BILL NUMBER: AB 244 CHAPTERED 09/18/00 CHAPTER 468 FILED WITH SECRETARY OF STATE SEPTEMBER 18, 2000 APPROVED BY GOVERNOR SEPTEMBER 16, 2000 PASSED THE ASSEMBLY AUGUST 30, 2000 PASSED THE SENATE AUGUST 28, 2000 AMENDED IN SENATE AUGUST 21, 2000 AMENDED IN SENATE AUGUST 18, 2000 AMENDED IN SENATE AUGUST 7, 2000 AMENDED IN SENATE JULY 6, 2000 AMENDED IN SENATE JUNE 7, 2000 AMENDED IN ASSEMBLY JANUARY 11, 2000 AMENDED IN ASSEMBLY MARCH 17, 1999 INTRODUCED BY Assembly Member Ackerman FEBRUARY 1, 1999 An act to add Section 25118 to the Corporations Code, relating to usury. LEGISLATIVE COUNSEL'S DIGEST AB 244, Ackerman. Corporations: evidences of indebtedness. The California Constitution prohibits usury, which is the loan or forbearance of any money, goods, or things at a rate of interest in excess of specified ceilings, but exempts certain transactions and lenders from these provisions, and allows the Legislature to exempt additional classes of persons by statute. Existing statutory law, the Corporate Securities Act of 1968, provides that certain evidences of indebtedness, and their purchasers or holders, are exempt from state usury laws if the evidence of indebtedness is issued in compliance with specific provisions. Existing statutory law also provides that the usury exemption is applicable to an evidence of indebtedness issued in accordance with these provisions regardless of whether subsequent to its issuance the evidence of indebtedness is determined by a court of competent jurisdiction to be a security. This bill would provide that certain evidences of indebtedness in an amount of at least $300,000 at the time of issuance, and the purchasers or holders thereof, shall be exempt from the usury provisions of the California Constitution under certain circumstances, as specified. This bill would state that these exemptions apply regardless of whether the evidence of indebtedness or guaranty is determined by a court of competent jurisdiction not to be a "security," but would clarify that these exemptions do not extend to evidences of indebtedness issued or guaranteed by an individual, a revocable trust, or a partnership with general partners, as specified. The bill would provide that it does not exempt any person from the California Finance Lenders Law. This bill would state legislative intent that the standards contained in these provisions are approved with respect to commercial loans only and do not reflect any judgment by the Legislature regarding loans for personal, family, or household purposes and that the exemption contained therein shall not affect the application of existing licensing requirements, laws regarding unfair, unlawful, or deceptive acts or practices, or its availability to a successor in interest to the originating lender. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 25118 is added to the Corporations Code, to read: 25118. (a) An evidence of indebtedness issued by an entity or guaranteed by an entity that is an affiliate (as defined in Section 150) of the borrower that, on the day the evidence of indebtedness issued or guaranty is first issued or entered into, has total assets of at least two million dollars ($2,000,000) according to its then most recent financial statements, and the purchasers or holders thereof, shall be exempt from the usury provisions of the Constitution. The financial statements referred to in the preceding sentence shall be: (1) As of a date not more than 90 days prior to the date the evidence of indebtedness or guaranty is first issued or entered into. (2) Prepared: (A) In accordance with generally accepted accounting principles and, if the entity has consolidated subsidiaries, on a consolidated basis. (B) In accordance with the rules and requirements of the Securities and Exchange Commission, whether or not required by law to be prepared in accordance with those rules and requirements. (b) Any one or more evidences of indebtedness, and the purchasers or holders thereof, shall be exempt from the usury provisions of the Constitution if either of the following applies: (1) The evidences of indebtedness aggregate at the time of issuance at least three hundred thousand dollars ($300,000) in original face amount, or, if the evidences of indebtedness are purchased with original issue discount, they are purchased for an aggregate purchase price at the time of issuance of at least three hundred thousand dollars ($300,000). (2) The evidences of indebtedness are issued pursuant to a bona fide written commitment for the lending to the issuer of at least three hundred thousand dollars ($300,000), or the provision of a line of credit to the issuer in a principal amount of at least three hundred thousand dollars ($300,000). The exemption provided by this paragraph shall not be affected by a subsequent event of default or other event not in the lender's control that has relieved or may relieve the lender from its commitment. (c) Any evidence of indebtedness described in subdivisions (a) or (b), and the purchasers or holders thereof, shall be entitled to the benefits of the usury exemption contained in this section regardless of whether, at any time after the evidence of indebtedness or guaranty upon which the exemption is based is first issued or entered into, the evidence of indebtedness or guaranty is determined by a court of competent jurisdiction not to be a "security." (d) This section creates and authorizes a class of transactions and persons pursuant to Section 1 of Article XV of the California Constitution. (e) This section shall not apply to: (1) Any evidence of indebtedness issued or guaranteed (if the guaranty is part of the consideration for the indebtedness) by an individual, a revocable trust having one or more individuals as trustors, or a partnership in which, at the time of issuance, one or more individuals are general partners. (2) Any transaction subject to the limitation on permissible rates of interest set forth in paragraph (1) of the first sentence of Section 1 of Article XV of the California Constitution. (f) The exemptions created by this section shall only be available in a transaction which meets either of the following criteria: (1) The lender and either the issuer of the indebtedness or the guarantor, as the case may be, or any of their respective officers, directors, or controlling persons, or, if any party is a limited liability company, the managers as appointed or elected by the members, have a preexisting personal or business relationship. (2) The lender and the issuer, or the lender and the guarantor, by reason of their own business and financial experience or that of their professional advisers, could reasonably be assumed to have the capacity to protect their own interests in connection with the transaction. (g) For purposes of this section, "preexisting personal or business relationship" and "capacity to protect their own interests in connection with the transaction" as used in subdivision (f) shall have the same meaning as, and be determined according to the same standards as, specified in paragraph (2) of subdivision (f) of Section 25102 and its implementing regulations provided that, solely with respect to this section, a lender or purchaser who is represented by counsel may designate that person as its professional adviser whether or not that person is compensated by the issuer or guarantor, as long as that person has a bona fide attorney-client relationship with the lender or purchaser. (h) This section shall not exempt any person from the application of the California Finance Lenders Law (Division 9 (commencing with Section 22000) of the Financial Code). SEC. 2. It is the intent of the Legislature that the standards contained in Section 1 of this act are approved with respect to commercial loans only. They do not reflect any judgment by the Legislature regarding loans for personal, family, or household purposes. No inference should be drawn from those standards as to the appropriate treatment of any loans other than loans for commercial purposes that qualify for the exemption provided therein. It is also the intent of the Legislature that the exemption contained in Section 1 of this act shall not affect the application of any other provision of law that (1) requires any person in connection with a transaction described in Section 1 to comply with applicable licensing requirements, (2) protects parties to a transaction described in Section 1 from unfair, unlawful, or deceptive acts or practices, or (3) affects the availability of the exemption provided by Section 1 to a successor in interest of the originating lender of a loan described therein.