BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 2081|
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THIRD READING
Bill No: AB 2081
Author: Allen (D), et al.
Amended: 8/24/12 in Senate
Vote: 27 - Urgency
SENATE BANKING & FINANCIAL INST. COMM. : 2-2, 6/27/12
(FAIL)
AYES: Vargas, Evans
NOES: Blakeslee, Kehoe
NO VOTE RECORDED: Liu, Padilla, Walters
SENATE BANKING & FINANCIAL INST. COMM. : 4-2, 8/7/12
AYES: Vargas, Blakeslee, Evans, Padilla
NOES: Kehoe, Liu
NO VOTE RECORDED: Walters
SENATE JUDICIARY COMMITTEE : 3-2, 8/15/12
AYES: Evans, Blakeslee, Leno
NOES: Harman, Corbett
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 69-4, 5/21/12 - See last page for vote
SUBJECT : Securities transactions
SOURCE : Small Business California
DIGEST : This bill authorizes a new exemption for persons
seeking to offer securities using any form of general
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solicitation or general advertising, including unsolicited
telephone calls to a person's residence or cell phone if
the issuer and the caller take reasonable steps prior to
the unsolicited phone call, to verify that the person (the
potential purchaser) is an accredited investor, as
specified, and the transaction meets certain requirements.
Senate Floor Amendments of 8/24/12 add double-jointing
language with
SB 978 (Vargas).
ANALYSIS :
Existing federal law and regulation:
1. Provides for the Securities Act of 1933, and for its
implementing regulation, Regulation D, which provide a
regulatory framework for the qualification and sale of
securities and for the protection of investors that
purchase those securities. Generally speaking, the
Securities Act of 1933 and Regulation D require the sale
of all securities to be registered with the Securities
and Exchange Commission (SEC) and to be structured as
prescribed in federal law and regulation. They also
require those who offer (i.e., market) and sell
securities to be licensed as investment advisers or
broker-dealers, unless either the transaction or the
activity being undertaken is exempt.
2. Contains several exemptions from the requirement for
securities issuers to register the sale of their
securities with the SEC, and includes among those
exemptions the sale of securities in accordance with
Regulation D, Rules 501 through 508. Key elements of
those rules, which are relevant for this analysis,
include the following:
A. Rule 501 of Regulation D defines accredited
investors as, among other things, financial
institutions, securities broker-dealers, large
pension plans, corporate entities with assets in
excess of $5 million, and other large, financially
sophisticated entities. It also includes:
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(1) Any natural person whose individual net
worth, or joint net worth with that person's
spouse, exceeds $1 million at the time of his
purchase, exclusive of their primary residence; or
(2) Any natural person with 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, together with a reasonable expectation of
reaching the same income level in the current
year.
B. Rule 504 of Regulation D authorizes the offer and
sale of securities that are made exclusively
according to state law exemptions that permit general
solicitation and general advertising, as long as
sales are made only to accredited investors, as
defined in Rule 501. Thus, under Rule 504, the offer
and sale of securities is exempt from both federal
and state qualification, as long as the offer and
sale are covered by a specified state law exemption.
Existing state law:
1. Provides that it is unlawful for any person to offer or
sell any security in this state, unless such sale has
been qualified by the Commissioner of Corporations, as
specified, or unless the sale is covered by an express
exemption (Corporations Code (CORP) Section 25110).
2. Contains several exemptions from the requirement
immediately above. While the number of exemptions is
too numerous to list, two of the most relevant
exemptions for purposes of this bill include CORP
Sections 25102(f) and 25102(n).
A. 25102(f) provides an exemption for any offer or
sale of any security in a transaction that meets all
of the following criteria: (1) sales of the security
are made to an unlimited number of accredited
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investors and up to 35 other persons, who are not
accredited investors; (2) all purchasers either have
a pre-existing personal or business relationship with
the offeror, or can reasonably be assumed to have the
capacity to protect their own interests in connection
with the transaction, by reason of their business or
financial experience, or the business or financial
experience of their professional advisers; (3) each
purchaser represents that he or she is purchasing for
his/her own account, and not with a view to or for
sale in connection with any distribution of the
security; and (4) the offer and sale of the security
is not accomplished through the publication of any
advertisement.
According to the Department of Corporations (DOC),
approximately 20,000 to 35,000 people file forms with
DOC annually, claiming exemptions pursuant to Section
25102(f).
B. 25102(n) provides an exemption for any offer or
sale of any security in a transaction that meets all
of the following criteria: (1) the issuer is not a
blind pool issuer, as that term is defined by the
Commissioner of Corporations; (2) sales of securities
are made only to qualified purchasers or other
persons the issuer reasonably believes to be
qualified purchasers; (3) each purchaser represents
that he/she is purchasing for his/her own account,
and not with a view to or for sale in connection with
any distribution of the security; (4) each natural
person purchaser is provided with a disclosure
statement that meets the disclosure requirements of
federal Regulation D, at least five business days
before they purchase or commit to purchase the
security; (5) the offer and sale of the security is
made by way of a general announcement, whose content
is strictly limited; and (6) telephone solicitation
by the issuer is not permitted, until and unless the
issuer determines that the prospective purchaser
being solicited is a qualified purchaser.
Qualified purchasers are those who meet one or more of
several criteria listed in subdivision (n).
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Generally speaking, these criteria describe persons
with some degree of financial sophistication, though
the qualified purchaser bar is lower than the
accredited investor bar. As an example, an
individual is a qualified purchaser if they
individually, or jointly with their spouse, either
have a minimum net worth of $250,000 and had, during
the immediately preceding tax year, gross income in
excess of $100,000, and reasonably expect gross
income in excess of $100,000 during the current tax
year. Alternately, the term applies to individuals
who have a minimum net worth of $500,000, exclusive
of their home, home furnishings, and automobiles.
Natural persons are limited to investing no more than
10% of their net worth in any 25012(n) investment.
According to DOC, between 20 and 50 people file forms
with DOC annually, claiming exemptions pursuant to
Section 25102(n).
This bill:
1. Exempts from California's qualification requirements any
offer of a security by an issuer using any form of
solicitation or general advertising, as specified,
except that an offer of security by means of a telephone
or cell phone call would only be permissible if the
issuer and the caller take reasonable steps, prior to
the unsolicited phone call to verify that the person he
or she is calling is an accredited investor, as
specified, and provided that the transaction meets
specified requirements.
2. Provides for specified requirements that must be met to
qualify for the exemption, including that:
the aggregate offering price for an offering of
securities shall not exceed one million dollars, less
the aggregate offering price for all securities sold
within 12 months;
prior to selling any security to a person
solicited pursuant to this exemption, an issuer shall
obtain from that person a completed offeree
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questionnaire in a form adopted by the Commissioner;
prohibits an issuer from relying solely on the
questionnaire in making the determination of whether
the person is an accredited investor and the offering
is suitable for that person, and requires the issuer
maintain the confidentially of any information in the
questionnaire and prohibits the selling,
distribution, or use of the information in the
questionnaire for any purpose other than establishing
the suitability of that investor for that particular
offering;
sales of securities shall be made only to a
person who is, or with respect to whom the issuer has
taken reasonable steps to verify is, an accredited
investor immediately prior to the sale;
the issuer has taken reasonable steps to verify
that immediately prior to the sale, the offering is
suitable for the potential purchaser based on that
person's financial status, objectives, investment
experience, time horizon, risk tolerance, and any
other information that the issuer deems relevant to
determine whether the offering is suitable to that
person;
requires the issuer provide the person in writing
specified information including information related
to its business, its properties, its competition, its
officers and directors, disclosures of all risk
factors associated with the offering, and a statement
detailing the financial condition of the issuer and
supporting documentation, requires upon providing
this information, a mandatory 24-hour waiting period
before a sale may be made and the investor has the
right to void the contract within the first 72 hours
of the sale;
if the potential purchaser is a natural person,
the amount of consideration paid by the purchaser
does not exceed five percent of his or her net worth,
or joint net worth with the purchaser's spouse or
domestic partner, immediately prior to the
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investment, and each investors investment in the
offering together with all previous offerings under
this exemption made during the previous 12 months
does not exceed five percent of his or her net worth,
as specified (The "net worth" calculation excludes a
person's primary residence in calculating their
assets, among other things);
the issuer can reasonably 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
advisor, who is unaffiliated with and not
compensated, directly or indirectly by the issuer or
any affiliate or selling agent of the issuer;
the issuer believes in good faith that the offer
and sale are exempt from registration under the
Securities Act, as specified, or the rules and
regulations adopted by the SEC under Section 3(b)
(securities issued by small investment company) or
Section 4(2) (private offerings) of the Securities
Act;
the issuer specifies in all advertisements,
communications, sales literature, or other
information that is publicly disseminated, as
specified, that the securities will be sold to
accredited investors only;
the issuer places on a legend on the cover of
each disclosure document or subscription agreement
advising that the securities described in the
document or agreement will be sold to accredited
investors only; and
the issuer shall file with the Commissioner a
notice, as specified, and pay a specified fee within
15 days after the first sale of the securities in
this state, and upon filing this notice, the issuer
shall also pay a $5 fee to be deposited in the
Victims of Corporate Fraud Compensation Fund.
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3. Provides that the issuer shall maintain, for a period of
four years, documentation sufficient to establish the
basis for its determination of suitability, and a copy
of any advertisement, solicitation, and any other
offering material.
4. Provides that a person who purchases securities in an
offering that fails to meet all of the terms and
conditions of this exemption may bring an action under
Corporations Code Sections 25503, 25504, and 25504.1 for
rescission of the purchase, or seek other remedies
available in current law, provides that the issuer shall
have the burden of proof to demonstrate that the
requirements of this bill, and that the court shall
award attorney's fees and costs to a prevailing
purchaser in any such action.
5. Provides that dissemination of information regarding the
proposed offering to a person who is not an accredited
investor shall not disqualify the offering from the
exemption under this bill.
6. Provides that the exemption is not available for an
offering by an issuer who is an investment company or a
development stage company, as specified.
7. Provides that the exemption is not available to an
issuer if any of the following apply within the ten
years immediately prior to the first offer of the
security to the issuer or its predecessors, affiliates,
directors, officers, general partners, beneficial owners
of 10 percent or more of any classification of its
equity securities, or any underwriter of the securities
to be offered, or any of the underwriter's partners,
directors, or officers:
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 SEC;
the person has been convicted of any criminal
offense involving fraud, deceit, or any offense
concerning the offer, purchase, or sale of any
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security, or is subject to any order, judgment, or
decree of any court of competent jurisdiction
involving the commission of elder or dependent adult
financial abuse.
the person is currently subject to a state or
federal administrative enforcement order or judgment
entered finding fraud or deceit in connection with
the purchase or sale of any security; or
the person is currently subject to any order,
judgment, or decree of any court of competent
jurisdiction, that restrains or enjoins the person
from engaging in or continuing to engage in any
conduct or practice involving fraud or deceit in
connection with the purchase or sale of any security,
except if any of the following apply:
the person is licensed or registered to conduct
securities-related business in the state in which the
order, judgment, or decree described in any of these
provisions was entered against the person;
before the first offer of securities is made in
reliance upon the exemption under this subdivision,
the state securities administrator, the court, or the
regulatory authority that entered the order,
judgment, or decree removes, reverses, or vacates the
order, judgment, or decree; or
the issuer, exercising reasonable care and based
on factual inquiry, establishes that it could not
have known of the existence of any of these
circumstances.
8. Contains double-jointing language with SB 978 (Vargas).
9. Sunsets on January 1, 2016.
Background
In the early 1920s, "companies often sold stocks and bonds
on the basis of glittering promises of fantastic profits -
without disclosing any meaningful information to
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investors." By the end of that decade, the United States
economy was devastated in the Stock Market Crash of 1929.
(SEC, Q&A: Small Business and the SEC,
�as of
August 9, 2012].) In response to the crash, the U.S.
Congress enacted the first set of federal securities laws,
the Securities Act of 1933 (Securities Act), and the
Securities Exchange Act of 1934, and created the Securities
and Exchange Commission (SEC) to administer those laws,
both of which contain specified registration and disclosure
requirements.
Under the Securities Act, any company that offers or sells
its securities must register the securities with the SEC
unless it qualifies for an exemption under federal laws and
regulations. Among the several exemptions created by
federal law is an exemption for "transactions by an issuer
not involving any public offering" under Section 4(2) of
the Securities Act (a private offerings exemption).
Federal regulations, under Regulation D, provides for three
exemptions from the registration requirements known as
Rules 504, 505, and 506, of which Rule 506 specifically
operates as a "safe harbor" for the private offering
exemption-a company that meets the specified requirements
of Rule 506 thereby qualifies for the Section 4(2)
exemption. To qualify for Rule 506's safe harbor, no
general solicitation or advertising can be used in
connection with the securities offering. (15 U.S.C. Sec.
77d(a)(2); 17 C.F.R. Sec. 230.506.)
An exception to that prohibition on general solicitation or
advertising was recently created when the Jumpstart Our
Business Startups Act (JOBS Act) was signed into law by
President Obama on April 5, 2012. The JOBS Act sought to
better enable small businesses to raise capital, and
required the SEC to adopt rule changes within 90 days
(which was July 3, 2012) to provide that the prohibition
against general solicitation or advertising does not apply
to offers and sales of securities made pursuant to Rule
506, provided that all purchasers of the securities are
accredited investors. The JOBS Act also requires, however,
that issuers take reasonable steps to verify that
purchasers of the securities are accredited investors,
pursuant to the SEC regulations that are to be adopted.
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While the regulations have not yet been released, it has
been reported that the SEC will be considering rules at a
meeting scheduled for August 22, 2012.
Similar to federal law, the California Securities Law of
1968 makes it illegal to sell an unqualified (i.e.
unregistered) security unless the security is exempted by
statute or federal law otherwise preempts securities
registration requirements. (Corp. Code Sec. 25110; see 57
Ca. Jur., Securities Regulations, Sec. 13.) Like federal
law, California law specifically provides for numerous
exemptions to the qualification requirement, but those
exemptions generally limit the scope of both advertising
and the individuals to which the securities may be sold.
This bill, similar to Section 201 of the JOBS Act, seeks to
authorize a broad new exemption that would allow issuers to
offer or sell securities using any form of general
solicitation, general advertising, and allow unsolicited
telephone calls to a person's residence or cell phone, as
long as the issuer and the caller take reasonable steps
prior to the unsolicited phone call to verify that the
person he or she is calling is an accredited investor, as
specified, and the transaction meets certain requirements.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/15/12) (Unable to reverify at time
of writing)
Small Business California (source)
OPPOSITION : (Verified 8/15/12) (Unable to reverify at
time of writing)
AARP
Public Investors Arbitration Bar Association
ARGUMENTS IN SUPPORT : Small Business California, sponsor
of this bill, writes that "California small businesses,
especially women- and minority-owned businesses as well as
disabled veteran business enterprises have modest funding
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needs, typically less than $500,000 and no more than $1
million. The average small business owner is not likely to
have a broad circle of high net worth relationships
(business or personal), nor is the business owner likely to
attract an investment banker who has such relationships and
would be willing to engage in raising such modest amounts.
This bill will remove the barrier of small business access
to capital...and provide small businesses with the
opportunity to access a capital source that is not
currently available."
Small Business California also believes that this bill is
more important than ever, given the current financial
crisis and credit crunch. Prior to the economic downturn,
small businesses traditionally relied on bank financing and
credit card debt to fund their working capital
requirements, and were able to tap into their home equity
for additional liquidity. In the current financial crisis,
small businesses face declining business income, reduction
in credit lines, cancellation of credit cards, and loss of
home equity.
ARGUMENTS IN OPPOSITION : AARP opposes the bill because
it "places seniors who have saved over a lifetime at
significant risk of losing their retirement savings at the
hands of promoters of risky securities, which would be
exempted from the normal oversight of the Department of
Corporations. We are not at all comforted by the fact that
it would apply to investors with significant assets, as
this simply means that persons who have saved over a
lifetime would be targeted. Successful savers are not
necessarily sophisticated investors. Entities that cannot
raise capital from lending institutions or venture capital
sources should not be turned loose on an unwary public
without the oversight and restrictions that apply under
current law."
ASSEMBLY FLOOR : 69-4, 5/21/12
AYES: Achadjian, Alejo, Allen, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Conway, Cook, Davis, Dickinson, Donnelly, Feuer,
Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick,
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Gatto, Gordon, Gorell, Grove, Hagman, Halderman, Hall,
Harkey, Hayashi, Hill, Huber, Hueso, Huffman, Jeffries,
Jones, Knight, Lara, Logue, Bonnie Lowenthal, Ma,
Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell,
Nestande, Nielsen, Olsen, Pan, V. Manuel P�rez,
Portantino, Silva, Smyth, Solorio, Swanson, Torres,
Valadao, Wagner, Williams, John A. P�rez
NOES: Ammiano, Butler, Norby, Wieckowski
NO VOTE RECORDED: Buchanan, Eng, Fletcher, Roger
Hern�ndez, Perea, Skinner, Yamada
JJA:m 8/27/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
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