BILL ANALYSIS �
AB 2081
Page 1
ASSEMBLY THIRD READING
AB 2081 (Allen)
As Amended April 11, 2012
Majority vote
BANKING & FINANCE 7-1 APPROPRIATIONS 17-0
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|Ayes:|Achadjian, Charles |Ayes:|Fuentes, Harkey, |
| |Calderon, Gatto, Roger | |Blumenfield, Bradford, |
| |Hern�ndez, Lara, Perea, | |Charles Calderon, Campos, |
| |Torres | |Davis, Donnelly, Gatto, |
| | | |Hall, Hill, Lara, |
| | | |Mitchell, Nielsen, Norby, |
| | | |Solorio, Wagner |
|-----+--------------------------+-----+--------------------------|
|Nays:|Fuentes | | |
| | | | |
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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
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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,
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 the 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
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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
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; or,
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) through 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 (SEC).
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 SEC.
3)Prohibits, except as provided in Rule 504(b)(1) of Regulation
D, 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
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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:
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
million; 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 million 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
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total assets in excess of $5 million;
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 or
her purchase exceeds $1 million;
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
current year;
g) Any trust, with total assets in excess of $5 million,
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 Code of Federal Regulations
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 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
Corporations Code 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
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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 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
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
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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; and,
d) In the case of an unincorporated association which
provides by its articles for limited liability of any or
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 : According to the Assembly Appropriations
Committee, this measure has minor and absorbable costs and
revenues for the DOC.
COMMENTS :
Currently, small businesses may be constrained from finding
other sources of capital 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. While the original goal of
this measure may have been well intended by attempting to
increase capital for small businesses, the goal has been met at
the federal level which makes this measure no longer necessary.
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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 (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 this bill
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
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
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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."
Federal Activity
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
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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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0003683