BILL ANALYSIS �
AB 2081
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Date of Hearing: May 16, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 2081 (Allen) - As Amended: April 11, 2012
Policy Committee: Banking and
Finance Vote: 7-1
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill provides that an issuer can offer or sell securities
using any form of general solicitation or general advertising
and remain exempt from qualification. Specifically, this bill:
1)Provides that the issuer may sell securities only to a person
who is or is reasonably believed to be, an accredited investor
immediately prior to the sale.
2)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.
3)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.
4)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.
5)Prohibits the use of the exemption if the issuers or other
related parties have been the subject of specified civil or
criminal sanctions and penalties.
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FISCAL EFFECT
Minor and absorbable costs and revenues for the Department of
Corporations.
COMMENTS
1)Purpose . According to the author, AB 2081 is needed to help
the state reverse its severe economic and unemployment
downturn by facilitating access to capital for the small
business community so that they can obtain the capital to
expand, provide jobs and restart the state's economy. The
author notes AB 2081 is designed to allow start-up and
emerging growth companies to find sophisticated affluent
investors who can provide funds for start-ups that have the
capacity to grow fast, create jobs and develop innovative new
technologies that will make our state more competitive in the
global economy.
2)Background. Under California law, securities offers and sales
must be qualified with the Commissioner of Corporations unless
the transaction or the security is exempt. The law is
administered by the Department of Corporations under the
direction of the Commissioner of Corporations, appointed by
the governor. The Commissioner has the power to issue and
rescind rules to implement the law, similar to the power of
the Securities and Exchange Commission (SEC) under federal
securities laws, and may also waive any requirements of any
rule where the requirement is not necessary for the protection
of investors.
3)Federal developments. 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.
While the JOBS Act makes various changes, the most important
as it relates to this bill is allowing general solicitation
and advertising. The SEC is in the process of developing
rules.
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
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or privately-held small businesses and publicly traded
companies. The ACSEC's first recommendation was that the SEC
take immediate action 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 their view that investor
protections afforded by the existing restrictions on general
solicitation and general advertising are not necessary in
private offerings, whereby the securities are sold solely to
accredited investors.
4)Support. Small Business California, the sponsor of the bill,
states small businesses may be constrained from finding other
sources of capital because of the requirement that issuers
have a pre-existing relationship. According to the sponsor,
this measure attempts to expand opportunities for small
businesses by allowing them to use forms of general
solicitation or general advertising. They argue general
solicitation would allow issuers to reach out to the public if
an issuer reasonably believes the person is an accredited
investor. An issuer could use means of advertising through
the telephone or internet.
5)Concerns. The Consumer Attorneys of California are concerned
with the consequences of misuse of the proposed exemption.
They note 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 many are
widowed and hold the proceeds of their spouses' life insurance
policies.
6)Opposition. The American Association of Retired Persons
(AARP) argues this bill places seniors at a significant risk
of losing their retirement savings to promoters of risky
investments that are exempted from the normal oversight of the
Department of Corporations. AARP states the bill's limitation
to investors with significant assets is not a protection, as
success may be a result of a lifetime of savings rather than
sophistication.
The Public Investors Arbitration Bar Association also opposes
the bill, arguing allowing general solicitation and
advertising of exempt securities offerings diminish investor
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protection and likely lead to future losses for California
investors.
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7)Previous legislation
a) SB 875 (Price) of 2010, 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. The author dropped this bill in Senate Banking
and Financial Institutions.
b) AB 1644 (Campbell & Briggs) of 2001, was similar to SB
875. This bill failed in Assembly Banking and Finance
Committee.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081