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  








                                                                    AB 2751


                                                                    Page  2





                 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  








                                                                    AB 2751


                                                                    Page  3





                    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.  








                                                                    AB 2751


                                                                    Page  4






             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  








                                                                    AB 2751


                                                                    Page  5





                 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  








                                                                    AB 2751


                                                                    Page  6





                    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,  








                                                                    AB 2751


                                                                    Page  7





                    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.  









                                                                    AB 2751


                                                                    Page  8





               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.









                                                                    AB 2751


                                                                    Page  9





               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  








                                                                    AB 2751


                                                                    Page  10





                    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.









                                                                    AB 2751


                                                                    Page  11





               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  








                                                                    AB 2751


                                                                    Page  12





               $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  








                                                                    AB 2751


                                                                    Page  13





               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  








                                                                    AB 2751


                                                                    Page  14





            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  








                                                                    AB 2751


                                                                    Page  15





               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  








                                                                    AB 2751


                                                                    Page  16





               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:  








                                                                    AB 2751


                                                                    Page  17







          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:


          










                                                                    AB 2751


                                                                    Page  18





          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  








                                                                    AB 2751


                                                                    Page  19





          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  








                                                                    AB 2751


                                                                    Page  20





            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: 


          









                                                                    AB 2751


                                                                    Page  21






          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  








                                                                    AB 2751


                                                                    Page  22





          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.  













                                                                    AB 2751


                                                                    Page  23





          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  








                                                                    AB 2751


                                                                    Page  24





            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:








                                                                    AB 2751


                                                                    Page  25







          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. 








                                                                    AB 2751


                                                                    Page  26










          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  








                                                                    AB 2751


                                                                    Page  27





            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  








                                                                    AB 2751


                                                                    Page  28





            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








                                                                    AB 2751


                                                                    Page  29







          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











                                                                    AB 2751


                                                                    Page  30






          Opposition


          Public Investors Arbitration Bar Association (PIABA)




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