BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: SB 577 Hearing Date: April 15,
2015
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|Author: |Hueso |
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|Version: |April 6, 2015 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Securities: qualification: exemptions.
SUMMARY Authorizes three new securities permitting exemptions, as
specified, and increases, 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.
DESCRIPTION
1. Increases, from $300 to $1,000, the maximum aggregate
investment that may be made by a shareholder in shares or by
a member in memberships in a consumer cooperative
corporation. As long as this cap is not exceeded, sales of
those shares or memberships are exempt from state securities
permitting laws.
2. Exempts from state securities permitting laws all of the
following:
a. Any offer or sale of any evidence of indebtedness,
whether secured or unsecured, and any guarantee thereof,
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
SB 577 (Hueso) Page 2
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$1,000 in the aggregate during a 12-month period, or
a greater amount determined by the Commissioner of
Business Oversight.
iii.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.
iv. The issuer provides to DBO and purchasers and
makes available to potential purchasers, all of the
following:
A. 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. The
Commissioner of Business Oversight has in no way
passed upon the merits or qualifications of, or
recommended or given approval to, any person,
security, or transaction associated with this
offering."
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B. 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.
C. 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.
D. A written statement of information
about any material legal proceedings involving
the company or its officers and directors.
v. 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.
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
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through the offering will be reserved or allocated to
the purchase of fee title, leases of 30 years or
more, purchase of an easement, construction of or
improvement to real property to be used for
agricultural purposes.
iii. The issuer is an agricultural enterprise
that is majority controlled by one or more
individuals who are farmers and actively engaged in
the agricultural enterprise or the issuer is
controlled by a nonprofit corporation.
iv. Sales to non-accredited investors are
capped at either $1,000 or $5,000, depending on
whether the purchaser signs a statement verifying
that they have a minimum annual gross income of
$50,000 or a minimum net worth of $100,000, exclusive
of home, home furnishings, and automobiles. Any
non-accredited investor purchasing more than $1,000
in securities must sign the aforementioned statement.
Any non-accredited investor who does not sign such a
statement is limited to a maximum purchase of $1,000.
The Commissioner of DBO is authorized 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 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. In the case of real property purchases of
land, the issuer must set aside all funds raised in a
separate, third-party escrow account until entering
into a contract to purchase a property. If the
issuer does not enter into a contract to purchase a
property within two years of the effective date of
the offering, the issuer must return all proceeds to
the purchasers.
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vii. The issuer provides to DBO and purchasers
and makes available to potential purchasers, all of
the following:
A. 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. The
Commissioner of Business Oversight has in no way
passed upon the merits or qualifications of, or
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."
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B. 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.
C. If the 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,
estimated costs, and characteristics of the
property the issuer is seeking.
D. Income tax returns filed by the
issuer for the most recently completed year, if
any.
E. 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.
F. A written statement of information
about any material legal proceedings involving
the company or its officers and directors.
i. Issuers may not utilize the exemption to
raise funds for an enterprise dependent on the
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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.
a. 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 and
related equipment or wind turbines and related
equipment.
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 nonprofit public
benefit corporation with the purpose of
developing and operating one or more facilities
to generate electricity in a single city and
for residents of that city, or within a
similarly limited geographic area approved by
the commissioner.
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4. 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.
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 $1,000 or $5,000, depending on
whether the purchaser signs a statement verifying
that they have a minimum annual gross income of
$50,000 or a minimum net worth of $100,000, exclusive
of home, home furnishings, and automobiles. Any
non-accredited investor purchasing more than $1,000
in securities must sign the aforementioned statement.
Any non-accredited investor who does not sign such a
statement is limited to a maximum purchase of $1,000.
The Commissioner of DBO is authorized to authorize
greater purchase amounts for non-accredited investors
by rule or order.
i. The issuer provides to DBO and purchasers and
makes available to potential purchasers, all of the
following:
A. 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
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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. The
Commissioner of Business Oversight has in no way
passed upon the merits or qualifications of, or
recommended or given approval to, any person,
security, or transaction associated with this
offering."
B. 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.
C. 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
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material respects.
ii. 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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EXISTING FEDERAL LAW AND REGULATION
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 $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. Pursuant to the Jumpstart Our Business Startups (JOBS) Act
(Public Law 112-106), authorizes the use of general solicitation
and general advertising in certain circumstances not previously
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authorized. Title II of the JOBS Act, operative September 23,
2013, lifted the restriction against use of general solicitation
and general advertising, when sales are made only to accredited
investors and other requirements are met. Title III of the JOBS
Act, otherwise known as the CROWDFUND Act, will lift the
restriction against use of general solicitation and general
advertising to both accredited and non-accredited investors,
once the SEC promulgates final regulations implementing that
title.
EXISTING LAW
1. Provides that it is unlawful for any person to offer or
sell any security in this state, unless such offering or
sale has been qualified by the commissioner, as specified,
or unless the offering or sale is covered by an express
exemption (Corporations Code Section 25110).
2. Authorizes 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.
According to the Department of Business Oversight (DBO),
between 20,000 and 35,000 people file forms with DBO
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annually, claiming exemptions pursuant to Section
25102(f). In 2013, approximately 18,000 exemption
filings were made in connection with securities offerings
of $1 million or less.
b. 25102(n) provides an exemption for any offer or sale
of any security in a transaction that meets all of the
following criteria: i) the issuer is not a blind pool
issuer, as that term is defined by the commissioner; ii)
sales of securities are made only to qualified purchasers
or other persons the issuer reasonably believes to be
qualified purchasers; iii) each purchaser represents that
he or she is purchasing for his or her own account, and
not with a view to or for sale in connection with any
distribution of the security; iv) each natural person
purchaser is provided with a disclosure statement that
meets the disclosure requirements of federal Regulation
D, at least five business days before they purchase or
commit to purchase the security; v) the offer and sale of
the security is made by way of a general announcement,
whose content is strictly limited; and vi) telephone
solicitation by the issuer is not permitted, until and
unless the issuer determines that the prospective
purchaser being solicited is a qualified purchaser.
Qualified purchasers are those who meet one or more of
several criteria listed in subdivision (n). Generally
speaking, these criteria describe persons with some
degree of financial sophistication, though the qualified
purchaser bar is lower than the accredited investor bar.
As an example, an individual is a qualified purchaser if
that person individually, or jointly with their spouse,
has a minimum net worth of $250,000 and had, during the
immediately preceding tax year, gross income in excess of
$100,000, and reasonably expects gross income in excess
of $100,000 during the current tax year. Alternately,
the term applies to individuals who have a minimum net
worth of $500,000, exclusive of their home, home
furnishings, and automobiles. Natural persons are
limited to investing no more than 10% of their net worth
in any 25012(n) investment.
According to DBO, between 20 and 50 people file forms with
DBO annually, claiming exemptions pursuant to Section
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25102(n).
COMMENTS
1. Purpose: This bill is sponsored by the Sustainable
Economies Law Center (SELC) to reduce barriers in California
law that are currently limiting the ability of
community-rooted, small businesses to raise money from
investors.
2. Background: This bill addresses an issue that has been
heard by this Committee several times during prior years.
It would authorize entities seeking to raise money from
investors to use general solicitation and general
advertising to pitch both accredited and non-accredited
investors in California. By authorizing exemptions from
state securities permitting requirements, the bill would
allow entities seeking to raise money from investors to
avoid the costly and sometimes lengthy securities permitting
process. In lieu of applying for and complying with the
terms of a permit, an entity seeking to raise money
utilizing one of the exemptions authorized by this bill
would have to comply with a set of rules specific to the
exemption they wished to use. Although the specific rules
differ from exemption to exemption (see comparison table in
a subsequent section), they generally place a cap on the
total amount of money each entity may raise and require each
entity to provide specified disclosures to prospective
investors.
This bill's exemptions are structured in ways intended to
prevent the imposition of costly compliance burdens on
issuers (i.e., the entities seeking to raise money). The
bill's exemptions are also premised on the expectation that
prospective investors will carefully read and consider the
disclosures they are provided, and will be able to look out
for their own best interests when evaluating whether, and
how much, to invest. There is no expectation that the
Department of Business Oversight (DBO) will examine entities
that utilize these exemptions to ensure that these entities
are complying with the rules. Instead, responsibility for
enforcing the terms of exemptions rests largely with
investors; it is up to an individual investor to file a
complaint against an issuer with DBO or to file suit against
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that issuer in court, if the investor believes that an
issuer is failing to adhere to the rules applicable to that
issuer.
3. What Are General Solicitation and 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
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.
4. What is an Accredited Investor? The term "accredited
investor" is generally used as a proxy for a sophisticated
investor, but can also include people whose financial
sophistication may not match their income or wealth. The
term includes several different entities with considerable
financial experience, including financial institutions,
securities broker-dealers, large pension plans, and
corporate entities with assets in excess of $5 million; it
also includes certain high-wealth or high-income
individuals. Pursuant to SEC Rule 501, and as summarized
above, an accredited individual includes both of the
following:
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 $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.
This definition can include financially savvy individuals with
annual income or net worth above the listed amounts; it can also
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include senior citizens who have successfully saved for their
retirements, sole proprietors whose business income exceeds
$200,000 in two consecutive years, young professionals who take
well-paying jobs right out of graduate school, and others whose
financial sophistication may not match their income or wealth.
5. Discussion: This bill contains four provisions - one change
to the rules governing consumer cooperative corporations and
three new securities permitting exemptions. For clarity,
the consumer cooperative corporation provision is discussed
separately from the permitting exemptions. The permitting
exemptions are described together, to aid in comparing and
contrasting their similarities and differences.
Increase in Maximum Dollar Value of Shares and Memberships In
Consumer Cooperative Corporations: Existing California law
caps the maximum aggregate investment that may be made by a
shareholder in shares or by a member in memberships in a
consumer cooperative corporation. As long as this cap is
not exceeded, sales of those shares or memberships are
exempt from state securities permitting laws. The cap of
$300 was placed in California law, effective January 1,
1984. The sponsor of this bill is seeking to increase the
cap from $300 to $1,000 to give consumer cooperative
corporations greater ability to raise funds from their
members, without running afoul of California's securities
laws. By allowing consumer cooperatives to solicit needed
financing from their own members, rather than from
non-member, professional investors who will want to control
the direction of the co-op, the sponsor is seeking to give
co-ops greater ability to raise capital in ways that align
with their values and structures. Staff notes that if the
$300 cap had been allowed to increase with inflation since
1984, it would equal $695 in 2015, lower than the proposed
increase to $1,000.
Three New State Law Permitting Exemptions: The table below
compares and contrasts the key requirements of the three
permitting exemptions this bill would authorize.
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-------------------------------------------------------------
| | General | Agricultural | Solar/Wind |
| | Purpose | Exemption | Exemption |
| | Exemption | | |
|-------------+---------------+---------------+---------------|
|Maximum |$500,000 |$2 million |$2 million |
|Amount That | | | |
|Can Be | | | |
|Raised | | | |
|During Any | | | |
|12-Month | | | |
|Period | | | |
|-------------+---------------+---------------+---------------|
|Nature of |Debt |May be equity |May be equity |
|Offering | |or debt |or debt |
|-------------+---------------+---------------+---------------|
|Limitation |No |Must be |Must be one of |
|on Who the | |controlled by |four types of |
|Issuer May | |a nonprofit |entities: 1) a |
|Be | |corporation or |co-op or |
| | |an |nonprofit |
| | |agricultural |mutual benefit |
| | |enterprise |corporation |
| | |majority |seeking to |
| | |controlled by |develop and |
| | |farmers |operate one or |
| | | |more |
| | | |electricity-gen|
| | | |eration |
| | | |facilities; 2) |
| | | |A nonprofit |
| | | |public |
| | | |benefit |
| | | |corporation |
| | | |seeking to use |
| | | |solar or wind |
| | | |power to meet |
| | | |its energy |
| | | |needs; 3) A |
| | | |nonprofit |
| | | |public benefit |
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| | | |corporation |
| | | |seeking to |
| | | |build and |
| | | |operate one or |
| | | |more |
| | | |facilities to |
| | | |generate |
| | | |electricity |
| | | |for residents |
| | | |of a single |
| | | |city; or 4) An |
| | | |entity owned |
| | | |or entirely |
| | | |controlled by |
| | | |tenants in |
| | | |multi-tenant |
| | | |housing, which |
| | | |has entered |
| | | |into a |
| | | |contract with |
| | | |the owner of |
| | | |the property |
| | | |to install |
| | | |solar panels |
| | | |on the |
| | | |property. |
|-------------+---------------+---------------+---------------|
|Limitation |No, but money |At least 75% |At least 75% |
|on Use of |cannot be |of money |of the money |
|Money Raised |raised for an |raised must be |raised must be |
| |enterprise |allocated to |allocated to |
| |dependent on |the purchase |the purchase |
| |creation of a |or lease of |of solar |
| |product or |land or an |photovoltaic |
| |technology for |easement or |panels and |
| |which no fully |for |related |
| |functional |construction |equipment or |
| |prototype has |of or |wind turbines |
| |been made |improvement to |and related |
| |prior to the |real property |equipment. |
| |offering. |to be used for | |
| | |agricultural | |
| | |purposes. | |
|-------------+---------------+---------------+---------------|
SB 577 (Hueso) Page 19
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|Maximum |$1,000 |$1,000 if |$1,000 if |
|Amount a | |their gross |their gross |
|Non-Accredite| |income |income |
|d Investor | |<$50,000 or |<$50,000 or |
|May Invest | |net worth |net worth |
| | |<$100,000; |<$100,000; |
| | |$5,000 if they |$5,000 if they |
| | |sign a |sign a |
| | |statement |statement |
| | |verifying |verifying |
| | |gross income |gross income |
| | |>$50,000 or |>$50,000 or |
| | |net worth |net worth |
| | |>$100,000. |>$100,000. |
|-------------+---------------+---------------+---------------|
|Maximum |No cap |No cap |No cap |
|Amount an | | | |
|Accredited | | | |
|Investor May | | | |
|Invest | | | |
|-------------+---------------+---------------+---------------|
|Limited to |Yes, unless |Yes, unless |Yes, unless |
|California |solicitations |solicitations |solicitations |
|investors |to |to |to |
|only? |nonresidents |nonresidents |nonresidents |
| |comply with |comply with |comply with |
| |federal law or |federal law or |federal law or |
| |other states' |other states' |other states' |
| |laws |laws |laws |
|-------------+---------------+---------------+---------------|
|Types of |Cover sheet |Cover sheet |Cover sheet |
|Information |with specified |with specified |with specified |
|That Must Be |warnings and |warnings and |warnings and |
|Shared With |cautionary |cautionary |cautionary |
|Potential |recommendations|recommendations|recommendations|
|Investors |; key |; key |; key |
| |information |information |information |
| |about the |about the |about the |
| |issuer and the |issuer and the |issuer and the |
| |intended |intended |intended |
| |use(s) of the |use(s) of the |use(s) of the |
| |money sought; |money sought; |money sought; |
| |specified |specified |specified |
| |financial |financial |financial |
SB 577 (Hueso) Page 20
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| |statements; |statements; |statements. |
| |information |information | |
| |about material |about material | |
| |legal |legal | |
| |proceedings |proceedings | |
| |involving the |involving the | |
| |issuer or its |issuer or its | |
| |management, if |management, if | |
| |any. |any. | |
| | | | |
| | |Additionally: | |
| | |Income tax | |
| | |returns filed | |
| | |by the issuer; | |
| | |key | |
| | |information | |
| | |about the | |
| | |property being | |
| | |sought; | |
| | |promise to | |
| | |refund | |
| | |investors' | |
| | |money if the | |
| | |intended use | |
| | |of that money | |
| | |is the | |
| | |purchase of | |
| | |farmland, and | |
| | |sufficient | |
| | |funds for the | |
| | |purchase are | |
| | |not raised | |
| | |within two | |
| | |years. | |
|-------------+---------------+---------------+---------------|
|Must File |Yes, but there |Yes, but there |Yes, but there |
|Notice of |is no penalty |is no penalty |is no penalty |
|Exemption |for failing to |for failing to |for failing to |
|With DBO |do so. |do so. |do so. |
| | | | |
-------------------------------------------------------------
Who These Exemptions Are Targeting: This bill is intended to
allow cooperatives, farms, and nonprofit organizations to
SB 577 (Hueso) Page 21
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raise money from investors in their communities. According
to this bill's sponsor, many investors who wish to invest in
such enterprises are not seeking high returns on their
investments; instead, they are seeking to help their
communities by enabling the creation and growth of such
enterprises. "Mission-driven enterprises often wish to
raise capital from their local community, such as extended
networks of friends, colleagues, customers, and fans. This
extended network surrounding any popular enterprise often
includes both accredited and non-accredited investors."
Sponsor's Logic For Failing to Cap Investments By Accredited
Investors: SB 577 proposes to cap amounts that
non-accredited investors may invest. It does not propose
caps on investments by accredited investors. According to
this bill's sponsor, the limits on non-accredited investors
are intended to ensure that less wealthy investors are not
exposed to more risk than is appropriate for their level of
wealth. The sponsor believes that imposing such
restrictions on accredited investors would force
entrepreneurs to either choose to solicit accredited
investors only (as is already authorized under existing
federal law) or to solicit both accredited and
non-accredited investors but be limited by restrictions that
are more appropriate for less wealthy investors. At the
present time, Title II of the federal JOBS Act authorizes
issuers to use general solicitation and general advertising
to solicit investors, when the investment is limited only to
accredited investors, and when the issuer takes reasonable
steps to verify that purchasers are accredited. The sponsor
claims that imposing limits on the amount of money that
accredited investors may invest would be inconsistent with
Title II of the JOBS Act.
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6. Summary of Arguments in Support:
a. The Sustainable Economies Law Center (SELC) is
sponsoring this bill, which it has named the "Local
Economies Securities Act." SELC writes, "Small
businesses, which are critical to our economy, need more
options to access capital. Meanwhile, investors are
increasingly interested in putting their money in local,
community-based enterprises instead [of] investing
through distant financial institutions. Currently,
California securities law makes it very expensive and
time-consuming for a small business to obtain the permit
necessary to be able to legally communicate about its
investment needs to a broad audience. SB 577 will create
modest exemptions from those requirements for small
businesses that comply with reasonable disclosure
requirements and other restrictions. 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 additional
exemptions designed for those types of enterprises in
particular...more and more Slow Money networks in
California are gathering groups of investors interested
in investing in local, sustainable food and agricultural
enterprises instead of Wall Street."
b. National Crowdfunding Services, Roots of Change, and
350 Santa Barbara echo SELC's concern that California's
securities laws make it extremely difficult for
California small businesses to make investment
opportunities publicly available. Although existing
California law is intended to protect investors from
overly risky investments, it inadvertently creates a
system where larger businesses have more financing
options, while smaller enterprises, especially those
rooted in low- to moderate-income communities, have fewer
options for financing, and thus fewer development
opportunities. Furthermore, under existing California
law, ordinary individuals are shut out from investment
opportunities in which they may wish to participate.
c. Slow Money Northern California and Slow Money South
Bay would like to connect sustainable food enterprises
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with local investors, and believe that existing
securities law prevent entrepreneurs from speaking out at
Slow Money meetings about their fundraising endeavors.
Among the diverse array of attendees at their monthly
meetings are many local investors who are interested in
making investments that align with their values, even if
that means taking on more risk or making lower returns
compared to investing through large financial
institutions. SB 577 would enable food entrepreneurs in
the Slow Money network to speak more openly about their
investment needs and give more investors access to the
kinds of investment opportunities they want.
7. Summary of Arguments in Opposition: None received.
8. Amendments: The amendments below are grouped into two
categories: a) technical and clarifying amendments
necessary to ensure that the bill does what the author and
sponsor intend it to do, and b) substantive amendments
intended to bolster the investor protections in the bill and
reduce unintended, potentially negative consequences.
a. Technical and Clarifying Amendments:
i. Ensure the correct use of terms, and
ensure consistency in the key requirements of the
different exemptions. Page 24, line 21 and page 33,
line 9, strike "company" and insert: issuer, and
add the following language on page 36, between lines
32 and 33, "(D) A written statement of information
about any material legal proceedings involving the
issuer or its officers and directors."
ii. Clarify the uses of money raised using
the agricultural exemption. On page 30, strike
lines 4 through 7 and insert: (1) At least 75% 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.
SB 577 (Hueso) Page 24
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iii. Require appraisals to be performed by
qualified persons. Page 32, line 28, after "year"
insert: by a California licensed or certified
appraiser
iv. Eliminate unnecessary language. Page
33, strike lines 10 through 20.
v. Clarify the definition of "related
equipment" in the context of the solar and wind
energy exemption. The sponsor is proposing to
clarify this exemption by replacing the words
"related equipment" with a reference to "equipment
necessary for the storage and transmission of energy
generated by the solar panels or wind turbines."
Page 33, delete lines 36 and 37 and insert: panels,
wind turbines, or equipment necessary for the
storage and transmission of energy generated by the
solar panels or wind turbines."
vi. Clarify what is meant by language
describing the first type of issuer who may utilize
the solar and wind energy definition. The sponsor
proposes to strike page 34, lines 5 through 10, and
insert the following:
(A) The issuer is a cooperative corporation or
nonprofit mutual benefit corporation with one or
more of the following purposes:
(i) Developing and/or operating facilities that
produce solar or wind energy for its members;
(ii) Selling or leasing solar photovoltaic panels
or wind turbines to its members or installing solar
photovoltaic panels or wind turbines for its
members;
(iii) Allocating net metering credits among its
members.
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b. Substantive Amendments Intended to Bolster Investor
Protections:
i. This bill places no limit on the
amount of money that accredited investors may invest
with an issuer. As noted above, not all accredited
investors are sophisticated investors. For that
reason, this Committee may wish to ask the author to
cap the amount that an accredited investor may
invest with any single issuer, to minimize the
possibility that an unsophisticated, accredited
investor could lose his or her life savings via an
investment authorized by this bill. One option:
cap the amount that any accredited investor may
invest with any issuer at 5% of that investor's net
worth. (Thus, an accredited investor with a net
worth of $1 million would be limited to investing
$50,000 in any single investment authorized by this
bill. Wealthier accredited investors could invest
greater amounts).
ii. Two of this bill's exemptions (the
agricultural exemption and the solar/wind energy
exemption) distinguish between two types of
non-accredited investors: those with minimum annual
gross income of $50,000 or minimum net worth of
$100,000 (who are authorized to invest up to $5,000)
and those with gross income less than $50,000 or net
worth less than $100,000 (who are capped at
investing $1,000). Using an annual gross income
threshold of $50,000 or a net worth of $100,000 as a
measure of financial capacity in a high-cost state
like California may be inappropriate.
In the alternative, staff suggests the "qualified
purchaser" approach already contained in the
exemption authorized by Corporations Code Section
25102(n). The qualified purchaser definition
describes non-accredited investors who are believed
to have some degree of financial sophistication.
The qualified purchaser bar is lower than the
accredited investor bar, but still high enough to
capture people who can afford to invest in
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potentially risky ventures.
Section 25102(n) defines a "qualified purchaser" as
one who 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.
Section 25102(n) also caps the maximum investment of
each qualified purchaser at 10% of their net worth.
Suggested amendment: Insert the qualified purchaser
definition in place of the proposed $50,000 net
worth/$100,000 gross income threshold in the current
version of the bill (page 30, lines 17 through 25
and page 34, lines 31 through 39).
iii. All three exemptions require the issuer
to file a notice of transactions with the
commissioner, but none of the exemptions specifies
the penalty for failure to file this notice. To
ensure that failure to file the notice carries a
stiff penalty, staff suggests conditioning the
availability of the exemption on submission of the
notice, an approach that is used in Corporations
Code Section 25102(n).
Page 28, line 10, page 31, line 23, and page 35, line
34, after the period, insert: "The exemption from
qualification afforded by this subdivision is
unavailable if an issuer fails to file the notice
within a time period specified by the commissioner
by rule. Neither the filing of the notice nor the
failure by the commissioner to comment thereon
precludes the commissioner from taking any action
that the commissioner deems necessary or appropriate
under this division with respect to the offer and
sale of the securities."
An alternate approach that is less punitive on
issuers who fail to file would pattern penalty
SB 577 (Hueso) Page 27
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language on the approach used in Corporations Code
Section 25102(f). If that approach is preferred,
the language would read, "The failure to file the
notice or the failure to file the notice within the
time specified by the rule of the commissioner shall
not affect the availability of the exemption. Any
issuer that fails to file the notice as provided by
rule of the commissioner shall, within 15 business
days after discovery of the failure to file the
notice or after demand by the commissioner,
whichever occurs first, file the notice and pay to
the commissioner a fee equal to the fee payable had
the transaction been qualified under Section 25110.
Neither the filing of the notice nor the failure by
the commissioner to comment thereon precludes the
commissioner from taking any action that the
commissioner deems necessary or appropriate under
this division with respect to the offer and sale of
the securities."
iv. All three exemptions require the
issuer to provide prospective investors with "a list
of the factors the issuer considers to be the most
significant risks to an investor." To ensure that
investors are made aware of all potential risks, and
not just those risks that the issuer believes to be
the most significant, the following amendment is
suggested:
Page 28, lines 36 through 38, page 32, lines 21 and
22, and page 36, lines 21 through 23, strike "a list
of the factors that the issuer considers to be the
most significant risks to an investor" and replace
it with "a list of the risks of the investment that
are known to the issuer, annotated to reflect which
of those risks the issuer believes to be the most
significant."
v. With one narrow exception involving
the fee title purchase of farmland, none of the
exemptions require issuers to set aside the money
they raise, by placing it into a third party escrow
account until the minimum amount sought is obtained.
Similarly, with one narrow exception involving the
SB 577 (Hueso) Page 28
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fee title purchase of farmland, none of the
exemptions require issuers to refund money to
investors, if less than the minimum amount sought is
raised.
Escrowing money raised from investors until the
minimum amount sought is raised, and requiring
issuers to return that money to investors if their
offerings are ultimately unsuccessful in raising the
minimum amount sought, will better protect
investors. If an issuer needs a certain amount of
money to achieve its stated goals and raises less
than that amount, investors are unlikely to realize
value from their investment, because the issuer will
not, by definition, have enough money with which to
achieve the goals for which it sought to raise
money. Staff suggests giving issuers one year in
which to meet their minimum fundraising goals.
Page 29, between lines 21 and 22, insert: (7) The
issuer sets aside in a separate third-party escrow
account all funds raised as part of the offering, to
be held in escrow until the time that the minimum
offering amount is reached. If the minimum offering
amount is not reached within one year following the
effective date of the offering, the issuer shall
return all funds to investors.
Page 32, strike lines 9 through 15, and insert the
following on page 33, between lines 9 and 10: (11)
The issuer sets aside in a separate third-party
escrow account all funds raised as part of the
offering, to be held in escrow until the time that
the minimum offering amount is reached. If the
minimum offering amount is not reached within one
year following the effective date of the offering,
the issuer shall return all funds to investors.
Page 36, between lines 32 and 33, insert: (10) The
issuer sets aside in a separate third-party escrow
account all funds raised as part of the offering, to
be held in escrow until the time that the minimum
offering amount is reached. If the minimum offering
amount is not reached within one year following the
SB 577 (Hueso) Page 29
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effective date of the offering, the issuer shall
return all funds to investors.
vi. Regardless of whether the author
accepts the amendments suggested in paragraph v
immediately above, the cover sheet required to be
provided to investors, informing them their money
will be returned to them if insufficient funds are
raised to purchase farmland within two years after
the beginning of the offering, requires
clarification to achieve the sponsor's intent and
modification to better protect investors. As
drafted, investors whose money is intended to be
used to purchase farmland, but whose money is not
spent because insufficient funds are raised to
purchase farmland, are told that their money will be
returned to them no earlier than 60 days following
failure of the issuer to raise sufficient funds. It
is unclear why investors should have to wait that
long to receive their money.
If the amendments suggested in paragraph v above are
accepted, lines 6 through 15 on page 32 should be
deleted for consistency. If the author fails to
accept the amendments suggested in paragraph v
above, the following language should be substituted
for lines 6 through 15 on page 32:
(iv) Where the goal of the issuer in conducting the
offering is to purchase fee title to farmland, the
offering must state "The company described in this
disclosure form is seeking to purchase farmland. If
the sum of the investment commitments received by
[the issuer] does not amount to a sum sufficient to
purchase farmland by [insert date two years after
beginning of offering], your investment will be
returned to you within 30 days following that date.
It is your responsibility to notify the issuer if
your address changes, to ensure you receive any
refund due to you. Notification regarding a change
in address may be made by either of the following
methods: [insert at least two methods by which the
issuer may be contacted regarding a change in
address]"
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vii. This bill requires issuers using the
agricultural exemption to provide prospective
investors with copies of their income tax returns
for the most recently completed year, if any. The
bill lacks this requirement under the other two
exemptions. The sponsor would prefer to delete this
requirement where it appears in the agricultural
exemption, rather than adding it to the other
exemptions. However, it is unclear how this
requirement would be burdensome on issuers, as the
issuer's tax returns should be readily available.
Staff suggests adding this requirement to the other
two exemptions, as follows:
Page 29, between lines 2 and 3, and page 36, between
lines 26 and 27, insert: (C) The income tax returns
filed by the issuer for the most recently completed
year, if any."
viii. Page 30, lines 8 through 11: This
language within the agricultural exemption requires
the issuer to either be a nonprofit organization
(undefined, and with no specific mission or purpose)
or an agricultural enterprise, majority-controlled
by one or more farmers who are actively engaged in
the enterprise. Failure to narrow the types of
nonprofit organizations that may act as issuers may
represent a loophole that could be exploited in ways
unintended by this bill's author and sponsor.
In response to this concern, the sponsor is proposing
to limit the availability of the agricultural
exemption to farmer-controlled agricultural
enterprises and to nonprofit public benefit
corporations, rather than to nonprofits generally.
The logic is that nonprofit public benefit
corporations do not have shareholders or otherwise
benefit private individuals.
Page 30, line 11, strike "organization" and insert:
public benefit corporation
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ix. As drafted, the bill does not require
issuers seeking to raise money using the solar/wind
energy exemption to provide investors with any
documentation that the use of solar or wind energy
is appropriate in the location(s) the issuer wishes
to place solar panels or wind turbines. The
following amendment would require this type of
documentation:
Page 36, line 19, after "issuer," insert:
justification that solar panels or wind turbines, as
applicable, are appropriate in the location where
the issuer is seeking to place them,
9. Prior and Related Legislation:
a. AB 722 (Perea), 2015-16 Legislative Session: Would
authorize a new way to obtain a securities permit
allowing the offer or sale of securities advertised by
means of general solicitation and general advertising to
both accredited and non-accredited investors, as
specified. Pending a hearing in the Assembly Banking and
Finance Committee.
b. AB 2096 (Muratsuchi), 2013-14 Legislative Session:
Would have authorized "qualification by notification" of
offers or sales of securities advertised by means of
general solicitation and general advertising to both
accredited and non-accredited investors, as specified.
Held on the Senate Appropriations Committee Suspense
File.
c. AB 783 (Daly), 2013-14 Legislative Session: Would
have authorized a state securities exemption for persons
seeking to offer or sell securities using any form of
general solicitation or general advertising, including
unsolicited telephone calls to a person's residence or
cellular telephone, provided that sales of the securities
were made only to persons who the issuer took reasonable
steps to verify were accredited investors. Never taken
up by the author in the Assembly Banking & Finance
Committee.
d. AB 2081 (Allen), 2011-12 Legislative Session:
SB 577 (Hueso) Page 32
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Substantially similar to AB 783. Failed passage on the
Senate Floor.
e. SB 875 (Price), 2009-10 Legislative Session:
Substantially similar to AB 783. Never taken up by the
author in the Senate Banking, Finance & Insurance
Committee.
f. AB 1644 (J. Campbell), 2001-02 Legislative Session:
Substantially similar to AB 783. Failed passage in the
Assembly Banking & Finance Committee.
SB 577 (Hueso) Page 33
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LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Sustainable Economies Law Center (sponsor)
The Greenhorns
National Crowdfunding Services
Roots of Change
350 Santa Barbara
Slow Money Northern California
Slow Money Santa Barbara
Slow Money South Bay
Opposition
None received
-- END --