BILL ANALYSIS
SB 1155
Page 1
Date of Hearing: June 21, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 1155 (Dutton) - As Amended: April 12, 2010
SENATE VOTE : 34-0
SUBJECT : Capital access companies
SUMMARY : Makes changes to the Capital Access Company (CAC)
Law. Specifically, this bill :
1)Changes the definition of a small business and adding a
definition for a smaller business, exempting CACs from the
Corporate Securities Law of 1968.
2)Exempts businesses from the CAC Law, if they are approved as
Small Business Investment Companies by the federal Small
Business Administration,
3)Replaces existing law conflict of interest provisions with
conflict of interest provisions utilized by the federal Small
Business Administration for its licensees, and making related
changes, as specified.
EXISTING LAW
1)Provides for Investment Company Act of 1940, which requires
investment companies with more than 100 shareholders to
register with, and be regulated by, the Securities and
Exchange Commission (SEC).
2)Authorizes exemptions from the Investment Company Act of 1940,
pursuant to changes added to that law by the National
Securities Markets Improvement Act of 1996. Under Section
6(a) (5) (A) of the Investment Company Act, an exemption is
provided for "any company that is not engaged in the business
of issuing redeemable securities, the operations of which are
subject to regulation by the State in which the company is
organized under a statute governing entities that provide
financial or managerial assistance to enterprises doing
SB 1155
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business, or proposing to do business, in that State." To be
eligible for an exemption, the company must also meet the
following requirements:
a) The organizational documents must state that the
activities of the company are limited to the promotion of
economic, business, or industrial development in the state
through the provision of financial or managerial assistance
to enterprises doing business or proposing to do business
in that state.
b) Immediately following each sale of securities of the
company, at least 80 percent of the securities must be held
by persons who reside in or who have a substantial business
presence in that state.
c) The securities must be sold only to accredited
investors, as that term is defined under the Securities Act
of 1933, or to other persons approved by the SEC.
d) The company must comply with specified criteria intended
to ensure that it invests its funds in a relatively safe
manner.
3)Provides for the CAC Law, which is administered by the
Department of Corporations (DOC), and was formed for the
express purpose of allowing companies to operate in California
under the exemption described in Existing federal law number 2
above. Under the CAC Law [Corporations Code Section 28000 et
seq.]:
a) A company seeking to become a CAC must submit an
application to DOC, and must be approved by DOC before it
may sell securities under the exemption granted to
specified companies under the Investment Company Act of
1940.
b) A small business firm is defined as one that proposes to
transact, or transacts business on a regular and continuous
basis in California, has fewer than 500 employees, and
meets other conditions, as specified.
c) A CAC is required to use its best efforts to provide
financing assistance to small business firms doing business
or proposing to do business wholly or substantially in this
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state.
d) CACs must comply with the Corporate Securities Law of
1968, which authorizes the Commissioner of Corporations to
regulate securities offerings in California.
e) CACs may not transfer or assign their licenses to other
entities.
f) CACs must comply with specified conflict of interest
provisions.
4)Exempts CACs from the requirement to obtain a permit from DOC
before selling non-redeemable securities [Corporations Code
Section 25102(p)], as long as the securities are sold to
accredited investors, as specified.
FISCAL EFFECT : According to the Senate Appropriations
Committee, costs will be offset by licensing fee revenue.
COMMENTS :
The logic behind the existing CAC Law is that small businesses
can better attract seed capital, if they can approach a large
number of investors. If a small business is reliant on 100 or
fewer investors for its capital needs, it is likely to be harder
to raise needed capital than if that same business could seek
out 1,000 investors. The more investors a business can solicit
the smaller amount the business needs to request from each
investor. Yet, under existing law, a business that seeks out
more than 100 investors must register with the SEC, a process
that is prohibitively expensive for most start-ups, especially
for small firms. Exemptions from the Investment Company Act of
1940 were created out of recognition that SEC registration
requirements could pose an insurmountable barrier to small
businesses.
The CAC Law was enacted in 1999, in an effort to utilize one of
the exemptions from the Investment Company Act of 1940, and
provide a source of capital to small businesses. However, to
date, only one company has applied for permission to become a
CAC, and that company ultimately withdrew its application. This
bill is an attempt to take a law that has been unused since its
enactment and encourage its usage.
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No other states offer models that can be used by California when
considering amendments to our law; according to the primary
proponent of this bill, no other states have enacted laws
similar to the CAC law.
REGISTERED SUPPORT / OPPOSITION :
Support
California Black Chamber of Commerce Foundation
Connect
DoshaCare
Petillon Hiraide Loomis Zagzebski & Zagzebski LLP
The Optimize Group
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081