Senate Bill No. 1181

Introduced by Senator Correa

February 20, 2014

An act to amend Section 22062 of the Financial Code, relating to lending.

LEGISLATIVE COUNSEL’S DIGEST

SB 1181, as introduced, Correa. Finance lenders.

Existing law, the California Finance Lenders Law, provides for the licensure and regulation of finance lenders and brokers. The California Finance Lenders Law exempts commercial bridge loans from the application of its provisions and defines a commercial bridge loan to require, among other things, that the loan have a maturity date not to exceed one year, as specified.

This bill would exempt from the California Finance Lenders Law a venture capital investment made by a venture capital company in an equity security, as defined, issued by an operating company, would revise the definition of commercial bridge loan to extend the permitted maturity date to 3 years, and would make a technical, nonsubstantive change.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 22062 of the Financial Code is amended
to read:

22062.  

(a) This division does not apply begin delete to a commercial bridge
loan made by a venture capital company to an operating company. end delete
begin insert to either of the following: end insert

begin insert

(1) A commercial bridge loan made by a venture capital
company to an operating company.

end insert begin insert

(2) A venture capital investment made by a venture capital
company in an equity security issued by an operating company.

end insert

(b) For purposes of this section:

(1) “Venture capital company” means a person other than an
individual or sole proprietorship that meets all of the following:

(A) Engages primarily in the business of promoting economic,
business, or industrial development through venture capital
investments or the provision of financial or management assistance
to operating companies.

(B) At all times maintains at least 50 percent of its assets in
venture capital investments or commitments to make venture
capital investments, and maintains or, assuming consummation of
the equity investment to which the commercial bridge loan relates,
will maintain a material equity interest in the operating company.

(C) Approves each loan made to an operating company through
the venture capital company’s board of directors, executive
committee, or similar policy body, based on a reasonable belief
that the loan is appropriate for the operating company after
reasonable inquiry concerning the operating company’s financing
objectives and financial situation.

(D) Complies, when making the loan, with all applicable federal
and state laws and rules or orders governing securities transactions
including, but not limited to, the Securities Act of 1933, the
Securities Exchange Act of 1934, the Investment Company Act
of 1940, and the Corporate Securities Law of 1968.

(2) “Operating company” means a person that meets all of the
following:

(A) Primarily engages, wholly or substantially, directly or
indirectly through a majority owned subsidiary or subsidiaries, in
the production or sale, or the research or development, of a product
or service other than the management or investment of capital.
This shall not include any of the following:

(i) A person that is either an individual or a sole proprietorship.

(ii) A person that has no specific business plan or purpose or
has indicated that its business plan is to engage in a merger or
acquisition with an unidentified company or companies or other
entity or person.

(B) Uses all of the proceeds of the commercial bridge loan for
the operations of its business.

(C) Approves each commercial bridge loan through its board
of directors, executive committee, or similar policy board, in the
exercise of its fiduciary duty, based on a reasonable belief that the
loan is appropriate for the operating company after reasonable
inquiry concerning the operating company’s financing objectives
and financial situation.

(3) “Commercial bridge loan” means a loan that meets all of
the following criteria:

(A) A loan of a principal amount of five thousand dollars
($5,000) or more, or any loan under an open-end credit program,
whether secured by personal property or unsecured, the proceeds
of which are intended by the operating company for use primarily
for other than personal, family, or household purposes.

(B) Is made with a maturity date not to exceed begin delete one year, end delete begin insert three
years, end insert and in connection with or in bona fide contemplation of, an
equity investment in the operating company.

(C) Is secured, if at all, solely by the operating company’s
business assets, exclusive of any real property.

(D) Is subject to the implied covenant of good faith and fair
dealing under Section 1655 of the Civil Code.

(4) For purposes of paragraph (1), “venture capital investment”
is an acquisition of securities in an operating company that a
person, an investment adviser of the person, or an affiliated person
of either, has or obtains management rights to.

begin insert

(5) “Equity security” shall have the same meaning as in Section
3(a)(11) of the federal Securities Exchange Act of 1934.

end insert

(c) For purposes of paragraph (3) of subdivision (b), for the
purposes of determining whether a loan is a commercial bridge
loan, a venture capital company may rely on any written statement
of intended purposes signed by the operating company. The
statement may be a separate statement signed by the operating
company or may be contained in another document signed by the
operating company, but in each case it shall be approved by its
board of directors, executive committee, or similar policy body.
The venture capital company may not be required to ascertain that
the proceeds of the loan are used in accordance with the statement
of intended purposes.

(d) For purposes of subparagraph (A) of paragraph (3) of
subdivision (b), the principles set forth in Section 22551 shall be
used to determine whether the specified amount of a commercial
bridge loan is a bona fide principal amount.

begin delete

(e) This section shall apply only to a commercial bridge loan
made by a venture capital company to an operating company on
or after January 1, 2004.

end delete begin delete

(f)

end delete

begin insert (e) end insert  Nothing in this section is intended to abrogate or diminish
the application of any other laws that are designed to protect
borrowers, including, but not limited to, laws pertaining to
licensing, unfair competition, usury, and conflicts of interest.