particular."
Background:
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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).
In addition, California provides under specified circumstances,
the ability for an issuer to claim an exemption without
qualification with the DBO. Rather than having to qualify with
DBO which can be costly and time consuming, AB 2751 creates
exemptions from qualification. Currently, the most widely used
exemptions under Corporations Code, Section 21502 are:
1)Section 25102(f) "friends & family":
Under Section 25102(f), which is referred to as the Limited
Offering Exemption, most issuances to the company's founders, as
well as friends and family of any of its directors and officers
will be exempt from the registration requirements of
California's securities laws.
The key aspect of this exemption is the existence of a prior
personal or business relationship between the purchaser of the
security (i.e. the investor or lender) and the company's
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leadership. The exemption is destroyed if there are more than 35
people purchasing securities, or if there is general advertising
or publication of the securities.
2)Section 25102(o) "employees and consultants":
Under Section 25102(o), an issuance of stock options to
employees and consultants is exempt from the registration
requirements of California's securities laws if it satisfies the
equivalent federal exemption under Rule 701 (which does not
preempt state securities laws). To satisfy Rule 701, an issuance
must be made pursuant to an approved option plan, and a company
cannot issue more than the greatest of the following in any
12-month period: $1,000,000, 15% of its total assets, or 15% of
the outstanding amount of that class of securities.
AB 2751 allows issuers to raise money utilizing forms of general
advertising and general solicitation from accredited and
non-accredited investors. Under AB 2751, if an issuer wanting
to utilize one of the exemptions under this measure the issuer
would have to comply with a set of specific rules specific to
the exemption. This measure places a cap on the total amount
that can be raised and requires specified disclosures to
prospective investors. The three new exemptions in this measure
include:
1)Small Investments: Any California business would be able to
raise up to $500,000 per year. Non-accredited investors would
be limited to investing no more than $1,000 each in one
offering. Accredited investors would be limited to 5% of their
net worth in an offering.
2)Farms and Agricultural Land Trusts: This bill would allow a
farm enterprise or agricultural land trust to raise up to
$2,000,000 per year for the purchase of land, long-term
leasing of land, purchase of an easement, construction on
farmland, or improvement of real property to be used for
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agriculture purposes. The issuers using this exemption must be
farmers who will actively farm the land or issuers must be an
agricultural land trust or other nonprofit organization. Under
this exemption, the limits on each individual's investment
amount would be as follows: Any individual investor could
invest up to $2,000. An investor could invest up to $5,000 if
the investor has an annual gross income of at least $100,000
or a total net worth of at least $200,000. Accredited
investors would be limited to investing no more than 5% of
their net worth.
3)Renewable Energy Projects: Similar to the farm and land trust
exemption in the previous paragraph, the bill would allow
nonprofits, cooperatives, and groups of tenants to raise up to
$2,000,000 to purchase solar panels or wind turbines, and
equipment necessary for the storage or transmission of the
energy produced by the panels or turbines. The same limits per
investor as in the farmland exemption above would apply to
these renewable energy projects.
Additionally, this bill would expand an existing exemption for
nonprofit organizations in California Corporations Code Section
25100(j) to include debt securities, not just equity securities.
Because this measure creates exemptions, the burden of complying
with these rules specified in the bill falls directly on the
investor rather than the DBO. Keep in mind, this measure allows
issuers to solicit to both accredited and non-accredited
investors. Most often, non-accredited investors are less
sophisticated to the rules and regulations that should be
followed.
Crowdfunding:
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Crowdfunding is a collective cooperation of people who network
and pool their money and resources together, 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.
Federal Crowdfunding expands securities to equity-based
crowdfunding. The public most often views crowdfunding as
donation based.
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.
Federal Crowdfunding Act:
On April 5, 2012, President Obama signed landmark legislation,
H.R. 3606, 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 2178 is concerned, Title III of the JOBS
Act required the SEC to develop new rules permitting capital
raising by "crowdfunding."
In October of 2013, the SEC issued the proposed crowdfunding
rules in a 585 page document. The SEC struggled to create the
final 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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On October 30, 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 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 the effective date of
crowdfunding on the impact of the regulation on capital
formation and investor protection.
Key features of the SEC's final 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
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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.
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.
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.
Related Legislation:
AB 2178 (Chiu) creates a new qualification by permit under
California's Corporate Securities Law of 1968 to allow
equity-crowdfunding. Pending in the Assembly Appropriations
Committee.
Previous Legislation:
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SB 577 (Hueso) (2015 Legislative Session) would have authorized
three new securities permitting exemptions, as specified, and
increase, from $300 to $1,000, the maximum allowable aggregate
investment of any shareholder in shares of a consumer
cooperative corporation or member in memberships of a consumer
cooperative corporation. Died in the Senate Judiciary
Committee.
AB 722 (Perea) (2015 Legislative Session) would have authorized
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. Died in the Assembly
Appropriations Committee.
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.
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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
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.
Questions & Concerns:
1)The economy is continuing to recover, the unemployment rate is
down, the federal government acted, is there still a need to
act on a statewide level to produce what could be perceived as
"risky" ways to raise capital? The U.S. Treasury gave the
California State Treasurer a total of $168 million 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. The programs guarantee loans made by banks
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to small businesses that otherwise couldn't be made either for
lack of collateral or lack of credit history. California
received more money than any other state with the final $57
million provided in August, 2015. Are small businesses
capitalizing on these funds?
2)In the committee background received, it states, "AB 2751
seeks to provide opportunity for entrepreneurs and investors
who are more comfortable with more personalized communication
methods compared to a website. In some investment offerings
we believe that more open and personalized communication
opportunities may enhance consumer protection because it would
allow an investor and entrepreneur to develop more of a
relationship before the investor makes an investment decision.
Furthermore, it would enable investment offerings to be made
at meetings of community groups that focus on local investing,
where investors often discuss offerings amongst each other in
a supportive environment among peers where they can learn from
each other and are more likely to detect suspicious activity
before investments are made." This statement goes against all
the protections that the SEC created around the JOBS Act as
well as current state law. How are the current securities
exemptions insufficient and why should California open up the
floodgates to allow issuers to solicit accredited and
non-accredited investors to invest in farm land or renewable
energy projects?
3)This measure lacks investor protections and if adopted in its
current form, would leave Californians vulnerable to potential
bad actors due to the limited oversight over these types of
securities transactions. This measure has no limits on
general solicitation and general advertising; therefore, an
issuer could go door to door. Due to all of the historic
changes made surrounding securities, why does California need
additional exemptions now, which could potentially lead to
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fraud and taking thousands from consumers with little
recourse?
Recommended Amendments:
This committee recently heard and passed out AB 2178 which
created a new permit process for crowdfunding. This measure
also tries to implement a new crowdfunding process by way of a
securities exemption. Based on the recent and supportive action
by this committee on AB 2178, the committee is recommending
deleting from this measure the general exemption due to the
similar intent and nature. In addition, AB 2178 carried more
investor protections and vetting process through DBO rather than
a pure exemption as this measure attempts.
1) On page 26, delete (r) starting on line 22- to page 29,
line 2.
REGISTERED SUPPORT / OPPOSITION:
Support
California Farmlink
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Cutting Edge Capital
Food Access Coalition
Greenhorns
Humboldt Food Policy Council
Local Clean Energy Alliance
New Hope Farms
Peak Agency
Roots of Change
Slow Money South Bay
Sustainable Economies Law Center
The Farmers Guild
4 Individuals
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Opposition
Public Investors Arbitration Bar Association (PIABA)
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081