BILL ANALYSIS �
AB 2096
Page 1
ASSEMBLY THIRD READING
AB 2096 (Muratsuchi)
As Amended April 24, 2014
Majority vote
BANKING & FINANCE 12-0 APPROPRIATIONS 17-0
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|Ayes:|Dickinson, Allen, |Ayes:|Gatto, Bigelow, |
| |Achadjian, Bonta, Chau, | |Bocanegra, Bradford, Ian |
| |Gatto, Harkey, Linder, | |Calderon, Campos, |
| |Perea, Rodriguez, Weber, | |Donnelly, Eggman, Gomez, |
| |Williams | |Holden, Jones, Linder, |
| | | |Pan, Quirk, |
| | | |Ridley-Thomas, Wagner, |
| | | |Weber |
| | | | |
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SUMMARY : Allows general solicitation and general advertising by
means of qualification of notification for any offer or sale of a
security. Specifically, this bill :
1)Provides that the aggregate amount of securities sold to all
investors by the issuer within a 12-month period cannot exceed $1
million.
2)Provides that 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 cannot
exceed $5,000.
a) Allows the commissioner of the Department of Business
Oversight (DBO) to increase that amount by rule or order; and,
b) Provides that the limit does not apply if the investor is an
accredited investor as defined under federal law.
3)Requires the offering to meet the requirements of the federal
exemption for limited offerings and sales of securities not
exceeding $1 million.
4)Requires the issuer to file with the administrator, provide to
investors and make available to potential investors the following:
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a) A Small Company Offering Registration disclosure document on
Form U-7, as adopted by the North American Securities
Administrators Association (NASAA), prior to the commencement
of the offering of securities.
b) Income tax returns filed by the issuer for the most recently
completed year, if any; and,
financial statements of the issuer certified by the principal
executive officer of the issuer to be true and complete on all
material respects, for offerings that, together with all other
offerings of the issuer within the preceding 12-month period,
have, in the aggregate offering amounts of $100,000 or less.
c) All financial statements reviewed by a public account who is
independent of the issuer, using professional standards and
procedures for the review or standards and procedures
established by the commissioner of the DBO by rule, for
offerings, that together with all other offering of the issuer
within the preceding 12-month period, have, in the aggregate,
offering amounts of more than $100,000, but no more than
$500,000.
d) Audited financial statements, for offerings that together
within the preceding 12-month period have in aggregate,
offering amounts of more than $500,000.
5)Requires the issuer to set aside in a separate bank account all
funds raised as part of the offering to be held until the time
that minimum offering amount is reached.
6)Provides that 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.
7)Provides an issuer, a predecessor of the issuer, an affiliated
issuer, a director, executive officer, or other officer
participating in the offering, among others specified in the
measure would not be disqualified as a "bad actor" under federal
regulations.
8)Requires a court to award attorney's fees and costs to a
prevailing purchaser and would authorize the court to award treble
and punitive damages.
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EXISTING FEDERAL LAW :
1)Establishes the Securities Act of 1933 and the Securities and
Exchange Act of 1934 administered by the Securities and Exchange
Commission (SEC).
2)Establishes the National Association of Security Dealers that
helps define the national behavior standards for member and
minimum standards for listed securities which is regulated by the
SEC.
3)Provides a "bad actor" disqualification that states no exemption
shall be available for a sale of securities if the issuer; any
predecessor of the issuer; any affiliated issuer; any director,
executive officer, other officer participating in the offering,
general partner or managing member of the issuer; any beneficial
owner of 20% or more of the issuer's outstanding voting equity
securities, calculated on the basis of voting power; any promoter
connected with the issuer in any capacity at the time of such
sale; any investment manager of an issuer that is a pooled
investment fund; any person that has been or will be paid
(directly or indirectly) remuneration for solicitation of
purchasers in connection with such sale of securities; any general
partner or managing member of any such investment manager or
solicitor; or any director, executive officer or other officer
participating in the offering of any such investment manager or
solicitor or general partner or managing member of such investment
manager or solicitor:
a) Has been convicted, within 10 years before such sale (or
five years, in the case of issuers, their predecessors and
affiliated issuers), of any felony or misdemeanor, as
specified;
b) Is subject to any order, judgment or decree of any court of
competent jurisdiction, entered within five years before such
sale that, at the time of such sale, restrains or enjoins such
person from engaging or continuing to engage in any conduct or
practice, as specified; or,
c) Is subject to a final order of a state securities commission
(or an agency or officer of a state performing like functions);
a state authority that supervises or examines banks, savings
associations, or credit unions; a state insurance commission
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(or an agency or officer of a state performing like functions);
an appropriate federal banking agency; the United States (U.S.)
Commodity Futures Trading Commission; or the National Credit
Union Administration that, as specified. [Title 17 of the Code
of Federal Regulations (CFR) Section 230.506(d)]
4)Provides an exemption for limited offerings and sales of
securities not exceeding $1 million. [Title 17 of the CFR Section
230.504]
5)Defines an "accredited investor" as any person who comes within
any of the following categories, or who the issuer reasonably
believes comes within any of the following categories, at the time
of the sale of the securities to that person:
a) Any bank or any savings and loan association or other
institution whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section
15 of the Securities Exchange Act of 1934; any insurance
company, any investment company registered under the Investment
Company Act of 1940 or a business development company, any
Small Business Investment Company licensed by the U.S. Small
Business Administration, any plan established and maintained by
a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for
the benefit of its employees, if such plan has total assets in
excess of $5 million; any employee benefit plan within the
meaning of the Employee Retirement Income Security Act of 1974
if the investment decision is made by a plan fiduciary, as
defined in section 3(21) of such act, which is either a bank,
savings and loan association, insurance company, or registered
investment adviser, or if the employee benefit plan has total
assets in excess of $5 million or, if a self-directed plan,
with investment decisions made solely by persons that are
accredited investors;
b) Any private business development company;
c) Any organization described in Internal Revenue Code Section
501(c)(3), corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess
of $5 million;
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d) Any director, executive officer, or general partner of the
issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general
partner of that;
e) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his purchase
exceeds $1 million;
f) Any natural person who had 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 and has a reasonable expectation of reaching the
same income level in the current year;
g) Any trust, with total assets in excess of $5 million, not
formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person;
and,
h) Any entity in which all of the equity owners are accredited
investors. [Title 17 of the CFR Section 230.501] [Rule 501,
Regulation D]
EXISTING STATE LAW :
1)Provides under the Corporate Securities Law of 1968 exemptions
from qualification for certain securities transactions.
[Corporations Code commencing with Section 25000]
2)Provides that the Commissioner of DBO shall approve all securities
offered or sold in California. [Corporation Code Section 25100]
3)Prohibits any person from offering or selling in this state any
security in an issuer transaction whether or not by or through
underwriters, unless such sale has been qualified under
Corporations Code Sections 25111, 25112 or 25113 or unless such
security or transaction is exempted or not subject to
qualification. The offer or sale of such a security in a manner
that varies or differs from, exceeds the scope of, or fails to
conform with either a material term or material condition of
qualification of the offering as set forth in the permit or
qualification order, or a material representation as to the manner
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of offering which is set forth in the application for
qualification, shall be an unqualified offer or sale.
[Corporations Code Section 25110]
4)Provides 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 issued, by an investment company
registered under the Investment Company Act of 1940, and which is
not eligible for qualification under Corporations Code Section
25111, may be qualified by notification under this section. An
application for qualification under this section shall contain
such information and be accompanied by such 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.
[Corporations Code Section 25112]
5)Requires all purchasers to have either a preexisting personal or
business relationship with the officer or any of its partners,
officers, directors or controlling persons, or managers (as
appointed or elected by the members) if the officer is a limited
liability company, or by reason of their business or financial
experience or the business or financial experience of their
professional advisers who are unaffiliated with and who are not
compensated by the issuer or any affiliate or selling agent of the
issuer, directly or indirectly, could be reasonably assumed to
have the capacity to protect their own interests in connection
with the transaction.
[Corporations Code Section 25102(f)]
6)Defines "issuer" as any person who issues or proposes to issue any
security, except that:
a) With respect to certificates of deposit, voting trust
certificates or collateral-trust certificates, or with respect
to certificates of interest or shares in an unincorporated
investment trust not having a board of directors or persons
performing similar functions or of the fixed, restricted
management or unit type, "issuer" means the person or persons
performing the acts and assuming the duties of depositor or
manager pursuant to the provisions of the trust or other
agreement or instrument under which the security is issued.
However, with respect to equipment-trust certificates or like
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securities, "issuer" means the person by whom the equipment or
property is or is to be used;
b) With respect to certificates of interest or participation in
oil, gas or mining titles or leases or in payments out of
production under those titles or leases, "issuer" means the
person or persons in active control of the exploration or
development of the property who sell those interests or
participations or payments or any person or persons who
subdivide and sell those interests or participations or
payments. The determination of the person or persons in active
control of the exploration or development of the property shall
be made on the basis of the actual relationship of the parties
and not on the basis of the legal designation of a person's
interest;
c) With respect to a fractional or pooled interest in a
viatical or life settlement contract, "issuer" means the person
who creates, for the purposes of sale, the fractional or pooled
interest. In the case of a viatical or life settlement contract
that is not fractionalized or pooled, "issuer" means the person
effecting the transactions with the investors in those
contracts; or,
d) In the case of an unincorporated association which provides
by its articles for limited liability of any or all of its
members, or in the case of a trust, committee, or other legal
entity, the trustees or members thereof shall not be
individually liable as issuers of any security issued by the
association, trust, committee, or other legal entity.
[Corporations Code Section 25010]
FISCAL EFFECT : According to the Assembly Appropriations Committee,
minor and absorbable costs to DBO 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 : Based on the April 9, 2014 amendments to AB 2096, this
bill is closely modeled after the recent enacted equity crowdfunding
exemption established in Maine without the Governor's signature.
This bill will allow small businesses to raise up to $1 million in
capital by selling small amounts of equity to individual investors.
Small businesses will need to register with DBO, as well as, set a
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fundraising goal and deadline. This bill will allow individual
investors to purchase up to $5,000 in equity from a single business.
This bill provides three significant differences from Maine which
include:
1)Instead of laying out a unique offering document, the measure uses
an existing document established by the NASAA, Form U-7;
2)The measure includes a "bad actor" provision as provided under
Title 17 of the CFR Section 230.506(d); and,
3)The measure provides attorney's fees and costs to a prevailing
purchaser, as well as, treble and punitive damages.
While the goal of this measure is admirable, providing increased
access to capital for small businesses, the risks associated with
the measure could be at the expense of those most vulnerable,
unsophisticated non-accredited investors. This bill does have a cap
of $5,000 which weakens the ability for an issuer to take an
investors lifesavings but small business investments have even
greater risk than normal. About 50% of all small businesses fail
within the first five years according to a crowdfunding warning
document issued by the NASAA. This document can be found at:
http://www.nasaa.org/wp-content/uploads/2012/05/NASAA_Advisory_Crowdf
unding.pdf.
Under existing state law, all securities offered or sold must either
be qualified with the commissioner of DBO or exempted from
registration by the commissioner. This bill would add an additional
way of qualification of notification rather than a pure exemption
under the Corporate Securities Act of 1968.
Background: On April 5, 2012, President Barack Obama signed
landmark legislation, H.R. 3606, the Jumpstart Our Business Startups
Act (the "JOBS Act"). The JOBS Act makes it easier for startups and
small businesses to raise funds. This legislation passed Congress
through a 73-26 U.S. Senate vote and a 380-41 House of
Representatives vote. As far as, this bill is concerned, Title III
of the JOBS Act requires the SEC to develop new rules permitting
capital raising by "crowdfunding." SEC is still in the rule-making
process and is due to publish final regulations before non-SEC
accredited investors can start financing small businesses.
In October 2013, the SEC issued the proposed crowdfunding rules in a
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585 page document. The JOBS Act creates an exemption from the
registration requirements of the Securities Act of 1933 that
provides for a form of securities crowdfunding. The SEC has not
taken lightly the role of establishing a brand new type of financial
intermediary and a whole new regulatory process which is why it is
estimated the final rules will not be released until Summer 2014 or
as late as Winter 2014. The SEC has struggled to create a set of
rules that respected the flexible and democratic nature of
crowdfunding (which makes it so appealing to very small and early
stage start-up companies) while also implementing sufficient
regulation to satisfy consumer and investor protection critics who
fear that investment crowdfunding is far too open to abuse and
fraud.
Key features of the SEC's proposed rules:
1)A company will only be able to raise a maximum aggregate amount of
$1 million through crowdfunding offerings per 12-month period.
2)Companies raising less than $500,000 through crowdfunding within
any 12-month period will need to share financial statements and
income-tax returns with their investors and those raising more
than $500,000 will be obligated to provide audited financial
statements to investors.
3)Investors with an annual income or net worth of less than $100,000
will be permitted to invest a maximum of $2,000 or 5% of their
annual income or net worth (whichever is greater) per 12-month
period.
4)Investors with an annual income or net worth equal to or greater
than $100,000 will be permitted to invest up to 10% of their
annual income or net worth (whichever is greater) per 12-month
period up to a total maximum of $100,000 in securities.
5)Companies conducting a crowdfunding offering will need to file
certain information with the SEC, the relevant intermediary
facilitating the crowdfunding offering and potential investors.
6)Private crowdfunding offerings will be conducted exclusively
online through a registered broker or funding platform (portal).
Funding platforms will be required to register with the SEC.
Non-U.S. crowdfunding platforms will be able to register with the
SEC, subject to an on-site examination.
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7)Registration rules for crowdfunding platforms, which were
developed in partnership with the Financial Industry Regulatory
Authority (FINRA). FINRA released its set of proposed rules, the
Funding Portal Rules.
Crowdfunding: Crowdfunding is a collective cooperation of people
who network and pool their money and resources together, usually via
the Internet, to support efforts initiated by other organizations.
Crowdfunding literally attracts a "crowd" of people, each of whom
takes a small stake in a business idea by contributing towards an
online funding target. Crowdfunding has become a popular and
alternative method of raising finance for a business, real estate
investments, projects or ideas and has become popularized online by
sites such as Kickstarter, Wefunder, Crowdfunder and RockthePost.
Crowdfunding is a means to raise money by attracting relatively
small individual contributions from a large number of people. In
recent years, crowdfunding Web sites have proliferated to raise
funds for charities, artistic endeavors and businesses. These sites
did not offer securities, such as an ownership interest or share of
profits in a business; rather, money was contributed in the form of
donations, or in return for the product being made. Through this
bill and when the final rules are issued by the SEC, crowdfunding
will expand to securities.
NASAA: This bill requires an issuer to file with the administrator
(commissioner of DBO) a small company offering registration
disclosure document on Form U-7. The form is found at the NASAA Web
site:
http://www.nasaa.org/industry-resources/corporation-finance/scor-over
view/scor-forms/. The form goes into detail, among other things,
the type of investment, potential risks to the investor, the
offering amount, and the deadline to reach the offering.
Other states: A number of other states have enacted crowdfunding in
a variety of forms. These states include: Georgia, Kansas,
Michigan, Idaho, Washington, Wisconsin and Maine.
Questions and concerns:
1)Should California enact intrastate crowdfunding or should the
Legislature wait until after the SEC finalizes the federal
crowdfunding rules? The SEC proposed rules have been touted as
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being too stringent which may hinder those who actually use it.
Some would say this is intentional to deter fraud and scams under
this new framework. Ultimately, the question is whether or not
California needs to establish its own crowdfunding framework which
may be more lax and/or conflict and if so, is that good?
2)The economy is recovering, the unemployment rate is down, the
federal government acted, is there still a need to act on a
statewide level to produce more ways to raise capitol? In
addition, the U.S. Treasury just gave the California State
Treasurer $55,218,250 in federal funds from the JOBS Act to
provide access to capital to small businesses through the
California Pollution Control Financing Authority and the
California Infrastructure and Economic Development Bank. This is
the second of three disbursements. Are small businesses
capitalizing on these funds?
3)As noted above in "other states," the states that have adopted a
crowdfunding framework are states that are desperately trying to
attract and lure in new businesses. California is known as the
start-up epicenter. According to a recent study by Radius, a San
Francisco technology company that collects small business data in
the U.S. of the top 12 places to establish a start-up in 2014,
California had three cities which included: San Diego as number
one, San Francisco as number six and San Jose as number 12. Are
small businesses really struggling to establish themselves in
California? The small businesses that would need to use
crowdfunding may be the types of businesses that have exhausted
all other options and if so, are these the type of businesses we
want established in California soliciting to potentially
vulnerable unsophisticated investors?
Previous legislation: AB 783 (Daly) of the current legislative
session, provides that an issuer can offer or sell securities using
any form of general solicitation or general advertising. AB 783
died in the Assembly Banking and Finance Committee.
AB 2081 (Allen) of 2012, provides that an issuer can offer or sell
securities using any form of general solicitation or general
advertising. AB 2081 died on the Senate Floor.
SB 875 (Price) of 2010, would have exempted from qualification
offerings or sales of securities using a general solicitation or
general advertising, provided the transaction meets specified
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requirements, including a requirement that the sales are made to
accredited investors. SB 875 died in the Senate Banking and
Financial Institutions Committee.
AB 1644 (Campbell) of 2001, would have exempted from qualification
offerings or sales of securities using a general solicitation or
general advertising, provided the transaction meets specified
requirements, including a requirement that the sales are made to
accredited investors. AB 1644 failed passage in the Assembly
Banking and Finance Committee.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0003511