Amended in Senate May 23, 2014

Amended in Assembly January 14, 2014

Amended in Assembly January 6, 2014

California Legislature—2013–14 Regular Session

Assembly Bill No. 713

Introduced by Assembly Member Wagner

February 21, 2013

An act to amend Section 25004 of the Corporations Code, relating to securities.

LEGISLATIVE COUNSEL’S DIGEST

AB 713, as amended, Wagner. Broker-dealers.

Existing law, the Corporate Securities Law of 1968, defines a broker-dealer as, among other things, any person engaged in the business of effecting securities transactions in California for the account of others or his or her own account, and it specifies those persons or entities excluded from the definition.

Pursuant to the Governor’s Reorganization Plan No. 2 of 2012 (GRP 2), the regulation of corporations is transferred, effective July 1, 2013, from the Commissioner of Corporations to the Commissioner of Business Oversight.

This bill would add to the persons excluded from the definition of a broker-dealer an individual who is a finder, as defined, who satisfied specified requirements, including, among other things, filing an initial statement of information with the Department of Business Oversight and paying a filing fee. The bill also would make technical changes to conform with the GRP 2.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 25004 of the Corporations Code is
amended to read:

25004.  

(a) “Broker-dealer” means any person engaged in the
business of effecting transactions in securities in this state for the
account of others or for his or her own account. “Broker-dealer”
also includes a person engaged in the regular business of issuing
or guaranteeing options with regard to securities not of his or her
own issue. “Broker-dealer” does not include any of the following:

(1) Any other issuer.

(2) An agent, when an employee of a broker-dealer or issuer.

(3) A bank, trust company, or savings and loan association.

(4) Any person insofar as he or she buys or sells securities for
his or her own account, either individually or in some fiduciary
capacity, but not as part of a regular business.

(5) A person who has no place of business in this state if he or
she effects transactions in this state exclusively with (A) the issuers
of the securities involved in the transactions or (B) other
broker-dealers.

(6) A broker licensed by the Real Estate Commissioner of this
state when engaged in transactions in securities exempted by
subdivision (f) or (p) of Section 25100 or in securities the issuance
of which is subject to authorization by the Real Estate
Commissioner of this state or in transactions exempted by
subdivision (e) of Section 25102.

(7) An exchange certified by the Commissioner of Business
Oversight pursuant to this section when it is issuing or guaranteeing
options. The commissioner may by order certify an exchange under
this section upon any conditions as he or she by rule or order deems
appropriate, and upon notice and opportunity to be heard he or she
may suspend or revoke that certification, if he or she finds the
certification, suspension, or revocation to be in the public interest
and necessary and appropriate for the protection of investors.

begin delete

(8) (A) An individual who acts only as a finder in this state and
who satisfies all of the conditions set forth in subparagraphs (B)
to (G), inclusive. For purposes of this section, a “finder” is an
individual who introduces or refers one or more accredited
investors, as that term is defined in Rule 501(a) of Regulation D
under the Securities Act of 1933 (17 C.F.R. 230.501(a)), to an
issuer or an issuer to one or more accredited investors, solely for
the purpose of a potential sale of securities of the issuer, and who
does not (i) participate in negotiating any of the terms of the
securities transaction; (ii) advise any party to the securities
transaction regarding the merits of, or the advantages or
disadvantages of entering into the securities transaction; or (iii)
sell or intend to sell any securities of the issuer, which securities
are owned, directly or indirectly, by the finder as part of the
securities transaction. An individual who fails to comply with the
requirements of this paragraph shall not be entitled to rely on the
exemption afforded hereunder.

(B) The finder shall file with the Department of Business
Oversight prior to engaging in any activities described in
subparagraph (A), on a form prescribed by the commissioner, an
initial statement of information that shall include both of the
following: (i) the name and complete business or residential address
of the finder and (ii) the mailing address of the finder, if different
from the business or residential address. A filing fee of not more
than twenty-five dollars ($25) may be required to be submitted,
as determined by the commissioner by rule, to the Department of
Business Oversight along with the initial statement of information
required by this subparagraph.

(C) For each securities transaction or series of securities
transactions, the finder shall file with the Department of Business
Oversight, on a form prescribed by the commissioner, a notice that
shall include the following affirmative representations by the
finder, that the finder (i) is acting only to introduce the issuer and
the potential accredited investor of an issuer’s securities and will
not effect any securities transaction in, advise or consult on, or
induce or attempt to induce the purchase or sale of, any securities
in this state; (ii) has not done any of the acts, satisfied any of the
circumstances, or is subject to any order specified in Section 25212;
(iii) will not receive, directly or indirectly, possession or custody
of any funds related to the purchase and sale of the subject
securities transactions; (iv) has not acted in violation of any
provision of this section; and (v) has fully disclosed and obtained
the informed written consent of the issuer and each potential
accredited investor introduced by the finder to the issuer regarding
the material terms of the compensation arrangement between the
issuer and the finder relating to the finder’s services provided for
the subject securities transaction. A separate notice shall be filed
for each new securities transaction or series of securities
transactions, no later than 20 business days following the first sale
of securities in the offering. The commissioner may by rule require
the finder to pay a filing fee in connection with the notice required
in this subparagraph of not more than twenty-five dollars ($25).

(E) Concurrently with each introduction or referral, the finder
shall obtain the informed, written consent of each potential
accredited investor introduced or referred by the finder to an issuer
for the purchase and sale of securities of the issuer, in an agreement
signed by the finder, the issuer, and the potential accredited
investor, disclosing the following: (i) the type and amount of
compensation that will be paid to the finder in connection with the
subject securities transactions and the conditions for payment of
that compensation; (ii) that the finder shall neither recommend nor
advise the potential accredited investor with respect to the subject
securities transaction; (iii) whether the finder is also an owner of
the securities of the issuer, and (iv) any other actual and potential
conflict of interest in connection with the finder’s activities related
to the subject securities transaction. Each potential accredited
investor shall represent in the written consent that the potential
accredited investor is an accredited investor, as that term is defined
in Rule 501(a) of Regulation D under the Securities Exchange Act
of 1933 (17 C.F.R. 230.501(a)), and that the potential accredited
investor knowingly consents to the payment of the compensation
described therein.

(F) The finder shall maintain and preserve, for a period of five
years from the date of filing of the notice prescribed in
subparagraph (D), a copy of the notice, the written consent required
in subparagraph (E), and all other records relating to any securities
transaction in connection with which the finder receives
compensation, as the commissioner may by rule require. The finder,
upon written request of the commissioner, shall furnish to the
commissioner any records required to be maintained and preserved
under this subparagraph.

(G) The finder shall not engage in any of the following: (i)
directly or indirectly take possession or custody of funds related
to the purchase and sale of any subject securities transaction; (ii)
knowingly participate in any unregistered offering not otherwise
exempt from registration or qualification; (iii) fail to make the
disclosures required by subparagraph (E); (iv) conduct due
diligence on behalf of the issuer or the potential accredited investor
related to any subject securities transaction; (v) make any
disclosures to potential accredited investors other than disclosures
expressly permitted or required under this subparagraph. Permitted
disclosures are limited to the name, address, and telephone number
of the issuer; the name, type, and price (if known) of any securities
to be issued; the issuer’s industry, location, and years in business;
the type, number, and aggregate amount of securities being offered;
and contact information regarding the potential accredited investor.

end delete begin insert

(8) (A) Any finder who satisfies all of the conditions set forth
in subparagraphs (B) to (E), inclusive. For purposes of this section,
a “finder” is a natural person who, for direct or indirect
compensation, introduces or refers one or more accredited
investors, as that term is defined in Rule 501(a) of Regulation D
under the Securities Act of 1933 (17 C.F.R. 230.501(a)), to an
issuer or an issuer to one or more accredited investors, solely for
the purpose of a potential offer or sale of securities of the issuer
in an issuer transaction in this state, and who does not do any of
the following:

end insert begin insert

(i) Participate in negotiating any of the terms of the offer or
sale of the securities.

end insert begin insert

(ii) Advise any party to the transaction regarding the value of
the securities or the advisability of investing in, purchasing, or
selling the securities.

end insert begin insert

(iii) Conduct any due diligence on the part of any party to the
transaction.

end insert begin insert

(iv) Sell or offer for sale in connection with the issuer
transaction any securities of the issuer that are owned, directly or
indirectly, by the finder.

end insert begin insert

(v) Receive, directly or indirectly, possession or custody of any
funds in connection with the issuer transaction.

end insert begin insert

(vi) Knowingly receive compensation in connection with any
offer or sale of securities unless the sale is qualified under this
division or unless the security or the transaction is exempt or not
otherwise subject to qualification.

end insert begin insert

(vii) Make any disclosure to a potential purchaser other than
the following:

end insert begin insert

(I) The name, address, and contact information of the issuer.

end insert begin insert

(II) The name, type, price, and aggregate amount of any
securities being offered in the issuer transaction.

end insert begin insert

(III) The issuer’s industry, location, and years in business.

end insert begin insert

(B) (i) The finder shall file with the Department of Business
Oversight before engaging in any activities described in
subparagraph (A), on a form prescribed by the commissioner, an
initial statement of information that shall include both of the
following:

end insert begin insert

(I) The name and complete business or residential address of
the finder.

end insert begin insert

(II) The mailing address of the finder, if different from the
business or residential address.

end insert begin insert

(ii) A filing fee of not more than twenty-five dollars ($25) may
be required to be submitted, as determined by the commissioner
by rule, to the Department of Business Oversight along with the
initial statement of information required by this subparagraph.

end insert begin insert

(C) (i) For each issuer transaction, the finder shall file with
the Department of Business Oversight, on a form prescribed by
the commissioner, a notice that shall include the following
affirmative representations by the finder:

end insert begin insert

(I) The finder has complied and will continue to comply with
the provisions of subparagraph (A).

end insert begin insert

(II) The finder has not performed any acts or satisfied any
circumstances prohibited by Section 25212, nor been sanctioned
by the commissioner pursuant to Section 25212.

end insert begin insert

(III) The finder has obtained the written agreement described
in subparagraph (D).

end insert begin insert

(ii) A separate notice shall be filed for each new issuer
transaction, no later than 20 business days following the first sale
of securities. The commissioner may by rule require the finder to
pay a filing fee in connection with the notice required in this
subparagraph of up to twenty-five dollars ($25).

end insert begin insert

(D) (i) Concurrently with each introduction, the finder shall
obtain the informed, written consent of each person introduced or
referred by the finder to an issuer, in a written agreement signed
by the finder, the issuer, and the person introduced or referred,
disclosing the following:

end insert begin insert

(I) The type and amount of compensation that has been or will
be paid to the finder in connection with the introduction or referral
and the conditions for payment of that compensation.

end insert begin insert

(II) That the finder is not providing advice to the issuer or any
person introduced or referred by the finder to an issuer as to the
value of the securities or as to the advisability of investing in,
purchasing, or selling the securities.

end insert begin insert

(III) Whether the finder is also an owner, directly or indirectly,
of the securities being offered or sold.

end insert begin insert

(IV) Any actual and potential conflict of interest in connection
with the finder’s activities related to the issuer transaction.

end insert begin insert

(V) That the parties to the agreement shall have the right to
pursue any available remedies at law or otherwise for any breach
of the agreement.

end insert begin insert

(ii) To satisfy the requirements of this subparagraph, the
agreement shall also include a representation by the person
introduced or referred by the finder to the issuer that the person
is an accredited investor, as that term is defined in Rule 501(a) of
Regulation D under the Securities Exchange Act of 1933 (17 C.F.R.
230.501(a)), and that the person knowingly consents to the payment
of the compensation described therein.

end insert begin insert

(E) The finder shall maintain and preserve, for a period of five
years from the date of filing of the notice prescribed in
subparagraph (C), a copy of the notice, the written agreement
required in subparagraph (D), and all other records relating to
any offer or sale of securities in connection with which the finder
receives compensation, as the commissioner may by rule require.
The finder, upon written request of the commissioner, shall furnish
to the commissioner any records required to be maintained and
preserved under this subparagraph.

end insert begin insert

(F) (i) A natural person who does not meet the definition of
“finder” set forth in subparagraph (A) and does not satisfy all the
conditions set forth in subparagraphs (B) to (E), inclusive, may
be determined to be a broker-dealer by the commissioner.

end insert begin insert

(ii) In the event a natural person does not meet the definition
of “finder” set forth in subparagraph (A) and does not satisfy all
the conditions set forth in subparagraphs (B) to (E), inclusive, any
person introduced or referred by that natural person to an issuer,
who purchases securities of that issuer in an issuer transaction
following that introduction or referral, shall have the right to
pursue any applicable remedy afforded under state law, including,
without limitation, any applicable remedies pursuant to Section
25501.5.

end insert

(b) For purposes of this section, an agent is an employee of a
broker-dealer under paragraph (2) of subdivision (a) when the
agent is employed by or associated with the broker-dealer under
all of the following conditions:

(1) The agent is subject to the supervision and control of the
broker-dealer.

(2) The agent performs under the name, authority, and marketing
policies of the broker-dealer.

(3) The agent discloses to investors the identity of the
broker-dealer.

(4) The agent is reported pursuant to subdivision (c) of Section
25210 and the rules adopted thereunder.