BILL NUMBER: SB 633 INTRODUCED
BILL TEXT
INTRODUCED BY Senator Ayala
FEBRUARY 25, 1997
An act to amend Section 330.24 of, to add a chapter heading to,
and to add Chapter 2 (commencing with Section 332) to, Title 1 of
Part 4 of Division 1 of, the Civil Code, and to amend Section 25100
of the Corporations Code, relating to mutual water companies.
LEGISLATIVE COUNSEL'S DIGEST
SB 633, as introduced, Ayala. Mutual water companies.
(1) Existing law authorizes any corporation organized for or
engaged in the business of selling, distributing, supplying, or
delivering water for irrigation purposes, or for domestic use, to
provide in its articles or bylaws that water shall be sold,
distributed, supplied, or delivered only to owners of its shares and
that these shares shall be appurtenant to certain lands described in
the certificate issued therefor.
This bill would require a corporation organized for or engaged in
the business of selling, distributing, supplying, or delivering water
for domestic use to have these provisions in its articles or bylaws.
This bill would require a mutual water company formed in
connection with the offering for sale or lease, or with the sale or
lease, of lots within a subdivision, as defined, and organized to
sell, distribute, supply, or deliver water for domestic use to owners
of the lots to meet the specified requirements of the bill
regarding, among other things, supply and distribution system design
standards and water service standards.
This bill would require any person who intends to offer for sale
or lease lots within a subdivision in this state and to provide water
for domestic use to purchasers of the lots through the formation of
this mutual water company to attach to an application for a public
report a document with prescribed information that is verified under
penalty of perjury. This bill would require the Real Estate
Commissioner to prescribe the form and content of this document. By
creating a new crime, this bill would impose a state-mandated local
program.
(2) Existing law exempts certain securities from requirements in
existing law regarding the issuance of securities. These exempt
securities include securities consisting of any interest in all or
portions of a parcel or parcels of real property that are subdivided
or in a real estate development, except as specified.
This bill would also exempt any security of a mutual water company
issued in connection with subdivided lands pursuant to the
provisions of this bill.
(4) The California Constitution requires the state to reimburse
local agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
This bill would provide that no reimbursement is required by this
act for a specified reason.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: yes.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. A chapter heading is added to Title 1 of Part 4 of
Division 1 of the Civil Code, immediately preceding Section 330.24,
to read:
CHAPTER 1. WATER COMPANIES
SEC. 2. Section 330.24 of the Civil Code is amended to read:
330.24. Any corporation organized for or engaged in the business
of selling, distributing, supplying or delivering water for
irrigation purposes , or for domestic use, may
provide , and any corporation organized for or engaged in the
business of selling, distributing, supplying, or delivering water for
domestic use shall provide, in its articles or by-laws that
water shall be sold, distributed, supplied or delivered only to
owners of its shares and that such the
shares shall be appurtenant to certain lands when the same are
described in the certificate issued therefor; and when such
the certificate is so issued and a certified
copy of such the articles or by-laws
recorded in the office of the county recorder in the county where
such the lands are situated the shares
of stock shall become appurtenant to the said
lands and shall only be transferred therewith, except after sale or
forfeiture for delinquent assessments thereon as provided in Section
331 of this title. Notwithstanding such this
provision in its articles or by-laws, any such corporation may
sell water to the State, or any department or agency thereof, or to
any school district, or to any public agency, or, to any other mutual
water company or, during any emergency resulting from fire or other
disaster involving danger to public health or safety, to any person
at the same rates as to holders of shares of such
the corporations; and provided further, that any
such corporation may enter into a contract with a county
fire protection district to furnish water to fire hydrants and for
fire suppression or fire prevention purposes at a flat rate per
hydrant or other connection. In the event lands to which any
such stock is appurtenant are owned or purchased
by the State, or any department or agency thereof, or any school
district, or public agency, such the
stock shall be canceled by the secretary, but shall be reissued to
any person later acquiring title to such the
land from the state department, agency, or school district, or
public agency.
SEC. 3. Chapter 2 (commencing with Section 332) is added to Title
1 of Part 4 of Division 1 of the Civil Code, to read:
CHAPTER 2. MUTUAL WATER COMPANIES FORMED IN CONNECTION WITH
SUBDIVIDED LANDS
332. (a) It is the intent of the Legislature to ensure both of
the following:
(1) That when a mutual water company is formed or is about to be
formed in connection with a subdivision, as defined in Section 11000
of the Business and Professions Code, an adequate potable water
supply and distribution system exists for domestic use and fire
protection.
(2) That adequate disclosure and protection to the security
holders exist with respect to rights and duties arising from their
security holdings in a mutual water company.
(b) For purposes of this chapter, the use of the term "subdivision"
has the same definition as "subdivision" as defined in Section 11000
of the Business and Professions Code.
332.1. A mutual water company formed in connection with the
offering for sale or lease, or with the sale or lease, of lots within
a subdivision and organized to sell, distribute, supply, or deliver
water for domestic use to owners of lots in the subdivision shall
meet all the requirements of this chapter.
332.2. (a) Any person who intends to offer for sale or lease lots
within a subdivision within this state and to provide water for
domestic use to purchasers of the lots within a subdivision through
the formation of a mutual water corporation described in Section
332.1, shall attach to the application for a public report, as
described in Section 11010 of the Business and Professions Code, a
separate document. This document shall be verified by the subdivider
or applicant under penalty of perjury, and contain all the following
information, representations, and assurances:
(1) That the provisions of this chapter have been complied with.
(2) That the service area in which the mutual water company
proposes to deliver water encompasses and includes the entire
subdivision, and when applicable, will include parcels to be annexed
to the subdivision.
(3) That the mutual water company contacted the Public Utilities
Commission and the county local agency formation commission to
determine if the proposed service area described in paragraph (2)
will overlap an existing water service area or if an existing water
service area could more appropriately serve the subdivision.
(4) That the mutual water company has a source of, and title to, a
water supply, distribution, and fire protection system sufficient to
satisfy expected demands for water from the subdivision.
(5) That copies of the contracts and other documents relating to
the acquisition by the mutual water company of the water supply,
distribution, and fire protection system have been delivered to, and
are on file with, the mutual water company and that these contracts
and documents evidence the mutual water company's title to the water
supply, distribution, and fire protection system.
(6) That the subdivider or applicant has executed and entered into
a written contract with the mutual water company wherein the
subdivider or applicant has agreed to pay monthly a proportional part
of the repair and replacement fund according to a ratio of the
number of lots owned or controlled by the subdivider or applicant to
the total number of lots in the subdivision.
(7) That an engineer's report has been prepared in accordance with
Section 333 of this chapter and Sections 260.504.2 to 260.504.2.4,
inclusive, of Title 10 of the California Code of Regulations and is
on file with the mutual water company.
(8) That the mutual water company will distribute potable water
for domestic use and has obtained, and has on file, a copy of the
certificate of the Director of Public Health, as required by Sections
4010 to 4024, inclusive, of the Health and Safety Code.
(9) That the securities of the mutual benefit water corporation
will be sold or issued only to purchasers of lots in the subdivision,
or to successors in interest of purchasers of lots in the
subdivision, and not sold or issued to the subdivider, applicant, or
to the successor in interest of the subdivider or applicant, and that
the securities shall be sold or issued only after a public report
for the subdivision has been issued by the Real Estate Commissioner.
(10) That the applicant or subdivider has complied with the
requirements of Section 330.24 of the Corporations Code for making
the security issued by the mutual water company appurtenant to the
land.
(11) That the water supply and distribution system will serve each
lot in the subdivision and be completed prior to the issuance of the
public report by the Real Estate Commissioner.
(12) That there is a statement, signed by either the engineer who
prepared the engineer's report referred to in paragraph (7) or a
person employed or acting on behalf of a public agency or other
independent qualified person, that the water supply and distribution
system has been examined and tested and that the water supply and
distribution system operates in accordance with the design standards
of the water supply and distribution system required by this chapter,
and that a copy of this statement is on file with the mutual water
company.
(13) That the articles of incorporation or bylaws of the mutual
water company contain all of the following:
(A) A statement to the effect that the mutual water company shall
provide water to all members or shareholders.
(B) A provision directing the board of directors to establish a
rate structure that will result in the accumulation and maintenance
of a fund for the repair, administration, maintenance, and
replacement of the water supply, distribution, and fire protection
system, that the rate charged shall bear a reasonable relationship to
the cost of furnishing water and maintaining the system, and that
unimproved lots included within the area to be served shall bear a
proportionate share of the cost of repair and replacement of the
water supply, distribution, and fire protection system, as well as a
proportionate share of the cost of maintaining the fund.
(C) A statement that the relationship between each unit of the
securities to be issued and each unit of the area to be served shall
be one share of common stock issued for each subdivision lot
purchased.
(D) A prohibition on the issuance of fractional shares or
securities.
(E) A statement, meeting the requirements of Section 330.24 of the
Corporations Code, that the securities are appurtenant to the land
within the area to be served.
(F) Provision for the transfer of the securities, voting rights of
the security holders, inspection of books and records by security
holders, necessary or contemplated expansion of the facilities of the
mutual water company, and further subdivision, where applicable, of
the area to be served.
(G) The limitation on the salaries paid to the persons operating,
or employed by, the mutual water company including officers and
directors.
(H) A provision for annual meetings of the security holders
accompanied by a provision for adequate notice.
(I) A provision for the annual distribution to each security
holder or fiscal year-end financial statements within 105 days of the
close of the fiscal year.
(J) In the case of a mutual water company that purchases water for
distribution from a public utility, municipal water company, or
water district, a provision for charging all security holders a pro
rata amount of the cost of water supplied to an entity providing fire
protection service.
(K) A provision that a share certificate shall be issued to each
lot purchased.
(14) That the subdivider or applicant, on behalf of the mutual
water company, has prepared an offering circular to be used in an
offer and sale of its securities.
(15) That the writings and documents evidencing compliance with
all of the above provisions of this subdivision are on file as part
of the permanent record of the mutual water company.
(b) The contracts and documents described in paragraph (5) of
subdivision (a) shall include all of the following:
(1) A bill of sale transferring all personal property used and
usable in the operation of the mutual water company.
(2) A copy of the recorded deed to the wells and water tanks to be
used by the mutual water company in the supply, distribution, and
fire protection system.
(3) Copies of recorded deeds granting assessments for
construction, repair, maintenance, and improvements of the water
supply, distribution, and fire protection system.
(c) The written contract described in paragraph (6) of subdivision
(a) shall provide that, in consideration of the transfer by the
subdivider or applicant to the mutual water company of the water
supply, distribution, and fire protection system, the mutual water
company agrees to do all of the following:
(1) Sell and issue securities to the purchasers of the remaining
lots in the subdivision on the same terms, except for price, if the
difference is justified, for the initial purchasers.
(2) Cooperate with the subdivider or applicant in the operation,
maintenance, and improvement of the present and contemplated water
supply, distribution, and fire protection system.
(3) Contract with the subdivider, applicant, or a successor in
interest, if a reasonable request is made to do so, for the
management of the mutual water company for as long as lots in the
subdivision remain unsold. The terms of the contract shall be
subject to approval by the board of directors of the mutual water
company, including terms related to the compensation to the
subdivider, applicant, or successor in interest, if any.
(d) The offering circular described in paragraph (12) of
subdivision (a) shall be delivered to each prospective purchaser of
the securities and shall include, among other things, all of the
following:
(1) A discussion of the water supply, distribution, and fire
protection system.
(2) A summary of the opinion of the engineer along with the
engineer's consent, as required by Sections 260.504.2 to 260.504.2.4,
inclusive, of Title 10 of the California Code of Regulations.
(3) The area in which the mutual water company intends to provide
water service.
(4) A discussion of the rights and duties of the security holders
of the mutual water company as set forth in its articles of
incorporation and bylaws, including the consequence of failure to pay
for water or assessments.
(5) The fact that the articles of incorporation provide that the
shares or securities of the mutual water company may not be sold
separately from the right to water evidenced by the security of the
mutual water company and prohibit issuance of fractional shares or
securities of the mutual water company.
(6) A discussion of the certificate issued by the Director of
Public Health certifying that the water is fit for domestic use.
(7) The limitation imposed on salaries to be paid to personnel
operating, or employed by, the mutual water company, including
officers and directors.
(8) A discussion of the transferability of the securities, the
voting rights of the security holders, access to books and records,
necessary or contemplated expansion of the facilities of the mutual
water company, and further subdivision of the area to be served, if
applicable.
(9) A discussion of the subdivider's duties with respect to
maintenance and repair or replacement of the water supply,
distribution, or fire protection system; and a discussion of the
establishment and maintenance of the operating, repair, and
replacement fund.
(e) The following exhibits shall also be attached to the offering
circular:
(1) A copy of the recorded articles of incorporation and bylaws of
the mutual water company.
(2) A copy of financial statements of the mutual water company.
If the mutual water company has not yet commenced operations, a
detailed operating budget for the first six months of operations
should be included as an exhibit to the offering circular. The
operating budget must include estimated monthly fees to be charged to
the water users.
(f) The Real Estate Commissioner shall prescribe the form and
content of the verified document required by this section.
332.3. The engineer's report prepared pursuant to the verified
document under Section 332.2 shall contain all relevant information
pertaining to the proposed water supply, distribution, and fire
protection system, including, but not limited to, the following:
(a) A system map of the area to be served showing all of the
following:
(1) The total acreage.
(2) The number and location of lots into which the area is or can
be subdivided and the location of the connection for water service.
(3) The location of all sources of supply, principal pumping
stations, diversion works, water treatment and filter plants, and
storage facilities.
(4) The size, character, and location of all mains and ditches.
(5) The location of all valves and gates, gauges, interconnections
with other systems, and fire hydrants.
(6) The location, size, and kind of each service pipe.
(7) The layout of all principal pumping stations and water
treatment and filter plants to show size, location, and character of
all major equipment, pipelines, connections, valves, and other
equipment used in connection therewith.
(8) The date of construction and condition of all principal items
of plant and extensions of all mains.
(b) A description of the sources of supply, including, in the case
of wells, information on the depth, diameter, and casing of the
well, and a statement indicating that the proposed water supply and
distribution system complies with this section, supported by reports
showing the sustained capacity of source of supply, or, if all or
some water is to be obtained from another source, copies of contracts
for obtaining such water, together with estimates of the present and
ultimate water consumption in the area to be served.
(c) A statement indicating in detail the cost of the water supply,
distribution, and fire protection system, and indicating the cost of
any required repairs or replacement.
(d) An opinion by the engineer to the effect that the water
supply, distribution, and fire protection system will adequately,
dependably, and safely meet the total requirements for all water
consumers under maximum consumption and will meet the requirements of
Section 332.4. The opinion shall have attached to it the
calculations and data used in estimating the water requirements.
(e) A statement by the engineer of the estimated cost of
maintenance of the system, the estimated useful life of the
components of the system, the estimated cost of replacement of the
system, and the monthly or annual amount which should be charged to
establish a reasonable reserve for maintenance and replacement of the
system based on these estimates.
332.4. The water supply and distribution system of a mutual water
company described in Section 321.1 that proposes to distribute water
for domestic use pursuant to this chapter shall comply with all of
the following design standards:
(a) The system shall be adequate to maintain normal operating
pressure of not less than 25 pounds per square inch, nor more than
125 pounds per square inch, at the service connection; provided,
however, that during periods of hourly maximum demand, or at the time
of peak seasonal loads, the pressure may be reduced to not less than
20 pounds per square inch, and during periods of hourly minimum
demand the pressure man increase to not more than 150 pounds per
square inch. Variations in pressure under normal operation shall not
exceed 50 percent of the average operating pressure. The average
operating pressure shall be determined by computing the arithmetical
average of at least 24 consecutive hourly pressure readings.
(b) The quantity of water delivered to the distribution system
from all source facilities shall be sufficient to supply adequately,
dependably, and safely the total requirements of all water consumers
under maximum consumption, and shall be sufficient to maintain the
pressure specified by subdivision (a).
(c) The distribution system shall provide at least one connection
per service and, to the extent feasible, shall be designed in a
property segmented grid so as to do both of the following:
(1) Minimize the extent of interruption in water service when
repairs are necessary.
(2) Avoid dead ends in its water mains.
332.5. (a) The mutual water company described in Section 332.1
shall provide at least a minimum level of water service to its
customers for fire protection purposes as an inherent part of the
water system design in accordance with the standards set forth in
this section. The standards set forth in this section are the
minimum levels of water service that the mutual water company shall
provide and shall not preclude the mutual water company from
designing a fire protection system that meets higher standards, nor
preclude any governmental agency from setting higher standards in any
area subject to its jurisdiction. A mutual water company may
request a fire protection agency to approve a fire protection system
that does not meet the standards set forth in this chapter upon a
showing by the mutual water company that the proposed system is
adequate for fire protection purposes.
(b) In the initial construction, extension, or modification of a
water system, any one of which is required to serve (1) a new user or
(2) a change in use, the facilities constructed, extended, or
modified shall be designed to be capable of providing, for a
sustained period of at least two hours, in addition to the
requirements of the average daily demand within the area to be
served, the minimum flow requirements set forth below opposite the
classification of land use to be served:
Land Use Minimum Flow
1. Rural, residential with a lot density of two or
less per acre primarily for recreational and
retirement use ................................. 250 gpm
2. Lot density of less than one single-family
residential unit per acre ...................... 500 gpm
3. Lot density of one or two single-family
residential units per acre ..................... 750 gpm
4. Lot density of three or more single-family
residential units per acre ..................... 1,000 gpm
5. Duplex residential units, neighborhood
business of one story .......................... 1,500 gpm
6. Multiple residential, one and two stories;
light commercial or light industrial ........... 2,000 gpm
7. Multiple residential, three stories or higher;
heavy commercial or heavy industrial ........... 2,500 gpm
332.6. The water supply and distribution system of a mutual water
company described in Section 332.1 that proposes to distribute water
for domestic use shall be constructed to conform with currently
accepted engineering practices, and shall comply with the following
construction standards where possible:
(a) Water mains to be installed below the frost level or otherwise
protected to prevent freezing and shall not have less than 30 inches
of cover over the top of the pipe in public streets or alleys except
where such depth is rendered impossible by underground obstructions
or rocky or hardpan conditions.
(b) The size, design, material, and installation of service pipes
shall conform to the reasonable requirements of the mutual water
company; provided, however, that the minimum size of the pipe shall
be 3/4 inch or greater nominal size. Except where services are not
intended for use during freezing weather and arrangements are made to
drain service pipes prior to freezing weather, and except at
terminations in connection with the meter or water consumer's piping,
all service pipes shall be laid at a depth sufficient to prevent
freezing.
332.7. The fire protection system of a mutual water company shall
be constructed to conform with currently accepted engineering
practices, and shall comply with the following construction
standards:
(a) The flows set forth in Section 332.5 shall be calculated on
the basis of a residual pressure of 20 p.s.i.g. in the distribution
system under flowing conditions.
(b) Fire hydrants shall be attached to the distribution systems at
the locations designated by the entity responsible for their use for
fire fighting purposes. Any new mains to which a hydrant may be
attached shall not be less than six inches in diameter.
(c) Each separately operated water system shall not have less than
two independent sources of supply.
332.8. The mutual water company shall be financially responsible
for the maintenance, repair, or replacement of fire hydrants. A
mutual water company shall perform and record annual flow tests
pursuant to Section 332.7 or, in lieu of the annual flow test under
Section 332.7, any test to determine available flow performed by a
fire protection agency. The recorded test results shall become part
of the mutual water company's books and records.
SEC. 4. Section 25100 of the Corporations Code is amended to read:
25100. The following securities are exempted from Sections 25110,
25120, and 25130:
(a) Any security (including a revenue obligation) issued or
guaranteed by the United States, any state, any city, county, city
and county, public district, public authority, public corporation,
public entity, or political subdivision of a state or any agency or
corporate or other instrumentality of any one or more of the
foregoing; or any certificate of deposit for any of the foregoing.
(b) Any security issued or guaranteed by the Dominion of Canada,
any Canadian province, any political subdivision or municipality of
that province, or by any other foreign government with which the
United States currently maintains diplomatic relations, if the
security is recognized as a valid obligation by the issuer or
guarantor; or any certificate of deposit for any of the foregoing.
(c) Any security issued or guaranteed by and representing an
interest in or a direct obligation of a national bank or a bank or
trust company incorporated under the laws of this state, and any
security issued by a bank to one or more other banks and representing
an interest in an asset of the issuing bank.
(d) Any security issued or guaranteed by a federal savings
association or federal savings bank or federal land bank or joint
land bank or national farm loan association or by any savings
association, as defined in subdivision (a) of Section 5102 of the
Financial Code, which is subject to the supervision and regulation of
the Commissioner of Financial Institutions of this state.
(e) Any security (other than an interest in all or portions of a
parcel or parcels of real property which are subdivided land or a
subdivision or in a real estate development), the issuance of which
is subject to authorization by the Insurance Commissioner, the Public
Utilities Commission, or the Real Estate Commissioner of this state.
(f) Any security consisting of any interest in all or portions of
a parcel or parcels of real property which are subdivided lands or a
subdivision or in a real estate development and any security of
a mutual water company issued in connection with subdivided lands
pursuant to Chapter 2 (commencing with Section 332) of Title 1 of
Part 4 of Division 1 of the Civil Code ; provided that the
exemption in this subdivision shall not be applicable to any
investment contract sold or offered for sale with, or as part of, any
such interest , or to any person engaged in the business of
selling, distributing, or supplying water for irrigation purposes or
domestic use which is not a public utility .
(g) Any mutual capital certificates or savings accounts, as
defined in the Savings Association Law, issued by a savings
association, as defined by subdivision (a) of Section 5102 of the
Financial Code, and holding a license or certificate of authority
then in force from the Commissioner of Financial Institutions of this
state.
(h) Any security
issued or guaranteed by any federal credit union, or by any credit
union organized and supervised, or regulated, under the Credit Union
Law.
(i) Any security issued or guaranteed by any railroad, other
common carrier, public utility, or public utility holding company
which is (1) subject to the jurisdiction of the Interstate Commerce
Commission or (2) a holding company registered with the Securities
and Exchange Commission under the Public Utility Holding Company Act
of 1935 or a subsidiary of that company within the meaning of that
act or (3) regulated in respect of the issuance or guarantee of the
security by a governmental authority of the United States, of any
state, of Canada or of any Canadian province; and the security is
subject to registration with or authorization of issuance by that
authority.
(j) Any security (except evidences of indebtedness, whether
interest bearing or not) of an issuer (1) organized exclusively for
educational, benevolent, fraternal, religious, charitable, social, or
reformatory purposes and not for pecuniary profit, if no part of the
net earnings of the issuer inures to the benefit of any private
shareholder or individual, or (2) organized as a chamber of commerce
or trade or professional association. The fact that amounts received
from memberships or dues or both will or may be used to construct or
otherwise acquire facilities for use by members of the nonprofit
organization does not disqualify the organization for this exemption.
This exemption does not apply to the securities of any nonprofit
organization if any promoter thereof expects or intends to make a
profit directly or indirectly from any business or activity
associated with the organization or operation of that nonprofit
organization or from remuneration received from that nonprofit
organization.
(k) Any agreement, commonly known as a "life income contract," of
an issuer (1) organized exclusively for educational, benevolent,
fraternal, religious, charitable, social, or reformatory purposes and
not for pecuniary profit and (2) which the commissioner designates
by rule or order, with a donor in consideration of a donation of
property to that issuer and providing for the payment to the donor or
persons designated by him or her of income or specified periodic
payments from the donated property or other property for the life of
the donor or those other persons.
(l) Any note, draft, bill of exchange, or banker's acceptance
which is freely transferable and of prime quality, arises out of a
current transaction or the proceeds of which have been or are to be
used for current transactions, and which evidences an obligation to
pay cash within nine months of the date of issuance, exclusive of
days of grace, or any renewal of that paper which is likewise
limited, or any guarantee of that paper or of any such renewal,
provided that the paper is not offered to the public in amounts of
less than twenty-five thousand dollars ($25,000) in the aggregate to
any one purchaser. In addition, the commissioner may, by rule or
order, exempt any issuer of any notes, drafts, bills of exchange or
banker's acceptances from qualification of those securities when the
commissioner finds that the qualification is not necessary or
appropriate in the public interest or for the protection of
investors.
(m) Any security issued by any corporation organized and existing
under the provisions of Chapter 1 (commencing with Section 54001) of
Division 20 of the Food and Agricultural Code.
(n) Any beneficial interest in an employees' pension,
profit-sharing, stock bonus or similar benefit plan which meets the
requirements for qualification under Section 401 of the federal
Internal Revenue Code or any statute amendatory thereof or
supplementary thereto. A determination letter from the Internal
Revenue Service stating that an employees' pension, profit-sharing,
stock bonus or similar benefit plan meets those requirements shall be
conclusive evidence that the plan is an employees' pension,
profit-sharing, stock bonus or similar plan within the meaning of the
first sentence of this subdivision until the date the determination
letter is revoked in writing by the Internal Revenue Service,
regardless of whether or not the revocation is retroactive.
(o) Any security listed or approved for listing upon notice of
issuance on a national securities exchange or designated or approved
for designation upon notice of issuance as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., if the exchange or
interdealer quotation system has been certified by rule or order of
the commissioner and any warrant or right to purchase or subscribe to
the security. The exemption afforded by this subdivision does not
apply to securities listed or designated, or approved for listing or
designation upon notice of issuance, in a rollup transaction unless
the rollup transaction is an eligible rollup transaction as defined
in Section 25014.7.
That certification of any exchange or system shall be made by the
commissioner upon the written request of the exchange or system if
the commissioner finds that the exchange or system: (i) in acting on
applications for listing of common stock substantially applies the
minimum standards set forth in either alternative (A) or (B) of
paragraph (1), and (ii) in considering suspension or removal from
listing or designation, substantially applies each of the criteria
set forth in paragraph (2).
(1) Listing standards:
(A) (i) Shareholders' equity of at least four million dollars
($4,000,000).
(ii) Pretax income of at least seven hundred fifty thousand
dollars ($750,000) in the issuer's last fiscal year or in two of its
last three fiscal years.
(iii) Minimum public distribution of 500,000 shares (exclusive of
the holdings of officers, directors, controlling shareholders, and
other concentrated or family holdings), together with a minimum of
800 public holders or minimum public distribution of 1,000,000 shares
together with a minimum of 400 public holders. The exchange or
system may also consider the listing or designation of a company's
securities if the company has a minimum of 500,000 shares publicly
held, a minimum of 400 shareholders and daily trading volume in the
issue has been approximately 2,000 shares or more for the six months
preceding the date of application. In evaluating the suitability of
an issue for listing or designation under this trading provision, the
exchange or system shall review the nature and frequency of that
activity and any other factors as it may determine to be relevant in
ascertaining whether the issue is suitable for trading. A security
which trades infrequently shall not be considered for listing or
designation under this paragraph even though average daily volume
amounts to 2,000 shares per day or more.
Companies whose securities are concentrated in a limited
geographical area, or whose securities are largely held in block by
institutional investors, normally may not be considered eligible for
listing or designation unless the public distribution appreciably
exceeds 500,000 shares.
(iv) Minimum price of three dollars ($3) per share for a
reasonable period of time prior to the filing of a listing or
designation application; provided, however, in certain instances an
exchange or system may favorably consider listing an issue selling
for less than three dollars ($3) per share after considering all
pertinent factors, including market conditions in general, whether
historically the issue has sold above three dollars ($3) per share,
the applicant's capitalization, and the number of outstanding and
publicly held shares of the issue.
(v) An aggregate market value for publicly held shares of at least
three million dollars ($3,000,000).
(B) (i) Shareholders' equity of at least four million dollars
($4,000,000).
(ii) Minimum public distribution set forth in clause (iii) of
subparagraph (A) of paragraph (1).
(iii) Operating history of at least three years.
(iv) An aggregate market value for publicly held shares of at
least fifteen million dollars ($15,000,000).
(2) Criteria for consideration of suspension or removal from
listing:
(i) If a company which (A) has shareholders' equity of less than
one million dollars ($1,000,000) has sustained net losses in each of
its two most recent fiscal years, or (B) has net tangible assets of
less than three million dollars ($3,000,000) and has sustained net
losses in three of its four most recent fiscal years.
(ii) If the number of shares publicly held (excluding the holdings
of officers, directors, controlling shareholders and other
concentrated or family holdings) is less than 150,000.
(iii) If the total number of shareholders is less than 400 or if
the number of shareholders of lots of 100 shares or more is less than
300.
(iv) If the aggregate market value of shares publicly held is less
than seven hundred fifty thousand dollars ($750,000).
(v) If shares of common stock sell at a price of less than three
dollars ($3) per share for a substantial period of time and the
issuer shall fail to effectuate a reverse stock split of the shares
within a reasonable period of time after being requested by the
exchange to take that action.
A national securities exchange or interdealer quotation system of
the National Association of Securities Dealers, Inc. certified by
rule or order of the commissioner under this subdivision shall file
annual reports when requested to do so by the commissioner. The
annual reports shall contain, by issuer: the variances granted to an
exchange's listing standards or interdealer quotation system's
designation criteria, including variances from corporate governance
and voting rights' standards, for any security of that issuer; the
reasons for the variances; a discussion of the review procedure
instituted by the exchange or interdealer quotation system to
determine the effect of the variances on investors and whether the
variances should be continued; and any other information that the
commissioner deems relevant. The purpose of these reports is to
assist the commissioner in determining whether the quantitative and
qualitative requirements of this subdivision are substantially being
met by the exchange or system in general or with regard to any
particular security.
The commissioner after appropriate notice and opportunity for
hearing in accordance with the provisions of the Administrative
Procedure Act, Chapter 5 (commencing with Section 11500) of Part 1 of
Division 3 of Title 2 of the Government Code, may, in his or her
discretion, by rule or order, decertify any exchange or interdealer
quotation system previously certified which ceases substantially to
apply the minimum standards or criteria as set forth in paragraphs
(1) and (2).
A rule or order of certification shall conclusively establish that
any security listed or approved for listing upon notice of issuance
on any exchange, or designated or approved for designation upon
issuance as a national market system security on any interdealer
quotation system, named in a rule or order of certification, and any
warrant or right to purchase or subscribe to any such security, is
exempt under this subdivision until the adoption by the commissioner
of any rule or order decertifying the exchange or interdealer
quotation system.
(p) A promissory note secured by a lien on real property, which is
neither one of a series of notes of equal priority secured by
interests in the same real property nor a note in which beneficial
interests are sold to more than one person or entity.
(q) Any unincorporated interindemnity or reciprocal or
interinsurance contract, which qualifies under the provisions of
Section 1280.7 of the Insurance Code, between members of a
cooperative corporation, organized and operating under Part 2
(commencing with Section 12200) of Division 3 of Title 1, and whose
members consist only of physicians and surgeons licensed in
California, which contracts indemnify solely in respect to medical
malpractice claims against the members, and which do not collect in
advance of loss any moneys other than contributions by each member to
a collective reserve trust fund or for necessary expenses of
administration.
(1) Whenever it appears to the commissioner that any person has
engaged or is about to engage in any act or practice constituting a
violation of any provision of Section 1280.7 of the Insurance Code,
the commissioner may in the commissioner's discretion bring an action
in the name of the people of the State of California in the superior
court to enjoin the acts or practices or to enforce compliance with
Section 1280.7 of the Insurance Code. Upon a proper showing a
permanent or preliminary injunction, restraining order or writ of
mandate shall be granted and a receiver or conservator may be
appointed for the defendant or the defendant's assets.
(2) The commissioner may, in the commissioner's discretion, (A)
make such public or private investigations within or outside of this
state as the commissioner deems necessary to determine whether any
person has violated or is about to violate any provision of Section
1280.7 of the Insurance Code or to aid in the enforcement of Section
1280.7, and (B) publish information concerning the violation of
Section 1280.7.
(3) For the purpose of any investigation or proceeding under this
section, the commissioner or any officer designated by the
commissioner may administer oaths and affirmations, subpoena
witnesses, compel their attendance, take evidence, and require the
production of any books, papers, correspondence, memoranda,
agreements, or other documents or records which the commissioner
deems relevant or material to the inquiry.
(4) In case of contumacy by, or refusal to obey a subpoena issued
to, any person, the superior court, upon application by the
commissioner, may issue to the person an order requiring the person
to appear before the commissioner, or the officer designated by the
commissioner, there to produce documentary evidence, if so ordered,
or to give evidence touching the matter under investigation or in
question. Failure to obey the order of the court may be punished by
the court as a contempt.
(5) No person is excused from attending or testifying or from
producing any document or record before the commissioner or in
obedience to the subpoena of the commissioner or any officer
designated by the commissioner, or in any proceeding instituted by
the commissioner, on the ground that the testimony or evidence
(documentary or otherwise), required of the person may tend to
incriminate the person or subject the person to a penalty or
forfeiture, but no individual may be prosecuted or subjected to any
penalty or forfeiture for or on account of any transaction, matter,
or thing concerning which the person is compelled, after validly
claiming the privilege against self-incrimination, to testify or
produce evidence (documentary or otherwise), except that the
individual testifying is not exempt from prosecution and punishment
for perjury or contempt committed in testifying.
(6) The cost of any review, examination, audit, or investigation
made by the commissioner under Section 1280.7 of the Insurance Code
shall be paid to the commissioner by the person subject to the
review, examination, audit, or investigation, and the commissioner
may maintain an action for the recovery of these costs in any court
of competent jurisdiction. In determining the cost, the commissioner
may use the actual amount of the salary or other compensation paid
to the persons making the review, examination, audit, or
investigation plus the actual amount of expenses including overhead
reasonably incurred in the performance of the work.
The recoverable cost of each review, examination, audit, or
investigation made by the commissioner under Section 1280.7 of the
Insurance Code shall not exceed twenty-five thousand dollars
($25,000), except that costs exceeding twenty-five thousand dollars
($25,000) shall be recoverable if the costs are necessary to prevent
a violation of any provision of Section 1280.7 of the Insurance Code.
(r) Any shares or memberships issued by any corporation organized
and existing pursuant to the provisions of Part 2 (commencing with
Section 12200) of Division 3 of Title 1, provided the aggregate
investment of any shareholder or member in shares or memberships sold
pursuant to this subdivision does not exceed three hundred dollars
($300). This exemption does not apply to the shares or memberships
of any such corporation if any promoter thereof expects or intends to
make a profit directly or indirectly from any business or activity
associated with the corporation or the operation of the corporation
or from remuneration, other than reasonable salary, received from the
corporation. This exemption does not apply to nonvoting shares or
memberships of any such corporation issued to any person who does not
possess, and who will not acquire in connection with the issuance of
nonvoting shares or memberships, voting power (Section 12253) in the
corporation. This exemption also does not apply to shares or
memberships issued by a nonprofit cooperative corporation organized
to facilitate the creation of an unincorporated interindemnity
arrangement that provides indemnification for medical malpractice to
its physician and surgeon members as set forth in subdivision (q).
(s) Any security consisting of or representing an interest in a
pool of mortgage loans which meets each of the following
requirements:
(1) The pool consists of whole mortgage loans or participation
interests in those loans, which loans were originated or acquired in
the ordinary course of business by a national bank or federal savings
association or federal savings bank having its principal office in
this state, by a bank incorporated under the laws of this state or by
a savings association as defined in subdivision (a) of Section 5102
of the Financial Code and which is subject to the supervision and
regulation of the Commissioner of Financial Institutions, and each of
which loans at the time of transfer to the pool is an authorized
investment for such originating or acquiring institution.
(2) The pool of mortgage loans is held in trust by a trustee which
is a financial institution specified in paragraph (1) as trustee or
otherwise.
(3) The loans are serviced by a financial institution specified in
paragraph (1).
(4) The security is not offered in amounts of less than
twenty-five thousand dollars ($25,000) in the aggregate to any one
purchaser.
(5) The security is offered pursuant to a registration under the
Securities Act of 1933, or pursuant to an exemption under Regulation
A under that act, or in the opinion of counsel for the issuer, is
offered pursuant to an exemption under Section 4(2) of that act.
(t) (1) Any security issued or guaranteed by and representing an
interest in or a direct obligation of an industrial loan company
incorporated under the laws of the state and authorized by the
Commissioner of Financial Institutions to engage in industrial loan
business.
(2) Any investment certificate in or issued by any industrial loan
company that is organized under the laws of a state of the United
States other than this state, that is insured by the Federal Deposit
Insurance Corporation, and that maintains a branch office in this
state.
(u) Any security issued by an issuer registered as an open-end
management company or unit investment trust under the Investment
Company Act of 1940, provided that all of the following requirements
are met:
(1) The registration statement for the securities is currently
effective under the Securities Act of 1933.
(2) Prior to any offer or sale in this state of securities claimed
to be exempt under this subdivision, there is filed with or paid to
the commissioner each of the following:
(A) A notice of intention to sell that has been executed by the
issuer and that includes the name and address of the issuer and the
name of the securities to be offered and sold under this subdivision.
(B) A copy of the current prospectus to be used in the offer and
sale of the security.
(C) The fee provided in subdivision (f) of Section 25608.
If any offer or sale is made pursuant to this exemption more than
12 months after the date the notice was filed under this subdivision,
the issuer shall file another notice of intention to sell, a copy of
the prospectus the issuer is currently utilizing for the purpose of
making that offer, and the fee specified in subparagraph (C) of
paragraph (2).
SEC. 5. No reimbursement is required by this act pursuant to
Section 6 of Article XIIIB of the California Constitution because the
only costs that may be incurred by a local agency or school district
will be incurred because this act creates a new crime or infraction,
eliminates a crime or infraction, or changes the penalty for a crime
or infraction, within the meaning of Section 17556 of the Government
Code, or changes the definition of a crime within the meaning of
Section 6 of Article XIIIB of the California Constitution.
Notwithstanding Section 17580 of the Government Code, unless
otherwise specified, the provisions of this act shall become
operative on the same date that the act takes effect pursuant to the
California Constitution.