Amended in Senate June 9, 2014

Amended in Assembly April 24, 2014

Amended in Assembly April 9, 2014

Amended in Assembly March 26, 2014

California Legislature—2013–14 Regular Session

Assembly Bill No. 2096

Introduced by Assembly Member Muratsuchi

February 20, 2014

An act to amend Sections 25112 and 25503 of the Corporations Code, relating to securities transactions.

LEGISLATIVE COUNSEL’S DIGEST

AB 2096, as amended, Muratsuchi. Securities transactions: qualification requirements: notification.

Existing law, the Corporate Securities Law of 1968, requires certain securities offered or sold in this state to be qualified through application filed with the Commissioner of Business Oversight, or to be exempt from the qualification requirements. Under existing law, a security issued either by the issuer of a security registered under a designated provision of the federal law or issued by an investment company registered under other specified federal law, and which is not eligible for qualification under existing law, may be qualified by notification by making a specified application, and providing certain documents and additional information.

Existing law imposes liability for specified damages on a person who offers or sells a security if the sale is not qualified, violates a condition of qualification under the act, or violates an order suspending trading issued by the commissioner.

This bill, in addition, would authorize qualification by notification for any offer or sale of a security, if, among other requirements, the offering meets the requirements for a federal exemption for limited offerings and sales of securities not exceeding $1,000,000, and the aggregate amount of securities sold to any investor by the issuer does not exceed certain amounts within a 12-month time period, except as specified.

This bill would require a court to award attorney’s fees and costs to a prevailing purchaser in an action brought against a person who makes a sale in violation of the qualification provisions prescribed in the bill, and would authorize the court to award treble or punitive damages.

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 25112 of the Corporations Code is
amended to read:

25112.  

(a) (1) Any security issued by a person which is the
issuer of any security registered under Section 12 of the Securities
Exchange Act of 1934 or begin delete issued, end delete begin insert issued end insert by an investment company
registered under the Investment Company Act of 1940, and which
is not eligible for qualification under Section 25111, may be
qualified by notification under this section.

(2) Any offer or sale of any security that meets all of the
following criteria may be qualified by notification under this
section:

(A) The aggregate amount of securities sold to all investors by
the issuer within any 12-month period is not more than one million
dollars ($1,000,000).

(B) The aggregate amount of securities sold to any investor by
the issuer, including any amount sold during the 12-month period
preceding the date of the transaction, does not exceed five thousand
dollars ($5,000), or a greater amount as the commissioner may
provide by rule or order, unless the investor is an accredited
investor as defined in Section 230.501 of Title 17 of the Code of
Federal Regulations.

(C) The offering meets the requirements of the federal
exemption for limited offerings and sales of securities not
exceeding one million dollars ($1,000,000) in Section 230.504 of
Title 17 of the Code of Federal Regulations.

(D) The issuer files with the commissioner, provides to
investors, and makes available to potential investors the following:

(i) A Small Company Offering Registration disclosure document
on Form U-7, as adopted by the North American Securities
Administrators Association, prior to the commencement of the
offering of securities. begin insert The issuer shall ensure that the cover page
of Form U-7 includes all of the following statements, in bold
typeface no smaller than 12-point type: end insert

begin insert

(I) The Commissioner of Business Oversight has in no way
passed upon the merits or qualifications of, or recommended or
given approval to, any person, security, or transaction associated
with this offering.

end insert begin insert

(II) The company described in this disclosure form is seeking
to raise a minimum offering of [insert minimum offering amount].

end insert begin insert

(III) If the sum of the investment commitments received by the
company does not equal or exceed the minimum offering amount
by [insert date] your investment in the company will be returned
to you.

end insert

(ii) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of one hundred thousand dollars ($100,000) or
less, the following:

(I) The income tax returns filed by the issuer for the most
recently completed year, if any.

(II) The financial statements of the issuer certified by the
principal executive officer of the issuer to be true and complete in
all material respects.

(iii) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of more than one hundred thousand dollars
($100,000), but not more than five hundred thousand dollars
($500,000), all financial statements reviewed by a public
accountant who is independent of the issuer, using professional
standards and procedures for the review or standards and
procedures established by the commissioner by rule.

(iv) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of more than five hundred thousand dollars
($500,000), audited financial statements.

(E) The issuer sets aside in a separate begin delete bank end delete begin insert third-party escrow end insert
account all funds raised as part of the offering begin insert , end insert to be held begin insert in escrow end insert
until the time that the minimum offering amount is reached. If the
minimum offering amount is not reached within one year of the
effective date of the offering, the issuer shall return all funds to
investors.

(F) The issuer, a predecessor of the issuer, an affiliated issuer,
a director, executive officer, or other officer participating in the
offering, a general partner or managing member of the issuer, a
beneficial owner of 20 percent or more of the issuer’s outstanding
voting equity securities, calculated on the basis of voting power,
a promoter connected with the issuer in any capacity at the time
of the sale, an investment manager of an issuer that is a pooled
investment fund, a person that has been or will be paid, directly
or indirectly, remuneration for solicitation of purchasers in
connection with the sale of securities, a general partner or managing
member of the investment manager or solicitor, or any director,
executive officer, or other officer participating in the offering of
the investment manager or solicitor or general partner or managing
member of the investment manager or solicitor would not be
disqualified as a “bad actor” under subdivision (d) of Section
230.506 of Title 17 of the Code of Federal Regulations.

(G) Any other requirement set forth by rule adopted by the
commissioner.

(b) An application for qualification under this section shall
contain begin delete such end delete begin insert all end insert information and be accompanied by begin delete such end delete begin insert all end insert
documents as shall be required by rule of the commissioner, in
addition to the information specified in Section 25160 and the
consent to service of process required by Section 25165. For this
purpose, the commissioner may classify issuers and types of
securities.

(c) If no stop order or order under subdivision (a) of Section
25143 is in effect under this law, qualification of the sale of the
securities under this section automatically becomes effective (and
the securities may be offered and sold in accordance with the terms
of the application as amended) at begin delete 12 o’clock noon end delete begin insert 12 p.m. end insert
California time of the 10th business day after the filing of the
application or the last amendment thereto or at begin delete such end delete begin insert an end insert earlier time
as the commissioner determines.

SEC. 2.  

Section 25503 of the Corporations Code is amended
to read:

25503.  

(a) Any person who violates Section 25110, 25130 begin insert , end insert or
25133, or a condition of qualification under Chapter 2
(commencing with Section 25110) of this part, imposed pursuant
to Section 25141, or an order suspending trading issued pursuant
to Section 25219, shall be liable to any person acquiring from him
the security sold in violation of that section, who may sue to
recover the consideration he paid for such security with interest
thereon at the legal rate, less the amount of any income received
therefrom, upon the tender of the security, or for damages, if he
no longer owns the security, or if the consideration given for the
security is not capable of being returned. Damages, if the plaintiff
no longer owns the security, shall be equal to the difference
between the plaintiff’s purchase price plus interest at the legal rate
from the date of purchase and the value of the security at the time
it was disposed of by the plaintiff plus the amount of any income
received therefrom by the plaintiff.

(b) If the consideration given for the security is not capable of
being returned, damages shall be equal to the value of that
consideration plus interest at the legal rate from the date of
purchase, provided the security is tendered; and if the plaintiff no
longer owns the security, damages in such case shall be equal to
the difference between the value of the consideration given for the
security plus interest at the legal rate from the date of purchase
and the value of the security at the time it was disposed of by the
plaintiff plus the amount of any income received therefrom by the
plaintiff. A person who violates Section 25120 or a condition of
qualification under Chapter 3 (commencing with Section 25120)
of this part imposed pursuant to Section 25141, shall be liable to
any person acquiring from him the security sold in violation of
that section who may sue to recover the difference between the
value of the consideration received by the seller and the value of
the security at the time it was received by the buyer, with interest
thereon at the legal rate from the date of purchase. A person on
whose behalf an offering is made and any underwriter of the
offering, whether on a best efforts or a firm commitment basis,
shall be jointly and severally liable under this section. However,
in no event shall an underwriter be liable, unless the underwriter
knowingly received from the issuer for acting as an underwriter
some benefit, directly or indirectly, in which all other underwriters
similarly situated did not share in proportion to their respective
interest in the underwriting, in any suit or suits authorized under
this section, for damages in excess of the total price at which the
securities underwritten by the underwriter and distributed to the
public were offered to the public. A tender specified in this section
may be made at any time before entry of judgment. A person shall
not be liable under this section for violation of Section 25110,
25120 begin insert , end insert or 25130 if the sale of the security is qualified prior to the
payment or receipt of any part of the consideration for the security
sold, even though an offer to sell or a contract of sale may have
been made or entered into without qualification.

(c) The court shall award attorney’s fees and costs to a prevailing
purchaser in an action brought against any person who violates
Section 25110 for failure to comply with paragraph (2) of
subdivision (a) of Section 25112, and may award treble or punitive
damages.