BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 2096 (Muratsuchi) - Securities Transactions
Amended: August 7, 2014 Policy Vote: BFI 7-2; Jud 4-3
Urgency: No Mandate: No
Hearing Date: August 11, 2014
Consultant: Maureen Ortiz
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 2096 would create a new way in which a person
seeking to offer or sell securities could qualify their
offering, by authorizing the "qualification by notification" of
offers or sales of securities advertised by means of general
solicitation and general advertising, as specified.
Fiscal Impact:
Admin costs of approximately $2.8 million, partially offset
by fee revenue (Special Fund)
The Department of Business Oversight indicates the need for 15
PYs based on approximately 1,800 filings that will have to be
reviewed and approved within 10 business days. Each
application will require an application fee of $200 plus 1/5 of
1% of the total aggregate value. Since that exact data is
unknown, revenue is also unknown but anticipated to be about $2
million.
Background: The federal Securities Act of 1933 establishes a
framework for regulating the offer and sale of securities and
ensuring the protection of investors that purchase those
securities. Generally speaking, the Securities Act of 1933
requires the offer or sale of all securities to be registered
with the Securities and Exchange Commission (SEC) and to be
structured as prescribed in federal law and regulation, unless
the offer or sale is covered by an exemption. This federal act
also require those who offer (i.e., market) and sell securities
to be licensed as investment advisers or broker-dealers, unless
either the transaction or the activity being undertaken is
exempt. However, Regulation D authorizes a series of exemptions
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from the registration requirements of the Securities Act of
1933.
California state law provides that it is unlawful for any person
to offer or sell any security in this state, unless such
offering or sale has been qualified by the commissioner, as
specified, or unless the offering or sale is covered by an
express exemption; and authorizes the qualification by
notification of any security issued by a person that is the
issuer of a 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.
Proposed Law: AB 2096 authorizes the "qualification by
notification" for security offerings that meet the following
criteria:
a) The aggregate amount of securities sold to all
investors by the issuer within any 12 month period is not
more than $1 million.
b) The aggregate amount sold to any investor does not
exceed $5,000, or a greater amount as the DBO commissioner
may provide as specified.
c) The offering meets the federal exemption requirement for
sales of securities not exceeding $1 million.
Additionally, the issuer must file with the Commissioner,
provide to investors, and make available to potential investors
the following information:
a) A Small Company Offering Registration disclosure
statement on Form U-7. The issuer must ensure that the
cover page of the Form U-7 includes statements that the
Commissioner has not approved the transaction; the dollar
amount the company is seeking to raise; and a notification
that funds will be returned if the company does not raise a
minimum amount.
b) For offerings that, together with all other offerings of
the issuer within the preceding 12-month period, have
offering amounts of $100,000 or less in the aggregate: the
income tax returns filed by the issuer for the most
recently completed year, if any; and financial statements
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of the issuer, certified by the principal executive officer
of the issuer to be true and complete in all material
respects.
c) For offerings that, together with all other offerings of
the issuer within the preceding 12-month period, have
offering amounts between $100,000 and $500,000: all
financial statements reviewed by a public accountant who is
independent of the issuer, using professional standards and
procedures or standards and procedures established by the
commissioner by rule.
d) For offerings that, together with all other offerings of
the issuer within the preceding 12-month period, have
offering amounts of more than $500,000: audited financial
statements.
AB 2096 requires the issuer to set aside all funds raised as
part of the offering in a third-party escrow account, to be held
until the minimum offering amount is reached, and return all
funds to investors, if the minimum offering amount is not
reached within one year following the effective date of the
offering.
Lastly, the bill directs a court to award attorney's fees and
costs, and authorizes the award of treble or punitive damages,
to a prevailing plaintiff purchaser who brings an action against
any person for a violation of the bill's provisions.
Staff Comments: Ordinarily, the words "qualified" or
"registered" suggest to investors that an offering has undergone
significant review by either the state or federal securities
regulator. Under existing state law, there are only three ways
to qualify a securities offering, all of which require
significant review of the offering by either the SEC or DBO.
AB 2096 would authorize use of the word "qualified" in
connection with offerings that would not have to undergo
extensive review by either DBO or the SEC. Issuers wishing to
utilize the qualification by notification authorized by this
bill would have to submit information about their offering and
their financial condition to DBO. The offering would
automatically become qualified, unless DBO makes an affirmative
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finding within 10 business days of receiving the notification
that the proposed transaction is unfair, unjust, or inequitable.