BILL ANALYSIS �
AB 2096
Page 1
Date of Hearing: May 7, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2096 (Muratsuchi) - As Amended: April 24, 2014
Policy Committee: Banking &
FinanceVote: 12-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill authorizes a new form of securities offering in
California to facilitate crowdfunding as an alternative to a
similar authorization in federal law under the JOBS Act.
Specifically, this bill allows any offer or sale of any security
to qualify by notification so long as:
1)The aggregate amount of securities sold in the offering does
not exceed million in any 12-month period.
2)The aggregate amount of securities sold to any investor who is
not an "accredited investor" (as defined in Regulation D under
the US Securities Act of 1933 (Securities Act)) does not
exceed $5,000 in any 12-month period (or greater amount if the
commissioner of the California Department of Business
Oversight (CDBO) authorizes by rule).
3)The issuer files with the commissioner and makes available to
investors a disclosure document on Form U-7 as adopted by the
North American Securities Administrators Association
containing certain financial statements that have been
reviewed by a public accountant in the case of offerings over
$100,000 and up to $500,000 or audited by a public accountant
in the case of offerings over $500,000.
4)The issuer holds any funds raised in the offering in a
separate account until a minimum offering amount, as specified
by the issuer, has been reached within a year of commencement
of the offering, failing which the funds must be returned to
investors.
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5)No issuer, predecessor of the issuer, affiliated issuer,
director, or other officer participating in the offering would
be disqualified as a "bad actor" under federal regulations.
The bill also requires a court to award attorney's fees and
costs to a prevailing purchaser of the securities and would
authorize the court to award treble and punitive damages.
FISCAL EFFECT
Minor and absorbable costs to CDBO to review offering
notifications, with a possible moderate increase in staff costs
if an unanticipated and substantial number of offerings are
conducted under this section.
COMMENTS
1) Purpose. According to the author, this bill would add an
equity crowdfunding provision to the California Corporate
Securities Law, and would allow companies to directly contact
investors, while also allowing them to continue to use
intermediary parties to access capital. The author states AB
2096 seeks to allow start-up and emerging small businesses to
find investors who can provide capital to help them grow and
create jobs.
While other sources of seed capital may be available,
supporters assert that crowdfunded equity capital will help
startup companies that would not otherwise attract investment
from venture capital funds or angel investors.
This bill creates an alternative set of rules and regulations
with respect to crowdfunding securities offerings in
California that issuers could use to qualify by notification
(the California equivalent of registration under the
Securities Act) instead of relying on the rules and
regulations on crowdfunding currently being promulgated by the
US Securities and Exchange Commission (SEC) pursuant to the
JOBS Act.
2) Crowdfunding. Crowdfunding is an alternative means of raising
seed funding for startup companies, projects, or ideas that do
not yet have sufficient assets or cash flows to attract more
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traditional funding, such as bank financing. It is an
alternative to the venture capital or angel investor funding
common in the high-tech and internet startup industries.
Crowdfunding investors typically provide small individual
contributions or investments in order to finance a new project
or company. One of the most common ways is to pre-order the
product or service that the startup company will eventually
provide. Certain charitable organizations have also had
success by "crowdfunding" contributions from supporters for
particular projects. Crowdfunding has been popularized by
websites such as Kickstarter, Wefunder, Crowdfunder and
RockthePost.
Another possible means of crowdfunding would be the sale of
equity securities, though the cost of compliance with existing
federal and state securities laws, which were enacted to
regulate much larger offerings, has previously been cost
prohibitive. AB 2096 and forthcoming regulations promulgated
by the SEC will expand crowdfunding to include the issuance of
securities.
3) Overlap with federal securities laws and the JOBS Act. In
April 2012, President Obama signed the Jumpstart Our Business
Startups Act (JOBS Act), which was designed to make it easier
for startups and small businesses to raise capital, and
included a provision requiring the SEC to develop new rules
permitting capital raising by crowdfunding.
In October of 2013, the SEC issued the proposed crowdfunding
rules. The rules are extensive and will result in an entirely
new regulatory process for crowdfunded securities offerings.
In creating this set of rules, the SEC attempted to respect
the flexible and democratic nature of crowdfunding while
adhering to its core mandate of protecting investors from
fraud and abuse.
Key features of the SEC's proposed rules include:
a) A maximum aggregate offering amount of million in any
12-month period.
b) Disclosure of financial statements for companies raising
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less than $500,000 and audited financial statements for
those raising more than $500,000, and filing with the SEC.
c) Limitations on the aggregate investments for individuals
over a 12-month period.
i) Investors with an annual income or net worth of less
than $100,000: a maximum of $2,000 or 5% of their annual
income or net worth, whichever is greater.
ii) Investors with an annual income or net worth equal
to or greater than $100,000: a maximum of $100,000 or 10%
of their annual income or net worth, whichever is
greater.
d) Private crowdfunding offerings will be conducted
exclusively online through broker or funding platforms
developed in partnership with the Financial Industry
Regulatory Authority (FINRA) and registered with the SEC.
4) Staff comments. The author and committee may wish to consider
whether state regulation of crowdfunded securities offerings
is premature given the current rulemaking in progress by the
SEC. In particular, the author and committee may wish to
consider the following:
a) This bill overlaps in many aspects yet differs in
certain areas relative to investor and investment
thresholds, disclosure requirements, and manner of offering
from the rules currently proposed by the SEC that could, in
many cases, make the regime proposed in AB 2096 less
attractive to issuers than the SEC rules. AB 2096 will
also be available only to offerings conducted exclusively
in California. As a result, issuers may be incentivized to
rely upon the SEC rules to access a deeper pool of capital
and avoid the added restrictions and disclosure
requirements of AB 2096, potentially undermining, at least
in part, the policy goals of the bill.
b) This bill is sufficiently similar to the proposed SEC
rules that certain investors may be confused as to which
offering standard issuers are relying upon and may not be
aware that there are different investor standards and
different disclosure requirements between the two regimes.
This may be particularly true if online crowdfunded
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offerings become common and take on an otherwise common
style and format in order to compete for investor interest.
As a result, California investors could inadvertently
violate investment limits or abstain from investing in
offerings for which they were otherwise eligible, not
realizing they had invested in multiple crowdfunded
offerings conducted under different rules.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081