BILL ANALYSIS �
AB 2081
Page 1
Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2081 (Allen) - As Amended: April 11, 2012
SUBJECT : Securities transactions: qualification requirements:
exemptions.
SUMMARY : Provides that an issuer can offer or sell securities
using any form of general solicitation or general advertising.
Specifically, this bill :
1)Prohibits unsolicited telephone calls to a person's residence
or cellular telephone unless the issuer and the caller
reasonably believes after reasonable inquiry, prior to the
unsolicited telephone call, that the person is an accredited
investor.
2)Provides that the sales of securities shall be made only to a
person who is or whom the issuer reasonably believes after
reasonable inquiry to be an accredited investor immediately
prior to the sale.
3)Provides that the issuer must show that the offering is
suitable for the person based on the person's financial
status, objectives, investment experience, time horizon, risk
tolerance and any other information the issuer deems relevant.
The information showing suitability must be kept for four
years.
4)Establishes if a person is a natural person, the amount of
consideration paid by the purchaser does not exceed 10% of his
or her net worth.
5)Defines "net worth" as the terms used in the definition of an
accredited investor described below.
6)Allows the issuer to assume that the person has the capacity
to protect his or her interests in connection with the
offering due to his or her business or financial experience or
the business or financial experience of his or her
professional adviser.
7)Requires the issuer to specify in all advertisements,
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communications, sales literature or other information that is
publicly disseminated in connection with the offering, that
the securities will be sold to accredited investors only.
8)Requires the issuer to believe in good faith that the offer
and sale are exempt from registration under Section 5 of the
Securities Act of 1933.
9)Defines "publicly disseminated" as communicated to 100 or more
persons or otherwise communicated, used, or circulated in a
public manner.
10)Requires a legend to be on the cover page of each disclosure
document advising that the securities described in the
disclosure document or subscription agreement will be sold to
accredited investors only.
11)Provides that dissemination of information regarding the
proposed offering to a person who is not an accredited
investor shall not disqualify the offering from exemption
under this subdivision.
12)Requires the issuer to file with Commissioner of the
Department of Corporations (DOC) a notice and pay the fee
within 15 days after the first sale of the securities in this
state.
13)Prohibits the offering by an issuer who is an investment
company or a development stage company.
14)Provides that a person who purchases securities in an
offering that fails to meet all of the terms of this bill can
bring action for recession of the purchase. Also provides for
attorney's fees and costs to a prevailing purchaser in any
such action.
15)Prohibits the exemption:
a) If within five years immediately prior the first offer
of the security the person has filed a registration
statement that is the subject of a currently effective stop
order entered by any state securities administrator or the
Securities and Exchange Commission.
b) If within five years immediately prior to the first
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offer of the security the person has been convicted of any
criminal offense involving fraud, deceit, or any offense
concerning the offer, purchase, or sale of any security.
c) If the person is subject to a state or federal
administrative enforcement order or judgment entered within
the five years immediately prior to the first offer of the
security finding fraud or deceit in connection with the
purchase or sale of any security.
d) If the person is subject to any order, judgment or
decree of any court of competent jurisdiction.
16)Provides that the issuer has the opportunity to clear
themselves of a-d listed above.
EXISTING FEDERAL LAW:
1)Establishes the Securities Act of 1933 and the Securities and
Exchange Act of 1934 administered by the Securities and
Exchange Commission.
2)Establishes the National Association of Security Dealers that
helps define the national behavior standards for member and
minimum standards for listed securities which is regulated by
the Securities and Exchange Commission.
3)Prohibits, Except as provided in Rule 504(b)(1), neither the
issuer nor any person acting on its behalf shall offer or sell
the securities by any form of general solicitation or general
advertising, including, but not limited to, the following:
a) Any advertisement, article, notice or other
communication published in any newspaper, magazine, or
similar media or broadcast over television or radio; and
b) Any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising. �Rule
502(c) of Regulation D]
4)Defines an "accredited investor" as any person who comes
within any of the following categories, or who the issuer
reasonably believes comes within any of the following
categories, at the time of the sale of the securities to that
person:
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a) Any bank or any savings and loan association or other
institution whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to
section 15 of the Securities Exchange Act of 1934; any
insurance company, any investment company registered under
the Investment Company Act of 1940 or a business
development company, any Small Business Investment Company
licensed by the U.S. Small Business Administration, any
plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state
or its political subdivisions, for the benefit of its
employees, if such plan has total assets in excess of
$5,000,000; any employee benefit plan within the meaning of
the Employee Retirement Income Security Act of 1974 if the
investment decision is made by a plan fiduciary, as defined
in section 3(21) of such act, which is either a bank,
savings and loan association, insurance company, or
registered investment adviser, or if the employee benefit
plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely
by persons that are accredited investors;
b) Any private business development company;
c) Any organization described in section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or
similar business trust, or partnership, not formed for the
specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000;
d) Any director, executive officer, or general partner of
the issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a
general partner of that issuer ;
e) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his
purchase exceeds $1,000,000;
f) Any natural person who had 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 and has a reasonable
expectation of reaching the same income level in the
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current year;
g) Any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person, and;
h) Any entity in which all of the equity owners are
accredited investors. �17 C.F.R. 230.501] �Rule 501,
Regulation D]
EXISTING STATE LAW
1)Establishes the Corporate Securities Law of 1968 provides for
exemptions from qualification for certain securities
transactions. �Corporations Code, commencing with Section
25000]
2)Provides that the Commissioner of the DOC to approve all
securities offered or sold in California. �Corporation Code,
Section 25100]
3)Prohibits any person to offer or sell in this state any
security in an issuer transaction whether or not by or through
underwriters, unless such sale has been qualified under
Section 25111, 25112 or 25113 or unless such security or
transaction is exempted or not subject to qualification. The
offer or sale of such a security in a manner that varies or
differs from, exceeds the scope of, or fails to conform with
either a material term or material condition of qualification
of the offering as set forth in the permit or qualification
order, or a material representation as to the manner of
offering which is set forth in the application for
qualification, shall be an unqualified offer or sale.
�Corporations Code, Section 25110]
4)Requires all purchasers to have either have a preexisting
personal or business relationship with the offeror or any of
its partners, officers, directors or controlling persons, or
managers (as appointed or elected by the members) if the
offeror is a limited liability company, or by reason of their
business or financial experience or the business or financial
experience of their professional advisers who are unaffiliated
with and who are not compensated by the issuer or any
affiliate or selling agent of the issuer, directly or
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indirectly, could be reasonably assumed to have the capacity
to protect their own interests in connection with the
transaction.
�Corporations Code, Section 25102 (f)]
5)Defines "issuer" as any person who issues or proposes to issue
any security, except that:
a) With respect to certificates of deposit, voting trust
certificates or collateral-trust certificates, or with
respect to certificates of interest or shares in an
unincorporated investment trust not having a board of
directors or persons performing similar functions or of the
fixed, restricted management or unit type, "issuer" means
the person or persons performing the acts and assuming the
duties of depositor or manager pursuant to the provisions
of the trust or other agreement or instrument under which
the security is issued. However, with respect to
equipment-trust certificates or like securities, "issuer"
means the person by whom the equipment or property is or is
to be used.
b) With respect to certificates of interest or
participation in oil, gas or mining titles or leases or in
payments out of production under those titles or leases,
"issuer" means the person or persons in active control of
the exploration or development of the property who sell
those interests or participations or payments or any person
or persons who subdivide and sell those interests or
participations or payments. The determination of the person
or persons in active control of the exploration or
development of the property shall be made on the basis of
the actual relationship of the parties and not on the basis
of the legal designation of a person's interest.
c) With respect to a fractional or pooled interest in a
viatical or life settlement contract, "issuer" means the
person who creates, for the purposes of sale, the
fractional or pooled interest. In the case of a viatical or
life settlement contract that is not fractionalized or
pooled, "issuer" means the person effecting the
transactions with the investors in those contracts.
d) In the case of an unincorporated association which
provides by its articles for limited liability of any or
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all of its members, or in the case of a trust, committee,
or other legal entity, the trustees or members thereof
shall not be individually liable as issuers of any security
issued by the association, trust, committee, or other legal
entity. �Corporations Code, Section 25010]
FISCAL EFFECT : Unknown.
COMMENTS :
Currently, small businesses may be constrained from finding
other sources of capitol because of the requirement that issuers
have a pre-existing relationship. This measure attempts to
expand opportunities for small businesses by allowing them to
use forms of general solicitation or general advertising.
General solicitation would allow issuers to reach out to the
"public" if an issuer reasonably believes that the person is an
accredited investor. An issuer could use means of advertising
through the telephone or internet.
THE JOBS ACT- GENERAL SOLICITATION & GENERAL ADVERTISING
On April 5, 2012, President Obama signed landmark legislation,
H.R. 3606, the Jumpstart Our Business Startups Act (the "JOBS
Act"). The JOBS Act makes it easier for startups and small
businesses to raise funds. This legislation passed Congress
through a 73-26 Senate vote and a 380-41 House vote. While the
JOBS Act makes various changes, the most important as to the
relation of this bill is allowing for general solicitation and
general advertising. The passage of this legislation makes AB
2081 unnecessary and duplicative to actions taken at the Federal
level. While the SEC does have 90 days from April 5, to change
its rules, this would also deem this measure premature
considering the finality of the Rules are not in print yet. It
is clear with the passage of the JOBS Act that general
solicitation and general advertising will be permitted.
Private investment funds generally rely on Rule 506 under
Regulation D to issue their securities in the United States
without being required to register the securities under the
Securities Act. Rule 506 permits a private fund to raise
virtually unlimited amounts of U.S. domestic capital so long as
the investors are all accredited investors. However, private
investment funds and their sponsors still have to find a way to
reach accredited investors. Prior to the JOBS Act, Issuers
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relying on Rule 506 have been prohibited by Rule 502(c) from
engaging in any form of "general solicitation or advertising" to
attract investors. The SEC has never precisely specified what
constitutes a "general solicitation," although a number of no
action letters have set out guidance on the "manner of offering"
restrictions of Rule 502(c). Issuers have often been cautioned
that to avoid a general solicitation, an issuer must approach
only offerees with whom the issuer has a "preexisting
substantive relationship." Over the last several years, many
commentators have noted the deleterious effects on private
investment funds' capital raising created both by this "general
solicitation" limitation and by the vagueness and apparent
internal contradiction in its interpretation.
Title II of the JOBS Act amends Section 4 of the Securities Act
to state specifically that a Rule 506 private placement shall
not be deemed a public offering solely as a result of general
solicitation or general advertising. It also orders the SEC to
modify Rule 506 within 90 days of enactment of the JOBS Act to
eliminate its prohibition against general solicitation or
general advertising for offers and sales of securities so long
as all purchasers of the relevant securities are accredited
investors.
The Model Accredited Investor Exemption
The North American Securities Administrators Association
(NASAA), the association of state securities regulators, drafted
and approved a "Model Accredited Investor Exemption" during its
1997 Spring Conference. When adopted by individual states, the
Model Exemption provides a new exemption from registration of
securities at the state level for small companies that offer and
sell their securities exclusively to "accredited investors." The
Model Exemption is based on the premise that accredited
investors are capable of undertaking their own due diligence and
gauging the risk factors before making any investments in small
companies. California adopted a version of the Model
Accredited Investor Exemption in 1997. California, at that
time, decided to not explicitly allow for general solicitation
and general advertising. The model itself also did not
explicitly use the terminology of "general solicitation and
general advertising."
NEED FOR THE BILL :
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According to the Author, "AB 2081 is needed to effectively
reverse its severe economic and unemployment downturns, it is
imperative that the state takes serious measures, such as
enacting AB 2081, that will facilitate access to capital for the
small business community so that they can obtain the capital to
expand, provide jobs and restart our economy. AB 2081 is
designed to allow start-up and emerging growth companies to find
sophisticated affluent investors who can provide the fuel for
start-ups that have the capacity to grow fast and create jobs,
and to develop innovative new technologies that will make our
state more competitive in the global economy."
FEDERAL ACITIVITY
The SEC established the Advisory Committee on Small and Emerging
Companies (ACSEC) 2011 to seek advice on its rules, regulations
and policies, as they relate to emerging companies or
privately-held small businesses and publicly traded companies
with less than $250 million in public market capitalization in
the areas of:
1)Raising capital through securities offerings, including
private and limited offerings and initial and other public
offerings;
2)Trading in the securities of emerging and smaller public
companies; and
3)Public reporting and corporate governance requirements of
emerging and smaller public companies.
On January 6, 2012, ACSEC made its first recommendation: "that
the SEC take immediate action to relax or modify the
restrictions on general solicitation and general advertising to
permit general solicitation and general advertising in private
offerings of securities under Rule 506 where securities are sold
only to accredited investors." The ACSEC also stated that is
their view that those investor protections afforded by the
existing restrictions on general solicitation and general
advertising are not necessary in private offerings of securities
whereby the securities are sold solely to accredited investors.
In November of 2011, the House passed the "Access to Capital for
Job Creators Act" (H.R. 2940) by a large and bi-partisan
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majority of 413-11. If the bill becomes law, the Securities and
Exchange Commission (SEC) would be required within 90 days to
revise Rule 506 of Regulation D to permit general solicitation
and general advertising for a private offering, as long as all
purchasers are accredited investors. Rule 506, which contains
no limits on offering size, is the most widely relied upon rule
used for private offerings that are exempt from registration
under Section 4(2) of the Securities Act.
CONCERNS
The Consumer Attorneys of California have concerns with AB 2081.
Their concerns "stem from the foreseeable consequences of
misuse of the proposed exemption. We believe the bill could
benefit from a closer look at foreseeable consequences including
harm to seniors who qualify as "accredited investors" based on
their assets but do not have the financial sophistication to
protect their life savings.
Elderly retirees make up a disproportionately large percentage
of people who meet the definition of accredited investors simply
because their houses have had longer to appreciate, their
savings have had longer to accumulate, they may have taken
lump-sum payouts on their pensions and, sadly, many are widowed
and hold the proceeds of their spouses' life insurance policies.
The funds they stand to lose cannot be replaced. We think a
closer look at this issue warrants attention."
QUESTIONS:
In light of the massive changes to federal law from the JOBS Act
that permits general solicitation and general advertising, why
is this bill necessary?
While the SEC does have 90 days from enactment of the JOBS Act
to changes its rules, why would the legislature want to move a
bill forward that may differ/counter from federal law? Would it
be better to wait and see the final changes and then make
changes if necessary?
The DOC is going to have to digest all the changes in the JOBS
Act and implement them at the state level, is it necessary to
also burden the DOC with another level of changes that may not
be necessary and then have DOC determine whether or not AB 2081
is preempted?
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RELATED FEDERAL LEGISLATION:
HR 2940 (Rep. Kevin McCarthy CA-22) creates the "Access to
Capitol for Job Creators Act" which would remove the restriction
on Section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d
(2)) by adding before the period the following: '', whether or
not such transactions involve general solicitation or general
advertising.''
S. 1831 (Thune R-SD) creates the "Access to Capitol for Job
Creators Act" to direct the Securities and Exchange Commission
to eliminate the prohibition against general solicitation as a
requirement for a certain exemption under Regulation D.
HR 2930 (Rep. Patrick McHenry NC-10) creates the "Entrepreneur
Access to Capital Act" which would amend the Securities Act of
1933 to exempt from its registration requirements and
prohibitions any transactions involving the offer or sale of
(crowd funded) securities by an issuer if the aggregate amount
sold within the previous 12-month period in reliance upon the
exemption is: (1) $1 million, adjusted for inflation, or less;
or (2) $2 million, adjusted for inflation, or less if the issuer
provides potential investors with audited financial statements.
Requires the aggregate amount sold to any investor in reliance
on this exemption within the previous 12-month period, in either
case, not to exceed the lesser of $10,000, adjusted for
inflation, or 10% of the investor's annual income. (Crowd
funding is a method of capital formation where groups of people
pool money, typically composed of very small individual
contributions, and often via internet platforms, to invest in a
company or otherwise support an effort by others to accomplish a
specific goal.)
RELATED LEGISLATION:
SB 978 (Vargas & Price) (2012 Legislative Session) makes several
changes including requiring the commissioner to require the
issuer to file a notice of transactions. 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,
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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.
PREVIOUS LEGISLATION:
SB 875 (Price) (2010 Legislative Session) would have exempted
from qualification offerings or sales of securities using a
general solicitation or general advertising, provided the
transaction meets specified requirements, including a
requirement that the sales are made to accredited investors.
Senate Banking and Financial Institutions.
AB 1644 (Campbell & Briggs) (2001 Legislative Session) would
have exempted from qualification offerings or sales of
securities using a general solicitation or general advertising,
provided the transaction meets specified requirements, including
a requirement that the sales are made to accredited investors.
Failed passage in Assembly Banking and Finance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Small Business California (Sponsor)
California Association of Microenterprise Opportunity (CAMEO)
Opposition
AARP
Concerns
Consumer Attorneys of California
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
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