BILL ANALYSIS �
AB 713
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ASSEMBLY THIRD READING
AB 713 (Wagner)
As Amended January 14, 2014
Majority vote
BANKING & FINANCE 12-0 APPROPRIATIONS 16-0
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|Ayes:|Dickinson, Morrell, |Ayes:|Gatto, Bigelow, Allen, |
| |Achadjian, Bonta, Chau, | |Bocanegra, Bradford, Ian |
| |Gatto, Harkey, Linder, | |Calderon, Campos, Eggman, |
| |Perea, Rodriguez, Weber, | |Gomez, Holden, Linder, |
| |Williams | |Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Exempts "finders" from the definition of
broker-dealers if he or she only acts as a "finder."
Specifically, this bill :
1)Defines a "finder" as an individual who introduces or refers
one or more accredited investors 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.
2)Prohibits a "finder" from:
a) Negotiating any of the terms of the securities
transaction;
b) Advising any party to the securities transaction
regarding the merits of, or the advantages or disadvantages
of entering into the securities transaction; or,
c) Selling or intending to sell any securities of the
issuer, which securities are owned, directly or indirectly,
by the finder as a part of the securities transaction.
3)Requires the "finder" to file a form (created by the
Department of Business Oversight (DBO)) with the DBO prior to
engaging in any activities that includes the following:
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a) The name and complete business or residential address of
the finder; and,
b) The mailing address of the finder, if different from the
business or residential address.
4)Requires the "finder" to pay a filing fee of no more than $25
if determined by the DBO with the form described above.
5)Requires a "finder" for each securities transaction or series
of securities transactions to file with the DBO on a form set
forth by the Commissioner of DBO a notice that includes the
following representations:
a) The finder acts only to introduce or refer the issuer
and the potential accredited investor of an issuer's
securities and will not effect any transaction in, advise
or consult on, or induce or attempt to induce the purchase
or sale of, any securities in this state;
b) The finder has not done any of the acts, satisfied any
of the circumstances, or is subject to any order specified
in Corporations Code Section 25212;
c) The finder will not receive, directly or indirectly,
possession or custody of any funds related to the purchase
and sale of the subject securities transactions;
d) The finder has not acted in violation of any provision
of this bill; and,
e) The finder 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.
6)Requires a "finder" to separately file a notice for each new
transaction or series of transactions no later than 20
business days following the first sale of securities in the
offering. Allows the commissioner of DBO to require a filing
fee of not more than $25.
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7)Requires the "finder" to obtain the written consent of each
accredited investor introduced 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. The agreement must disclose the
following:
a) The 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;
b) That the finder shall neither recommend nor advise the
potential accredited investor with respect to the subject
securities transaction;
c) Whether the finder is also an owner of the securities of
the issuer; and,
d) Any actual and potential conflict of interest in
connection with the finder's activities related to the
subject securities transaction.
8)Requires the potential accredited investor to represent in the
written consent that the potential accredited investor is an
accredited investor; as well as, consents to the payment of
the compensation.
9)Requires the "finder" to maintain and preserve for five years
from the date of the filing of the notice, a copy of the
notice, the written consent and all other records relating to
any securities transaction in connection with which the finder
receives compensation.
10)Prohibits a "finder" from:
a) Directly or indirectly taking possession or custody of
funds related to the purchase and sale of any subject
securities transaction;
b) Knowingly participating in any unregistered offering not
otherwise exempt from registration or qualification;
c) Failing to make the disclosures required by the measure;
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d) Conducting due diligence on behalf of the issuer or the
potential accredited investor related to any subject
securities transaction; and,
e) Making any disclosures to potential accredited investor
other than disclosures expressly permitted or required
under the measure.
11)Specifies permitted disclosures shall be limited to the name,
address, and telephone number of the issuer; the name, type
and price of any securities to be issued, issuer's industry,
location, and years in business; the type of number, aggregate
amount of securities being offered; and contact information
regarding the potential accredited investor.
EXISTING FEDERAL LAW :
1)Establishes the federal Securities Exchange Act of 1934 which
prohibits any broker or dealer from effecting, inducing, or
attempting to induce the purchase or sale of any security
unless such person is registered with the Securities and
Exchange Commission (SEC). (Section 15 (a) (1))
2)Defines "accredited investor." (17 C.F.R 230.501 (a))
EXISTING STATE LAW :
1)Defines a "broker-dealer" as any person engaged in the
business of effecting transactions in securities in this state
for the account of others or for his own account. A
broker-dealer also includes a person engaged in the regular
business of issuing or guaranteeing options with regard to
securities not of his own issue. (Corporations Code Section
25004)
2)Requires a broker-dealer to apply and obtain a certificate
from the DBO to act as a broker-dealer in California.
(Corporations Code Section 25210)
3)Defines "issuer" as any person who issues or proposes to issue
any security, with exceptions. (Corporations Code Section
25010)
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FISCAL EFFECT : According to the Assembly Appropriations
Committee, administrative costs of approximately $150,000 to DBO
to establish the programs, develop regulations and for ongoing
administration. Costs will be dependent upon the number of
people filing as finders.
COMMENTS :
NEED FOR THE BILL :
According to the sponsor, the Corporations Committee of the
State Bar of California Business Law Section, "A determination
that a finder has engaged in unlicensed broker-dealer with State
of California can be the basis for subjecting an issuer
(including its directors and officers) and the unlicensed person
to substantial liability, as California law provides investors
with the right of rescission and an extended statute of
limitations arising from unlicensed broker-dealer activity.
Whether a person is acting as a broker-dealer or finder is a
fact-specific inquiry, and the proposal will promote market
transparency among issuers, finders and investors."
In addition, the sponsor states, "the enactment of the proposal
adds a modicum of certainty in connection with the engagement of
finders in securities transactions. This added certainty will
benefit (a) the State of California via increased income tax
revenues, (b) startup companies, and small to midsized business
entities seeking access to the capital markets, and (c)
individuals who have the capability"
FINDERS :
Currently, both federally and at the state level, the law is
vague on the issue of "finders." Finders do not fall within the
definition of broker-dealer because they are limited to certain
activities. "Finders" is a common term used in the securities
environment as an unlicensed individual who introduces an
accredited investor to an issuer. In exchange for bringing in a
potential accredited investor, the finder receives compensation.
The only role of a finder in a securities transaction is the
introduction; therefore, finders are not required to register as
a broker-dealer. Questions that should be considered when
determining whether or not a finder should register as a broker-
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dealer include:
1)Is the finder planning on being involved in the negotiations
for the sale of securities? The more involved the finder, the
more likely the finder should register as a broker-dealer.
2)Is the finder intending to discuss with potential accredited
investors the details of the securities sold, or otherwise
make any recommendations? If yes, the finder should register
as a broker-dealer.
3)Will the finder be compensated by a transaction-based
compensation with the respect to a securities transaction? If
yes, the finder should register as a broker-dealer.
4)Has the finder previously been involved with effecting
securities transactions? Any previous compensation or other
evidence of previous involvement in effecting securities
transaction increases the likelihood that a finder should
register as a broker-dealer.
Finders fall in a gray area of the law, which increases the
liability of using one and potentially unnecessary litigation.
A finder, if found to act as an unregistered broker-dealer could
come with grave consequences such as: investor rescission
right, the issuer could be found as an aider and abettor,
negative publicity, as well as, be subject to criminal
penalties, fines, suspension and disbarment.
FEDERAL REGULATIONS :
Section 15(a) of the Securities Exchange Act (The Act) of 1934
requires that persons engaged in broker or dealer activity must
register with the SEC pursuant to Section 15(b) of the Act
unless an applicable exemption is available. In general,
federally, a "broker" is any person "engaged in the business of
effecting transactions in securities for the account of others"
and a "dealer" is any person "engaged in the business of buying
and selling securities for such person's own account." Although
the Act and the rules promulgated thereunder do not specifically
define "effecting transactions" or "engaged in the business,"
the SEC has taken a very expansive view of the scope of those
terms. Based on no-action guidance from the SEC, activities that
may be deemed (alone or in combination) to confer "broker"
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status include, among other things:
1)Soliciting investors to enter into securities transactions;
2)Assisting issuers in structuring prospective securities
transactions or helping issuers to identify potential
purchasers of securities;
3)Participating in the negotiating process or otherwise bringing
buyers and sellers of securities together; and;
4) Receiving compensation contingent on the success of a
securities transaction or based on the amount or value of a
securities transaction.
Activities that have been identified (alone or in combination)
by the SEC as indicators of "dealer" status include, among other
things:
1)Participating in a selling group, underwriting securities or
purchasing or selling securities as principal from or to
customers rather than from or to only brokers or dealers;
2)Carrying a dealer inventory (positions intended to be used
directly or indirectly to trade with customers) or holding
oneself out as a dealer or market-maker or as otherwise
willing to buy or sell particular securities on a continuous
basis;
3)Obtaining a regular clientele of customers, issuing or
originating securities or rendering incidental investment
advice to others; and,
4)Engaging in trading transactions for the benefit of others
(including for an affiliate or for an affiliate's customers),
rather than consistently with one's own judgment and
investment and liquidity objectives.
On April 5, 2013, the SEC addressed the potential application of
the broker-dealer registration requirements under Section 15(a)
of the Act in the context of fund raising activities and other
services for private funds. The SEC has observed that certain
private fund advisers are paying transaction-based compensation
to their personnel for selling interests in a fund and private
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fund advisers, their personnel and/or their affiliates are
receiving transaction-based compensation "for purported
investment banking or other broker activities relating to one or
more of the fund's portfolio companies." The SEC has
consistently viewed transaction-based compensation as
broker-dealer activity. The SEC cautioned that the receipt of
transaction-based compensation coupled with the types of
activities being performed may trigger the requirement to
register with the SEC as broker-dealers.
In the early 1990s, the SEC granted no-action relief to an
individual whose involvement in securities transactions was
limited to one instance of providing a list of names and
telephone numbers of potential investors and receiving a success
fee for doing so. This no-action position gave rise to the
notion that a so-called "finder's exemption" exists in the law.
Nonetheless, despite this very limited fact pattern, the SEC has
subsequently indicated its disapproval of this no-action
position, and has in fact stated that even one instance of
transaction-based compensation may be enough for a finding that
a person was "engaged in the business" of broker activity, and
thus subject to registration. Notably, while the SEC has taken
an extremely expansive view of the concept of being "engaged in
the business," some courts have been more lenient in this
regard, finding that something more than just transaction-based
compensation is necessary to require broker registration.
OTHER STATES :
Three other states have enacted finder legislation, Texas,
Michigan and Minnesota.
Michigan requires a "finder" (as defined under Michigan law) to
register as an investment adviser and finder activities are
limited to "locating, introducing, or referring potential
purchasers or sellers."
The Texas State Securities Board adopted regulations to provide
for a restricted registration system for finders (as defined by
regulation). A finder would be limited to introducing only
accredited investors and would not be permitted to negotiate the
terms of any investment or give any advice about entering the
investment. Securities examination requirements would be waived
for finders.
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In adopting the Uniform Securities Act of 2002, Minnesota
included a non-standard provision, which exempted private
placement broker-dealers representing issuers in connection with
any exempt transaction from registering as agents. Minnesota
conditioned the availability on the absence of any disciplinary
history, prohibited the handling or possession of funds and
securities, and required a notice filing and consent to service
of process. Minnesota's provision permits a private placement
broker-dealer to register only once with the state securities
regulator but allows the private placement broker-dealer to
represent multiple issuers.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0002980