Under existing law, the Corporate Securities Law of 1968, the Commissioner of Business Oversight regulates the activities of a broker-dealer which is defined as, among other things, any person engaged in the business of effecting securities transactions in California for the account of others or his or her own account, and it specifies those persons or entities excluded from the definition. Existing law requires, among other things, that a broker-dealer apply for and secure a certificate authorizing that person to act in that capacity, unless the person is exempted from this requirement, as prescribed. Existing law prohibits a person acting on behalf of a licensed broker-dealer or an issuer, from effecting any transaction in, or inducing or attempting to induce the purchase or sale of, any security in this state unless the broker-dealer and agent have complied with certain rules.

This bill would exempt from those provisions an individual who is a finder, as defined, who satisfies specified requirements, including, among other things, filing an initial statement of information with the Commissioner of Business Oversight and paying a filing fee.

Under existing law, the Corporate Securities Law of 1968, the Commissioner of Business Oversight regulates the activities of a broker-dealer which is defined as, among other things, any person engaged in the business of effecting securities transactions in California for the account of others or his or her own account, and it specifies those persons or entities excluded from the definition. Existing law requires, among other things, that a broker-dealer apply for and secure a certificate authorizing that person to act in that capacity, unless the person is exempted from this requirement, as prescribed. Existing law prohibits a person acting on behalf of a licensed broker-dealer or an issuer, from effecting any transaction in, or inducing or attempting to induce the purchase or sale of, any security in this state unless the broker-dealer and agent have complied with certain rules.

This bill would exempt from those provisions an individual who is a finder, as defined, who satisfies specified requirements, including, among other things, filing an initial statement of information with the Commissioner of Business Oversight and paying a filing fee.

Under existing law, the Corporate Securities Law of 1968, the Commissioner of Business Oversight regulates the activities of a broker-dealer which is defined as, among other things, any person engaged in the business of effecting securities transactions in California for the account of others or his or her own account, and it specifies those persons or entities excluded from the definition. Existing law requires, among other things, that a broker-dealer apply for and secure a certificate authorizing that person to act in that capacity, unless the person is exempted from this requirement, as prescribed. Existing law prohibits a person acting on behalf of a licensed broker-dealer or an issuer, from effecting any transaction in, or inducing or attempting to induce the purchase or sale of, any security in this state unless the broker-dealer and agent have complied with certain rules.

This bill would exempt from those provisions an individual who is a finder, as defined, who satisfies specified requirements, including, among other things, filing an initial statement of information with the Commissioner of Business Oversight and paying a filing fee.

Under existing law, the Corporate Securities Law of 1968, the Commissioner of Business Oversight regulates the activities of a broker-dealer which is defined as, among other things, any person engaged in the business of effecting securities transactions in California for the account of others or his or her own account, and it specifies those persons or entities excluded from the definition. Existing law requires, among other things, that a broker-dealer apply for and secure a certificate authorizing that person to act in that capacity, unless the person is exempted from this requirement, as prescribed. Existing law prohibits a person acting on behalf of a licensed broker-dealer or an issuer, from effecting any transaction in, or inducing or attempting to induce the purchase or sale of, any security in this state unless the broker-dealer and agent have complied with certain rules.

Under existing law, the Corporate Securities Law of 1968, the Commissioner of Business Oversight regulates the activities of a broker-dealer which is defined as, among other things, any person engaged in the business of effecting securities transactions in California for the account of others or his or her own account, and it specifies those persons or entities excluded from the definition.

This bill would add to the persons excluded from the definition of a broker-dealer an individual who is a finder, as defined, who satisfied specified requirements, including, among other things, filing an initial statement of information with the Department of Business Oversight and paying a filing fee.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 667

Author:(Wagner)

As Amended Ver:July 8, 2015

Majority vote

Original Committee Reference: B. & F.

SUMMARY: Creates an exemption for "finders" under the Corporate Securities Law of 1968. Specifically, this bill:

1. Defines a "finder" as an individual who introduces or refers one or more accredited investors to an issuer or an issuer to one or more accredited investors, solely for the purpose of a potential sale of securities of the issuer.

2. Prohibits a "finder" from:

   1. Providing services to an issuer for a transaction or a series of related transactions for the offer or sale of securities exceeding a securities purchase price of $15 million in the aggregate;

   2. Negotiating any of the terms of the securities transaction;

   3. Advising any party to the securities transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities;

   4. Conducting any due diligence on the part of any party to the transaction;

   5. Selling or offering to sell in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder;

   6. Receiving directly or indirectly, possession or custody of any funds in connection with the issuer transaction;

   7. Knowingly receive compensation in connection with any offer or sale of securities unless the sale is qualified or unless the security or the transaction is exempt or not otherwise subject to qualification; and,

   8. Making any disclosure to a potential purchaser other than:

      1. The name, address, and contact information of the issuer;

      2. The name, type, price, and aggregate amount of any securities being offered in the issuer transaction; and,

      3. The issuer's industry, location, and years in business.

3. Requires the "finder" to file an initial statement of information (SOI) (created by the Department of Business Oversight (DBO)) with the DBO prior to engaging in any activities that includes the following:

   1. The name and complete business or residential address of the finder; and,

   2. The mailing address of the finder, if different from the business or residential address.

4. Requires the "finder" to pay a filing fee of $300 to DBO with the SOI.

5. Requires the "finder" to file within 30 days of the anniversary of the finder's initial SOI and annually thereafter a renewal SOI with the DBO that includes all of the following:

   1. Representations that:

      1. The finder has complied and will continue to comply with 2)a), to h), above;

      2. The finder has not performed any acts or satisfied any circumstances prohibited by Corporations Code Section 25212 or been sanctioned by the commissioner; and,

      3. The finder has obtained the written agreement with respect to each transaction in which the finder has participated in the prior 12 months.

   2. An indication by the finder as to whether the finder has received transaction-based compensation that is subject to the actual sale of securities by the issuer in any transaction in which the finder participated in the prior 12 months.

6. Requires a filing fee of $275 with the renewal SOI.

7. Requires the finder with each introduction to obtain the informed written consent of each person introduced or referred by the finder to an issuer. The written agreement must be signed by the finder, the issuer, and the person introduced or referred disclosing the following:

   1. The type and amount of compensation that has been or will be paid to the finder and the conditions for the payment of that compensation;

   2. That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities;

   3. Whether the finder is also an owner, directly or indirectly of the securities being offered or sold;

   4. Any actual and potential conflict of interest in connection with the finder's activities related to the issuer transaction;

   5. That the parties to the agreement shall have the right to pursue any available remedies at law or otherwise for any breach of the agreement; and,

   6. Requires representation that the person introduced in an accredited investor.

8. Requires the "finder" to maintain and preserve for five years from the date of the filing of the notice, a copy of the notice, the written consent and all other records relating to any securities transaction in connection with which the finder receives compensation.

9. Provides that if a natural person does not meet the definition of finder, any person introduced or referred by that natural person to an issue shall have the right to pursue any applicable remedy afforded under state law.

10. Allows the commissioner to make, amend and rescind such rules forms and orders as are necessary to carry out the provisions, including rules and forms governing applications and reports, and defining any terms, whether or not used in the law, insofar as the definitions are not inconsistent with the existing law.

11. Provides that for the purpose of rules and forms, the commissioner may classify securities, persons, and matters within his or her jurisdiction, and may prescribe different requirements for different classes.

The Senate amendments:

1. Expand the authority of the commissioner to make, amend and rescind such rules forms and orders as are necessary to carry out the provisions.

2. Provide that for the purpose of rules and forms, the commissioner may classify securities, persons, and matters within his or her jurisdiction, and may prescribe different requirements for different classes.

EXISTING FEDERAL LAW:

1. Establishes the federal Securities Exchange Act of 1934 (Act) which prohibits any broker or dealer from effecting, inducing, or attempting to induce the purchase or sale of any security unless such person is registered with the Securities and Exchange Commission (SEC). (Section 15(a)(1) of the Act)

2. Defines "accredited investor," as: (17 Code of Federal Regulations Section 230.501(a))

   1. Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million at the time of their purchase of securities, exclusive of their primary residence; or,

Any natural person with 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, together with a reasonable expectation of reaching the same income level in the current year.

EXISTING STATE LAW: Provides a broker licensed by the Real Estate Commissioner is exempt from the provisions of Corporations Code Section 25210 when engaged in transactions in any interest in any general or limited partnership, joint venture, unincorporated association, or similar organization (but not a corporation) owned beneficially by no more than 100 persons and formed for the sole purpose of, and engaged solely in, investment in or gain from an interest in real property, including, but not limited to, a sale, exchange, trade, or development. An interest held by a husband and wife shall be considered held by one person for the purposes of this section. [Corporations Code Section 25206]

3. Defines a "broker-dealer" as any person engaged in the business of effecting transactions in securities in this state for the account of others or for his own account. A broker-dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of his own issue. [Corporations Code Section 25004]

4. Requires a broker-dealer to apply and obtain a certificate from the DBO to as a broker-dealer in California. [Corporations Code Section 25210]

5. Defines "issuer" as any person who issues or proposes to issue any security, with exceptions. [Corporations Code Section 25010]

6. Provides that "broker-dealer" does not include several persons, including, among others, banks; trust companies; savings and loan companies; real estate brokers; options exchanges certified by DBO; individuals who trade for their own accounts or in some fiduciary capacity, but not as part of a regular business; issuers; and agents, when they are employees of broker-dealers or issuers. [Corporations Code Section 25004]

7. Authorizes DBO to pursue the following types of enforcement actions against persons who are not licensed as broker-dealers, but who are acting in a manner that requires such licensure. DBO may:

   1. Issue an order to desist and refrain from the activity or activities that warrant licensure, until the required license is obtained. [Corporations Code Section 25532]

   2. Levy an administrative penalty of up to $5,000 for a first violation, up to $10,000 for a second violation, and up to $15,000 for a third and subsequent violation (Corporate Code Section 25252), and include in the administrative action imposing such penalty a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice giving rise to the action. [Corporations Code Section 25254]

   3. Take possession of the property, business, and assets of such person. [Corporations Code Section 25253]

   4. Bring an action in the name of the people of the State of California in Superior Court to enjoin the acts or practices of the person violating the law and enforce compliance, and, if the commissioner determines it is in the public interest, to include in that action a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice constituting the subject matter of the action. [Corporations Code Section 25530]

8. Provides that a person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and who has not, at the time of the sale or purchase, applied for and secured from the commissioner a certificate in effect at the time of sale or purchase, may bring an action for rescission of the sale or purchase, or, if the plaintiff or the defendant no longer owns the security, for damages, as specified. [Corporations Code Section 25501.5]

FISCAL EFFECT: According to the Senate Appropriations Committee, administrative costs of approximately $155,000 annually to DBO, depending on the number of individuals filing as finders, including costs to establish program and develop regulations, some of which may be recoverable through program fees.

COMMENTS: Currently, California does not have a clear statutory regime surrounding finders. About the only protection a purchaser has against an unregistered broker-dealer is Corporations Code Section 25501.5, stated above. This bill puts in statute, regulations regarding finders whom lurk in a grey area of securities law. This bill will exempt from certain broker-dealer requirements those persons who satisfy the statutory definition of finder and act in compliance with certain requirements. The requirements consist of: filing initial and subsequent statements of information and paying related filing fees as set by DBO, obtaining the informed written consent of each investor; and, maintaining certain records. This bill defines a finder, in order to meet the definition of finder, investors introduced by the finder must be accredited investors, and the finder must not participate in negotiating any terms of the investment, advise any party regarding the investment, or sell any securities owned by the finder.

Finders

Currently, both federally and at the state level, the law is vague on the issue of "finders." Finders do not fall within the definition of broker-dealer because they are limited to certain activities. "Finders" is a common term used in the securities environment as an unlicensed individual who introduces an accredited investor to an issuer. In exchange for bringing in a potential accredited investor, the finder receives compensation. The only role of a finder in a securities transaction is the introduction; therefore, finders are not required to register as a broker-dealer. Questions that should be considered when determining whether or not a finder should register as a broker- dealer include:

1. Is the finder planning on being involved in the negotiations for the sale of securities? The more involved the finder, the more likely the finder should register as a broker-dealer.

2. Is the finder intending to discuss with potential accredited investors the details of the securities sold, or otherwise make any recommendations? If yes, the finder should register as a broker-dealer.

3. Will the finder be compensated by a transaction-based compensation with the respect to a securities transaction? If yes, the finder should register as a broker-dealer.

4. Has the finder previously been involved with effecting securities transactions? Any previous compensation or other evidence of previous involvement in effecting securities transaction increases the likelihood that a finder should register as a broker-dealer.

Finders fall in a gray area of the law, which increases the liability of using one and potentially unnecessary litigation. A finder, if found to act as an unregistered broker-dealer could come with grave consequences such as: investor rescission right, the issuer could be found as an aider and abettor, negative publicity, as well as, be subject to criminal penalties, fines, suspension and disbarment.

Federal Regulations

Section 15(a) of the Act requires that persons engaged in broker or dealer activity must register with the SEC pursuant to Section 15(b) of the Act unless an applicable exemption is available. In general, federally, a "broker" is any person "engaged in the business of effecting transactions in securities for the account of others" and a "dealer" is any person "engaged in the business of buying and selling securities for such person’s own account." Although the Act and the rules promulgated thereunder do not specifically define "effecting transactions" or "engaged in the business," the SEC has taken a very expansive view of the scope of those terms. Based on no-action guidance from the SEC, activities that may be deemed (alone or in combination) to confer "broker" status include, among other things:

1. Soliciting investors to enter into securities transactions;

2. Assisting issuers in structuring prospective securities transactions or helping issuers to identify potential purchasers of securities;

3. Participating in the negotiating process or otherwise bringing buyers and sellers of securities together; and;

4. Receiving compensation contingent on the success of a securities transaction or based on the amount or value of a securities transaction.

Activities that have been identified (alone or in combination) by the SEC as indicators of "dealer" status include, among other things:

1. Participating in a selling group, underwriting securities or purchasing or selling securities as principal from or to customers rather than from or to only brokers or dealers;

2. Carrying a dealer inventory (positions intended to be used directly or indirectly to trade with customers) or holding oneself out as a dealer or market-maker or as otherwise willing to buy or sell particular securities on a continuous basis;

3. Obtaining a regular clientele of customers, issuing or originating securities or rendering incidental investment advice to others; and,

4. Engaging in trading transactions for the benefit of others (including for an affiliate or for an affiliate's customers), rather than consistently with one's own judgment and investment and liquidity objectives.

On April 5, 2013, the SEC addressed the potential application of the broker-dealer registration requirements under Section 15(a) of the Act in the context of fundraising activities and other services for private funds. The SEC has observed that certain private fund advisers are paying transaction-based compensation to their personnel for selling interests in a fund and private fund advisers, their personnel and/or their affiliates are receiving transaction-based compensation "for purported investment banking or other broker activities relating to one or more of the fund's portfolio companies." The SEC has consistently viewed transaction-based compensation as broker-dealer activity. The SEC cautioned that the receipt of transaction-based compensation coupled with the types of activities being performed may trigger the requirement to register with the SEC as broker-dealers.

In the early 1990s, the SEC granted no-action relief to an individual whose involvement in securities transactions was limited to one instance of providing a list of names and telephone numbers of potential investors and receiving a success fee for doing so. This no-action position gave rise to the notion that a so-called "finder's exemption" exists in the law. Nonetheless, despite this very limited fact pattern, the SEC has subsequently indicated its disapproval of this no-action position, and has in fact stated that even one instance of transaction-based compensation may be enough for a finding that a person was "engaged in the business" of broker activity, and thus subject to registration. Notably, while the SEC has taken an extremely expansive view of the concept of being "engaged in the business," some courts have been more lenient in this regard, finding that something more than just transaction-based compensation is necessary to require broker registration.

Analysis Prepared by: Mark Farouk / B. & F. / (916) 319-3081 FN: 0001653

 THIRD READING  

Bill No: AB 667

Author: Wagner (R)

Amended: 7/8/15 in Senate

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 7/1/15

AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/27/15

AYES: Lara, Bates, Beall, Hall, Leyva, Mendoza, Nielsen

ASSEMBLY FLOOR: 76-0, 6/2/15 - See last page for vote

SUBJECT: Broker-dealers: exemptions: finders

SOURCE: Corporations Committee of the Business Law Section of the
California State Bar

DIGEST: This bill defines a finder, as specified, and exempts a finder from the requirement to be licensed as a broker-dealer.

ANALYSIS:

Existing law:

1. Defines “broker-dealer” as any person engaged in the business of effecting transactions in securities in California for the account of others or for his or her own account (Corporations Code Section 25004).
   
   

2. Provides that, unless otherwise exempted from the requirement to obtain a certificate from the commissioner, no broker-dealer may effect any transaction in or induce or attempt to induce the purchase or sale of any security in California unless that broker-dealer has first applied for and secured from the commissioner a certificate authorizing that person to act in that capacity (Corporations Code Section 25210).
   
   

3. Authorizes several exemptions from the requirement to hold a certificate as a broker-dealer, as specified (Corporations Code Sections 25004, 25200, 25206, 25207, and 25208).
   
   

4. Authorizes the Department of Business Oversight (DBO) to pursue the following types of enforcement actions against persons who are not licensed as broker-dealers, but who are acting in a manner that requires such licensure. DBO may:
   
   

1. Issue an order to desist and refrain from the activity or activities that warrant licensure, until the required license is obtained (Corporations Code Section 25532).
   
   

2. Levy an administrative penalty of up to $5,000 for a first violation, up to $10,000 for a second violation, and up to $15,000 for a third and subsequent violation (Corporations Code Section 25252), and include in the administrative action imposing such penalty a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice giving rise to the action (Corporations Code Section 25254).
   
   

3. Take possession of the property, business, and assets of such person (Corporations Code Section 25253).
   
   

4. Bring an action in the name of the people of the State of California in Superior Court to enjoin the acts or practices of the person violating the law and enforce compliance, and, if the commissioner determines it is in the public interest, to include in that action a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice constituting the subject matter of the action (Corporations Code Section 25530).
   
   

5. Provides that a person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and who has not, at the time of the sale or purchase, applied for and secured from the commissioner a certificate in effect at the time of sale or purchase, may bring an action for rescission of the sale or purchase, or, if the plaintiff or the defendant no longer owns the security, for damages, as specified (Corporations Code Section 25501.5).

This bill:

1. Defines a finder as a natural person who, for direct or indirect compensation, introduces or refers one or more accredited investors, as defined, to an issuer, or an issuer to one or more accredited investors, solely for the purpose of a potential offer or sale of securities of the issuer in an issuer transaction in this state, and as someone who does not do any of the following:
   
   

1. Provide services to an issuer for a transaction or a series of related transactions whose purchase price exceeds $15 million in the aggregate.
   
   

2. Participate in negotiating any of the terms of the offer or sale of the securities.
   
   

3. Advise any party to the transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities.
   
   

4. Conduct any due diligence on the part of any party to the transaction.
   
   

5. Sell or offer for sale in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder.
   
   

6. Receive, directly or indirectly, possession or custody of any funds in connection with the issuer transaction.
   
   

7. Knowingly receive compensation in connection with any offer or sale of securities, unless the sale is qualified by the Commissioner of Business Oversight (commissioner) or the security or transaction is exempt or not otherwise subject to qualification.
   
   

8. Make any disclosure other than the following limited disclosures: the name, address, and contact information of the issuer; the name, type, price, and aggregate amount of any securities being offered in the issuer transaction; and the issuer’s industry, location, and years in business.
   
   

2. Requires each finder to submit a statement of information about him or herself and pay a filing fee of $300 to DBO before engaging in any authorized finder activities.
   
   

3. Require each finder to submit a renewal statement of information to DBO within 30 days of the anniversary of the finder’s initial statement of information, and annually, thereafter, and to pay a fee of $275 when submitting each renewal statement of information.
   
   

4. Requires, concurrent with each introduction or referral of a potential investor to an issuer, each finder to obtain the informed, written consent of the person introduced or referred, on an agreement that discloses information about the type and amount of compensation that has been or will be paid to the finder, and that contains information regarding actual or potential conflicts of interest that may exist in connection with the finder’s activities.
   
   

5. Provides that a finder who satisfies all of the conditions above is exempt from licensure as a broker-dealer.
   
   

6. Provides that in the event a natural person does not meet the definition of a finder, as set forth in the bill, or does not satisfy all of the requirements applicable to finders, as set forth in the bill, an investor that is introduced or referred by that natural person to an issuer, and who purchases securities of that issuer following that introduction or referral, shall have the right to pursue any applicable remedy afforded under state law, including, without limitation, any applicable remedies available pursuant to Corporations Code Section 25501.5.
   
   

Background

This bill is sponsored by the Corporations Committee of the Business Law Section of the California State Bar to promote and facilitate a regulatory framework to govern the activities and accountability of finders, provide statutory and regulatory certainty for finders and the businesses that rely upon them, and protect investors. According to this bill’s sponsor, “it is widely recognized among business participants that many individuals and entities act as ‘finders’ in the State of California in connection with securities transactions. Finders – generally viewed under California law to mean persons who introduce issuers and investors to each other without negotiating on behalf of either party – are often critical to the success of capital-raising efforts by start-up companies and other small to mid-sized companies that would otherwise be unable to engage a broker-dealer or access needed capital. In fact, it is believed that this is the method by which a vast majority of capital is raised to fund early stage businesses.”

This bill’s sponsor asserts that the vast majority of finders are not registered as broker-dealers, often resulting in inadvertent violations of broker-dealer registration requirements. By relying on finders who could be engaged in illegal broker-dealer conduct, companies risk severe consequences. These risks are either not known or just ignored by issuers and finders. The lack of certainty continues to jeopardize finders and the businesses which rely upon them for crucial funding, as well as other investors.

Comments

This bill is intended to create regulatory certainty for finders and the businesses which use them, by codifying a set of activities that will be legal when performed by persons without a broker-dealer license, who meet the bill’s definition of a finder, and who comply with the bill’s requirements for finders. This bill’s sponsor and supporters believe that by creating a bright-line which clearly distinguishes allowable finder activities from those which do not meet the bill’s definition of finder activities, the bill will encourage persons who act as finders to comply with the bill’s requirements. The value of the bill to persons who follow it is the assurance that they need not become licensed as broker-dealers. Persons who do not meet the bill’s finder definition may require licensure as broker-dealers, depending on their activities.

Prior Legislation

AB 713 (Wagner, 2014 ) was substantially similar to AB 667 but imposed lower filing fees for finders than those contained in AB 667. AB 713 was held on the Senate Appropriations Committee Suspense File.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, AB 667 will result in one-time moderate costs of $50,000 to $100,000 to the State Corporations Fund to cover costs for DBO to promulgate regulations. The bill will result in potentially significant ongoing costs in the range of $155,000 to $300,000 annually to the State Corporations Fund, partially offset by fee revenue, to register and renew finders. At the specified registration fee of $300 per finder, estimated revenue will not cover ongoing costs based on an estimated 80 to 150 finders to be registered and examined annually. First year revenue would be $24,000 to $45,000, and annual ongoing offsetting fee revenue would be $22,000 to $41,250.

SUPPORT: (Verified 8/27/15)

Corporations Committee of the Business Law Section of the California State Bar (source)

McConnell, Dunning & Barwick LLP

Law Offices of Douglas M. Wade PLC

OPPOSITION: (Verified 8/27/15)

None received

ARGUMENTS IN SUPPORT: The State Bar Corporations Committee believes that there is a need for some form of limited regulation of finders as an essential component of an efficient capitals market. “AB 667 effectively addresses this need by creating a straightforward definition of finder and clarifying the precise activities in which a finder may or may not engage. Moreover, we believe that the reporting and informed consent requirements under AB 667 help ensure greater accountability, investor protection, and regulatory oversight.”

McConnell, Dunning & Barwick LLP and the Law Offices of Douglas M. Wade write, “AB 667 creates a straightforward definition of a ‘finder’ and clarifies the scope of capital securities fundraising activities in which a finder may engage, including limiting the investors the finder may introduce to ‘accredited’ investors, and prohibiting the finder from taking custody of funds. By providing clear guidance and establishing meaningful reporting and other requirements for finders, AB 667 will ensure better market transparency, proper accountability, and additional investor protection while at the same time facilitating capital formation for business entities in California.”

ASSEMBLY FLOOR: 76-0, 6/2/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Hadley, Roger Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Chávez, Grove, Harper, Jones-Sawyer

Prepared by: Eileen Newhall / B. & F.I. / (916) 651-4102

8/31/15 15:45:58

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 667 (Wagner) - Broker-dealers: exemptions: finders

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 667 would establish a new regulatory framework to govern the activities and accountability of “finders,” as defined, and exempt a finder from the requirement to be licensed as a broker-dealer, as specified.

Fiscal Impact:

• One-time moderate costs of $50,000 to $100,000 (Special Fund*) to the Department of Business Oversight (DBO) to promulgate regulations.

• Potentially significant ongoing costs in the range of $155,000 to $300,000 (Special Fund*), partially offset by fee revenue, to register and renew finders. At the specified registration fee of $300 per finder, estimated revenues will not cover ongoing costs based on an estimated 80-150 finders to be registered and examined annually. First-year revenue would be $24,000 to $45,000, and annual ongoing offsetting fee revenue would be $22,000 to $41,250.

*State Corporations Fund

Background:

Existing law defines a “broker-dealer” as any person engaged in the business of effecting transactions in securities in California for the account of others or for his or her own account. Broker-dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of his or her own issue. (Corporations Code (CC) § 25004.)

Under existing law, no broker-dealer, unless otherwise exempt, may affect any transaction in the purchase or sale of any security in California unless that broker-dealer has first applied for and secured from the DBO Commissioner a certificate authorizing that person to act in that capacity. (CC § 25210.)

Existing state law provides for several exemptions from the requirement to hold a certificate as a broker-dealer, including persons without a physical location in California, who sell only to specified persons in California and only under specified circumstances, real estate brokers and financial institutions, under certain circumstances, and persons licensed under the Capital Access Company Law. (CC §§ 25200, 25206-25208.)

Under federal law, Section 29 of the Securities Exchange Act requires that offers and sales of securities in the U.S. must be made by a registered broker-dealer or appropriately licensed individuals associated with a registered broker-dealer. An exemption often relied upon by many in the securities industry is the so-called “finders” exemption. If a “finder” assists in negotiations, participates in structuring the transaction, pricing the security or any other activity in the transaction other than introducing the parties, the finder may be deemed to be acting as a broker-dealer. When looking for additional capital, many companies consider working with finders who offer to find investors and to serve as an intermediary between the company as an issuer of securities and potential investors.

Proposed Law:

This bill would establish a new regulatory framework to govern the activities and accountability of “finders,” as defined, and exempt a finder from the requirement to be licensed as a broker-dealer, as specified. This bill:

• Defines a “finder” is a natural person who, for direct or indirect compensation, introduces or refers one or more accredited investors, as defined in federal law, to an issuer or an issuer to one or more accredited investors, solely for the purpose of a potential offer or sale of securities of the issuer in an issuer transaction in this state, and who does not do any of the following:

• Provide services to an issuer for a transaction or a series of related transactions for the offer or sale of securities of the issuer that exceeds a securities purchase price of $15 million in the aggregate.

• Participate in negotiating any of the terms of the offer or sale of the securities.

• Advise any party to the transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities.

• Conduct any due diligence on the part of any party to the transaction.

• Sell or offer for sale in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder.

• Receive, directly or indirectly, possession or custody of any funds in connection with the issuer transaction.

• Knowingly receive compensation in connection with any offer or sale of securities unless the sale is qualified under this division or unless the security or the transaction is exempt or not otherwise subject to qualification.

• Make any disclosure to a potential purchaser other than the following:

• The name, address, and contact information of the issuer.

• The name, type, price, and aggregate amount of any securities being offered in the issuer transaction.

• The issuer’s industry, location, and years in business.

• Provides that a finder who satisfies all of the following conditions is exempt from licensure as a broker-dealer.

  • Requires the finder to file with the commissioner before engaging in any activities, as specified, on a form prescribed by the commissioner, an initial statement of information that shall include specified information.

  • A filing fee of $300 submitted to the DBO along with the initial statement of information required.

• Requires the finder to file with the commissioner within 30 days of the anniversary of the finder’s initial statement of information, and annually thereafter, on a form prescribed by the commissioner, a renewal statement of information that includes specified information and a filing fee of $275 to accompany each renewal statement of information.

• Concurrently with each introduction, requires the finder to obtain the informed, written consent of each person introduced or referred by the finder to an issuer, in a written agreement signed by the finder, the issuer, and the person introduced or referred, disclosing the following:

  • The type and amount of compensation that has been or will be paid to the finder in connection with the introduction or referral and the conditions for payment of that compensation.

  • That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities or as to the advisability of investing in, purchasing, or selling the securities.

  • Whether the finder is also an owner, directly or indirectly, of the securities being offered or sold.

  • Any actual and potential conflict of interest in connection with the finder’s activities related to the issuer transaction.

  • That the parties to the agreement shall have the right to pursue any available remedies at law or otherwise for any breach of the agreement.

• Requires the agreement to also include a representation by the person introduced or referred by the finder to the issuer that the person is an accredited investor, as defined, and that the person knowingly consents to the payment of the compensation described therein.

• Requires the finder to maintain and preserve, for a period of five years from the date of filing of the notice as prescribed, a copy of the notice, the written agreement, and all other records relating to any offer or sale of securities in connection with which the finder receives compensation, as the commissioner may by rule require. The finder, upon written request of the commissioner, shall furnish to the commissioner any records required to be maintained and preserved under this subdivision.

• Provides that a natural person who is engaged in the business of effecting transactions in securities and is not otherwise exempt from Section 25210 shall be subject to the requirements of Section 25210, if the individual fails to meet the definition of “finder” set forth in subdivision (a), or does not satisfy all the conditions set forth in the bill.

• In the event a natural person does not meet the definition of “finder” set forth in subdivision (a) or does not satisfy all the conditions set forth in subdivisions (c) to (f), inclusive, any person introduced or referred by that natural person to an issuer, who purchases securities of that issuer in an issuer transaction following that introduction or referral, shall have the right to pursue any applicable remedy afforded under state law, including, without limitation, any applicable remedies.

• Authorizes the DBO commissioner to periodically make, amend, and rescind such rules, forms, and orders as are necessary to carry out the provisions of this section, including rules and forms governing applications and reports, and defining any terms, whether or not used in this law, insofar as the definitions are not inconsistent with the provisions of this law. For the purpose of rules and forms, the commissioner may classify securities, persons, and matters within his or her jurisdiction, and may prescribe different requirements for different classes.

Related Legislation:

AB 713 (Wagner) 2014 was substantially similar to this measure. This bill was held on the Suspense File of this Committee.

-- END --

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Marty Block, Chair

2015 - 2016 Regular

Bill No: AB 667 Hearing Date: July 1, 2015

Subject: Broker-dealers: exemptions: finders.

SUMMARY

Defines a finder, as specified, and exempts a finder from the requirement to be licensed as a broker-dealer.

DESCRIPTION

1. Defines a finder as a natural person who, for direct or indirect compensation, introduces or refers one or more accredited investors, as defined, to an issuer, or an issuer to one or more accredited investors, solely for the purpose of a potential offer or sale of securities of the issuer in an issuer transaction in this state, and as someone who does not do any of the following:
   
   

   1. Provide services to an issuer for a transaction or a series of related transactions whose purchase price exceeds $15 million in the aggregate.
      
      

   2. Participate in negotiating any of the terms of the offer or sale of the securities.
      
      

   3. Advise any party to the transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities.
      
      

   4. Conduct any due diligence on the part of any party to the transaction.
      
      

   5. Sell or offer for sale in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder.
      
      

   6. Receive, directly or indirectly, possession or custody of any funds in connection with the issuer transaction.
      
      

   7. Knowingly receive compensation in connection with any offer or sale of securities, unless the sale is qualified by the Commissioner of Business Oversight (commissioner) or the security or transaction is exempt or not otherwise subject to qualification.
      
      

   8. Make any disclosure other than the following limited disclosures: the name, address, and contact information of the issuer; the name, type, price, and aggregate amount of any securities being offered in the issuer transaction; and the issuer’s industry, location, and years in business.
      
      

2. Requires each finder to submit a statement of information about him or herself and pay a filing fee of $300 to the Department of Business Oversight (DBO) before engaging in any authorized finder activities.
   
   

3. Require each finder to submit a renewal statement of information to DBO within 30 days of the anniversary of the finder’s initial statement of information, and annually, thereafter, and to pay a fee of $275 when submitting each renewal statement of information. In each of those statements of information, the finder must affirmatively represent that he or she has complied and will continue to comply with the provisions described in Number 1 above, has not performed any acts or satisfied any circumstances prohibited by Corporations Code Section 25212 or Securities and Exchange Commission Rule 506 (the so-called “bad boy” provisions), has not been sanctioned by the commissioner pursuant to Section 25212, and has obtained the informed, written consent of each person introduced or referred by the finder to an issuer during each transaction in which the finder participated during the prior 12 months, as specified below. Each renewal statement of information must also include an indication by the finder regarding whether he or she has received transaction-based compensation during the prior 12 months.
   
   

4. Concurrent with each introduction or referral of a potential investor to an issuer, requires each finder to obtain the informed, written consent of the person introduced or referred, on an agreement that discloses all of the following:
   
   

   1. The type and amount of compensation that has been or will be paid to the finder in connection with the introduction or referral, and the conditions for payment of that compensation.
      
      

   2. That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities.
      
      

   3. Whether the finder is also an owner, directly or indirectly, of the securities being offered or sold.
      
      

   4. Any actual or potential conflict of interest in connection with the finder’s activities related to the issuer transaction.
      
      

   5. That the parties to the agreement have the right to pursue any available remedies at law or otherwise for any breach of the agreement.
      
      

To satisfy the requirements of the bill, this signed, written agreement must also contain a representation by the potential investor that he or she is an accredited investor and that he or she knowingly consents to the payment of the compensation described in the agreement.

5. Requires each finder to maintain and preserve, for a period of at least five years, all notices, agreements, and other records relating to any offer or sale of securities in connection with which the finder received compensation, and requires each finder to furnish those documents to the commissioner upon written request by the commissioner.
   
   

6. Provides that a finder who satisfies all of the conditions above is exempt from licensure as a broker-dealer
   
   

7. Provides that a natural person who is engaged in the business of effecting transactions in securities and is not otherwise exempt from the requirement to be licensed as a broker-dealer is subject to licensure requirements, if that individual fails to meet the definition of a finder as set forth in the bill and or does not satisfy all of the requirements applicable to finders, as set forth in the bill.
   
   

8. Provides that in the event a natural person does not meet the definition of a finder, as set forth in the bill, or does not satisfy all of the requirements applicable to finders, as set forth in the bill, an investor that is introduced or referred by that natural person to an issuer, and who purchases securities of that issuer following that introduction or referral, shall have the right to pursue any applicable remedy afforded under state law, including, without limitation, any applicable remedies available pursuant to Corporations Code Section 25501.5.
   
   

EXISTING FEDERAL LAW AND REGULATION

1. Provides for the Securities Act of 1933, and for its implementing regulation, Regulation D, which provide a regulatory framework for the qualification and sale of securities and for the protection of investors that purchase those securities. Generally speaking, the Securities Act of 1933 and Regulation D require the 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 solicitation is covered by an exemption. They also require those who offer (i.e., market) and sell securities to be licensed or registered as investment advisers or licensed as broker-dealers, unless either the transaction or the activity being undertaken is exempt.
   
   

2. Contains several exemptions from the requirement for securities issuers to register the sale of their securities with the SEC, and includes among those exemptions the sale of securities in accordance with Regulation D, Rules 501 through 508. Rule 501 of Regulation D defines accredited investors as, among other things, financial institutions, securities broker-dealers, large pension plans, corporate entities with assets in excess of $5 million, and other large, financially sophisticated entities. An accredited investor also includes:
   
   

   1. Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million at the time of their purchase of securities, exclusive of their primary residence; or
      
      

   2. Any natural person with 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, together with a reasonable expectation of reaching the same income level in the current year.
      
      

EXISTING LAW

1. Defines “broker-dealer” as any person engaged in the business of effecting transactions in securities in California for the account of others or for his or her own account (Corporations Code Section 25004).
   
   

2. Provides that, unless otherwise exempted from the requirement to obtain a certificate from the commissioner, no broker-dealer may effect any transaction in or induce or attempt to induce the purchase or sale of any security in California unless that broker-dealer has first applied for and secured from the commissioner a certificate authorizing that person to act in that capacity (Corporations Code Section 25210).
   
   

3. Authorizes several exemptions from the requirement to hold a certificate as a broker-dealer, including persons without a physical location in California, who sell only to specified persons in California and only under specified circumstances (Section 25200); real estate brokers and financial institutions, under certain circumstances (Sections 25206 and 25207); and persons licensed under the Capital Access Company Law (Section 25208).
   
   

4. Further provides that “broker-dealer” does not include several persons, including, among others, banks; trust companies; savings and loan companies; real estate brokers; options exchanges certified by DBO; individuals who trade for their own accounts or in some fiduciary capacity, but not as part of a regular business; issuers; and agents, when they are employees of broker-dealers or issuers (Section 25004).
   
   

5. Authorizes DBO to pursue the following types of enforcement actions against persons who are not licensed as broker-dealers, but who are acting in a manner that requires such licensure. DBO may:
   
   

   1. Issue an order to desist and refrain from the activity or activities that warrant licensure, until the required license is obtained (Section 25532).
      
      

1. Levy an administrative penalty of up to $5,000 for a first violation, up to $10,000 for a second violation, and up to $15,000 for a third and subsequent violation (Section 25252), and include in the administrative action imposing such penalty a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice giving rise to the action (Section 25254).
   
   

2. Take possession of the property, business, and assets of such person (Section 25253).
   
   

3. Bring an action in the name of the people of the State of California in Superior Court to enjoin the acts or practices of the person violating the law and enforce compliance, and, if the commissioner determines it is in the public interest, to include in that action a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice constituting the subject matter of the action (Section 25530).
   
   

1. Provides that a person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and who has not, at the time of the sale or purchase, applied for and secured from the commissioner a certificate in effect at the time of sale or purchase, may bring an action for rescission of the sale or purchase, or, if the plaintiff or the defendant no longer owns the security, for damages, as specified (Section 25501.5).

COMMENTS

1. Purpose: This bill is sponsored by the Corporations Committee of the Business Law Section of the California State Bar to promote and facilitate a regulatory framework to govern the activities and accountability of finders, provide statutory and regulatory certainty for finders and the businesses that rely upon them, and protect investors.
   
   

2. Background: According to this bill’s sponsor, “it is widely recognized among business participants that many individuals and entities act as ‘finders’ in the State of California in connection with securities transactions. Finders – generally viewed under California law to mean persons who introduce issuers and investors to each other without negotiating on behalf of either party – are often critical to the success of capital-raising efforts by start-up companies and other small to mid-sized companies that would otherwise be unable to engage a broker-dealer or access needed capital. In fact, it is believed that this is the method by which a vast majority of capital is raised to fund early stage businesses.”
   
   The sponsor asserts that the vast majority of finders are not registered as broker-dealers, often resulting in inadvertent violations of broker-dealer registration requirements. By relying on finders who could be engaged in illegal broker-dealer conduct, companies risk severe consequences. These risks are either not known or just ignored by issuers and finders. The lack of certainty continues to jeopardize finders and the businesses which rely upon them for crucial funding, as well as other investors.
   
   

3. Discussion: This bill is intended to create regulatory certainty for finders and the businesses which use them, by codifying a set of activities that will be legal when performed by persons without a broker-dealer license, who meet the bill’s definition of a finder, and who comply with the bill’s requirements for finders. This bill’s sponsor and supporters believe that by creating a bright-line which clearly distinguishes allowable finder activities from those which do not meet the bill’s definition of finder activities, the bill will encourage persons who act as finders to comply with the bill’s requirements. The value of the bill to persons who follow it is the assurance that they need not become licensed as broker-dealers. Persons who do not meet the bill’s finder definition may require licensure as broker-dealers, depending on their activities.
   
   This bill is substantially similar to AB 713 (Wagner) from 2014, a measure which passed the Senate Banking and Financial Institutions Committee but was held on the Senate Appropriations Committee Suspense File. AB 667 authorizes filing fees that are considerably higher than those authorized in AB 713, in an attempt to address the cost concerns raised by DBO around AB 713.
   
   

4. Summary of Arguments in Support:
   
   

   1. AB 667 is sponsored by the Corporations Committee of the Business Law Section of the California State Bar and supported by McConnell, Dunning & Barwick LLP and the Law Offices of Douglas M. Wade. “The State Bar Corporations Committee believes that there is a need for some form of limited regulation of finders as an essential component of an efficient capitals market. AB 667 effectively addresses this need by creating a straightforward definition of finder and clarifying the precise activities in which a finder may or may not engage. Moreover, we believe that the reporting and informed consent requirements under AB 667 help ensure greater accountability, investor protection, and regulatory oversight.”
      
      The bill’s supporters write, “AB 667 creates a straightforward definition of a ‘finder’ and clarifies the scope of capital securities fundraising activities in which a finder may engage, including limiting the investors the finder may introduce to ‘accredited’ investors, and prohibiting the finder from taking custody of funds. By providing clear guidance and establishing meaningful reporting and other requirements for finders, AB 667 will ensure better market transparency, proper accountability, and additional investor protection while at the same time facilitating capital formation for business entities in California.”

5. Summary of Arguments in Opposition: None received.

6. Amendments:
   
   

   1. At the request of the Department of Business Oversight, the author will be proposing the following amendments in Committee:
      
      Page 5, line 12, insert the following:
      
      (h) The commissioner may from time to time make, amend, and rescind such rules, forms, and orders as are necessary to carry out the provisions of this law, including rules and forms governing applications and reports, and defining any terms, whether or not used in this law, insofar as the definitions are not inconsistent with the provisions of this law. For the purpose of rules and forms, the commissioner may classify securities, persons, and matters within his jurisdiction, and may prescribe different requirements for different classes.

7. Prior and Related Legislation:
   
   

   1. AB 713 (Wagner), 2013-14 Legislative Session. Substantially similar to AB 667. Held on the Senate Appropriations Committee Suspense File.
      
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Corporations Committee of the Business Law Section of the California State Bar (sponsor)

McConnell, Dunning & Barwick LLP

Law Offices of Douglas M. Wade PLC

Opposition

None received

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 667

Author:(Wagner)

As Amended Ver:April 6, 2015

Majority vote

SUMMARY: Creates an exemption for "finders" under the Corporate Securities Law of 1968. Specifically, this bill:

1. Defines a "finder" as an individual who introduces or refers one or more accredited investors to an issuer or an issuer to one or more accredited investors, solely for the purpose of a potential sale of securities of the issuer.

2. Prohibits a "finder" from:

   1. Providing services to an issuer for a transaction or a series of related transactions for the offer or sale of securities exceeding a securities purchase price of $15 million in the aggregate;

   2. Negotiating any of the terms of the securities transaction;

   3. Advising any party to the securities transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities;

   4. Conducting any due diligence on the part of any party to the transaction;

   5. Selling or offering to sell in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder;

   6. Receiving directly or indirectly, possession or custody of any funds in connection with the issuer transaction;

   7. Knowingly receive compensation in connection with any offer or sale of securities unless the sale is qualified or unless the security or the transaction is exempt or not otherwise subject to qualification; and,

   8. Making any disclosure to a potential purchaser other than:

      1. The name, address, and contact information of the issuer;

      2. The name, type, price, and aggregate amount of any securities being offered in the issuer transaction; and,

      3. The issuer's industry, location, and years in business.

3. Requires the "finder" to file an initial statement of information (SOI) (created by the Department of Business Oversight (DBO)) with the DBO prior to engaging in any activities that includes the following:

   1. The name and complete business or residential address of the finder; and,

   2. The mailing address of the finder, if different from the business or residential address.

4. Requires the "finder" to pay a filing fee of $300 to DBO with the SOI.

5. Requires the "finder" to file within 30 days of the anniversary of the finder's initial SOI and annually thereafter a renewal SOI with the DBO that includes all of the following:

   1. Representations that:

      1. The finder has complied and will continue to comply with 2)a), to h), above;

      2. The finder has not performed any acts or satisfied any circumstances prohibited by Corporations Code Section 25212 or been sanctioned by the commissioner; and,

      3. The finder has obtained the written agreement with respect to each transaction in which the finder has participated in the prior 12 months.

   2. An indication by the finder as to whether the finder has received transaction-based compensation that is subject to the actual sale of securities by the issuer in any transaction in which the finder participated in the prior 12 months.

6. Requires a filing fee of $275 with the renewal SOI.

7. Requires the finder with each introduction to obtain the informed written consent of each person introduced or referred by the finder to an issuer. The written agreement must be signed by the finder, the issuer, and the person introduced or referred disclosing the following:

   1. The type and amount of compensation that has been or will be paid to the finder and the conditions for the payment of that compensation;

   2. That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities;

   3. Whether the finder is also an owner, directly or indirectly of the securities being offered or sold;

   4. Any actual and potential conflict of interest in connection with the finder's activities related to the issuer transaction;

   5. That the parties to the agreement shall have the right to pursue any available remedies at law or otherwise for any breach of the agreement; and,

   6. Requires representation that the person introduced in an accredited investor.

8. Requires the "finder" to maintain and preserve for 5 years from the date of the filing of the notice, a copy of the notice, the written consent and all other records relating to any securities transaction in connection with which the finder receives compensation.

9. Provides that if a natural person does not meet the definition of finder, any person introduced or referred by that natural person to an issue shall have the right to pursue any applicable remedy afforded under state law.

EXISTING STATE LAW:

1. Provides a broker licensed by the Real Estate Commissioner is exempt from the provisions of Corporations Code Section 25210 when engaged in transactions in any interest in any general or limited partnership, joint venture, unincorporated association, or similar organization (but not a corporation) owned beneficially by no more than 100 persons and formed for the sole purpose of, and engaged solely in, investment in or gain from an interest in real property, including, but not limited to, a sale, exchange, trade, or development. An interest held by a husband and wife shall be considered held by one person for the purposes of this section. [Corporations Code Section 25206]

2. Defines a "broker-dealer" as any person engaged in the business of effecting transactions in securities in this state for the account of others or for his own account. A broker-dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of his own issue. [Corporations Code Section 25004]

3. Requires a broker-dealer to apply and obtain a certificate from the DBO to as a broker-dealer in California. [Corporations Code Section 25210]

4. Defines "issuer" as any person who issues or proposes to issue any security, with exceptions. [Corporations Code Section 25010]

5. Provides that "broker-dealer" does not include several persons, including, among others, banks; trust companies; savings and loan companies; real estate brokers; options exchanges certified by DBO; individuals who trade for their own accounts or in some fiduciary capacity, but not as part of a regular business; issuers; and agents, when they are employees of broker-dealers or issuers. [Corporations Code Section 25004]

6. Authorizes DBO to pursue the following types of enforcement actions against persons who are not licensed as broker-dealers, but who are acting in a manner that requires such licensure. DBO may:

   1. Issue an order to desist and refrain from the activity or activities that warrant licensure, until the required license is obtained. [Corporations Code Section 25532]

   2. Levy an administrative penalty of up to $5,000 for a first violation, up to $10,000 for a second violation, and up to $15,000 for a third and subsequent violation (Corporate Code Section 25252), and include in the administrative action imposing such penalty a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice giving rise to the action. [Corporations Code Section 25254]

   3. Take possession of the property, business, and assets of such person. [Corporations Code Section 25253]

   4. Bring an action in the name of the people of the State of California in Superior Court to enjoin the acts or practices of the person violating the law and enforce compliance, and, if the commissioner determines it is in the public interest, to include in that action a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice constituting the subject matter of the action. [Corporations Code Section 25530]

7. Provides that a person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and who has not, at the time of the sale or purchase, applied for and secured from the commissioner a certificate in effect at the time of sale or purchase, may bring an action for rescission of the sale or purchase, or, if the plaintiff or the defendant no longer owns the security, for damages, as specified. [Corporations Code Section 25501.5]

EXISTING FEDERAL LAW:

1. Establishes the federal Securities Exchange Act of 1934 (Act) which prohibits any broker or dealer from effecting, inducing, or attempting to induce the purchase or sale of any security unless such person is registered with the Securities and Exchange Commission (SEC). (Section 15(a)(1) of the Act)

2. Defines "accredited investor," as:(17 Code of Federal Regulations Section 230.501(a))

   1. Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million at the time of their purchase of securities, exclusive of their primary residence; or,

   2. Any natural person with 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, together with a reasonable expectation of reaching the same income level in the current year.

FISCAL EFFECT: According to the Assembly Appropriations Committee, administrative costs of approximately $155,000 annually to DBO, depending on the number of individuals filing as finders, including costs to establish program and develop regulations, some of which may be recoverable through program fees.

COMMENTS:

Currently, California does not have a clear statutory regime surrounding finders. About the only protection a purchaser has against an unregistered broker-dealer is Corporations Code Section 25501.5, stated above. This bill puts in statute, regulations regarding finders whom lurk in a grey area of securities law. This bill will exempt from certain broker-dealer requirements those persons who satisfy the statutory definition of finder and act in compliance with certain requirements. The requirements consist of: filing initial and subsequent statements of information and paying related filing fees as set by DBO, obtaining the informed written consent of each investor; and, maintaining certain records. This bill defines a finder, in order to meet the definition of finder, investors introduced by the finder must be accredited investors, and the finder must not participate in negotiating any terms of the investment, advise any party regarding the investment, or sell any securities owned by the finder.

Finders

Currently, both federally and at the state level, the law is vague on the issue of "finders." Finders do not fall within the definition of broker-dealer because they are limited to certain activities. "Finders" is a common term used in the securities environment as an unlicensed individual who introduces an accredited investor to an issuer. In exchange for bringing in a potential accredited investor, the finder receives compensation. The only role of a finder in a securities transaction is the introduction; therefore, finders are not required to register as a broker-dealer. Questions that should be considered when determining whether or not a finder should register as a broker- dealer include:

1. Is the finder planning on being involved in the negotiations for the sale of securities? The more involved the finder, the more likely the finder should register as a broker-dealer.

2. Is the finder intending to discuss with potential accredited investors the details of the securities sold, or otherwise make any recommendations? If yes, the finder should register as a broker-dealer.

3. Will the finder be compensated by a transaction-based compensation with the respect to a securities transaction? If yes, the finder should register as a broker-dealer.

4. Has the finder previously been involved with effecting securities transactions? Any previous compensation or other evidence of previous involvement in effecting securities transaction increases the likelihood that a finder should register as a broker-dealer.

Finders fall in a gray area of the law, which increases the liability of using one and potentially unnecessary litigation. A finder, if found to act as an unregistered broker-dealer could come with grave consequences such as: investor rescission right, the issuer could be found as an aider and abettor, negative publicity, as well as, be subject to criminal penalties, fines, suspension and disbarment.

Federal Regulations

Section 15(a) of the Act requires that persons engaged in broker or dealer activity must register with the SEC pursuant to Section 15(b) of the Act unless an applicable exemption is available. In general, federally, a "broker" is any person "engaged in the business of effecting transactions in securities for the account of others" and a "dealer" is any person "engaged in the business of buying and selling securities for such person’s own account." Although the Act and the rules promulgated thereunder do not specifically define "effecting transactions" or "engaged in the business," the SEC has taken a very expansive view of the scope of those terms. Based on no-action guidance from the SEC, activities that may be deemed (alone or in combination) to confer "broker" status include, among other things:

1. Soliciting investors to enter into securities transactions;

2. Assisting issuers in structuring prospective securities transactions or helping issuers to identify potential purchasers of securities;

3. Participating in the negotiating process or otherwise bringing buyers and sellers of securities together; and;

4. Receiving compensation contingent on the success of a securities transaction or based on the amount or value of a securities transaction.

Activities that have been identified (alone or in combination) by the SEC as indicators of "dealer" status include, among other things:

1. Participating in a selling group, underwriting securities or purchasing or selling securities as principal from or to customers rather than from or to only brokers or dealers;

2. Carrying a dealer inventory (positions intended to be used directly or indirectly to trade with customers) or holding oneself out as a dealer or market-maker or as otherwise willing to buy or sell particular securities on a continuous basis;

3. Obtaining a regular clientele of customers, issuing or originating securities or rendering incidental investment advice to others; and,

4. Engaging in trading transactions for the benefit of others (including for an affiliate or for an affiliate’s customers), rather than consistently with one’s own judgment and investment and liquidity objectives.

On April 5, 2013, the SEC addressed the potential application of the broker-dealer registration requirements under Section 15(a) of the Act in the context of fundraising activities and other services for private funds. The SEC has observed that certain private fund advisers are paying transaction-based compensation to their personnel for selling interests in a fund and private fund advisers, their personnel and/or their affiliates are receiving transaction-based compensation "for purported investment banking or other broker activities relating to one or more of the fund's portfolio companies." The SEC has consistently viewed transaction-based compensation as broker-dealer activity. The SEC cautioned that the receipt of transaction-based compensation coupled with the types of activities being performed may trigger the requirement to register with the SEC as broker-dealers.

In the early 1990s, the SEC granted no-action relief to an individual whose involvement in securities transactions was limited to one instance of providing a list of names and telephone numbers of potential investors and receiving a success fee for doing so. This no-action position gave rise to the notion that a so-called "finder's exemption" exists in the law. Nonetheless, despite this very limited fact pattern, the SEC has subsequently indicated its disapproval of this no-action position, and has in fact stated that even one instance of transaction-based compensation may be enough for a finding that a person was "engaged in the business" of broker activity, and thus subject to registration. Notably, while the SEC has taken an extremely expansive view of the concept of being "engaged in the business," some courts have been more lenient in this regard, finding that something more than just transaction-based compensation is necessary to require broker registration.

Other States

Three other states have enacted finder legislation; Texas, Michigan and Minnesota.

Michigan requires a "finder" (as defined under Michigan law) to register as an investment adviser and finder activities are limited to "locating, introducing, or referring potential purchasers or sellers."

The Texas State Securities Board adopted regulations to provide for a restricted registration system for finders (as defined by regulation). A finder would be limited to introducing only accredited investors and would not be permitted to negotiate the terms of any investment or give any advice about entering the investment. Securities examination requirements would be waived for finders.

In adopting the Uniform Securities Act of 2002, Minnesota included a non-standard provision, which exempted private placement broker-dealers representing issuers in connection with any exempt transaction from registering as agents. Minnesota conditioned the availability on the absence of any disciplinary history, prohibited the handling or possession of funds and securities, and required a notice filing and consent to service of process. Minnesota’s provision permits a private placement broker-dealer to register only once with the state securities regulator but allows the private placement broker-dealer to represent multiple issuers.

Analysis Prepared by: Kathleen O'Malley / B. & F. / (916) 319-3081 FN: 0000562

Date of Hearing: May 13, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 667

Author:(Wagner) – As Amended Ver:April 6, 2015

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill creates a regulatory regime for securities "finders" under the Corporate Securities Law of 1968 separate from the regulation of securities brokers and dealers. Specifically, this bill:

1) Defines a "finder" as an individual who introduces or refers accredited investors to issuers solely for the purpose of a potential sale of qualified or exempt securities of up to $15 million of the issuer subject to specific restrictions on the manner of participation in the offering and finder disclosures to potential investors.

2) Requires the finder to file an initial statement of information (SOI) with the Department of Business Oversight (DBO) and pay a $300 initial fee, and annually renew the SOI with the DOB along with a $275 annual fee.

3) Establishes procedures for finders to make disclosures of interests and obtain written consent from potential investors, and establishes legal recourse for investors.

FISCAL EFFECT:

Administrative costs of approximately $155,000 annually to DBO, depending on the number of individuals filing as finders, including costs to establish program and develop regulations, some of which may be recoverable through program fees.

COMMENTS:

1) Purpose. According to the sponsor, the Corporations Committee of the Business Law Section of the State Bar of California, finders play a critical role in capital raising efforts by start-up and other small to mid-sized companies. The sponsor believes there are many finders currently operating in California, facilitating a majority of the capital raised for early stage businesses. Under current law, the scope of permitted activities for finders is not well defined, often resulting in finders inadvertently violating broker-dealer requirements. The sponsor asserts AB 667 is an effort to regulate finders and finder activity, creating clear guidance for finders and the businesses that rely on their services.

2) Broker-Dealers. Traditional intermediaries that facilitate and effect securities transactions between issuers and purchasers are regulated as broker-dealers. Broker-dealers may effect transactions on behalf of clients (broking), or their own account (dealing). Broker-dealers are commonly involved in the distribution of securities in an offering, and are regulated by the federal Securities and Exchange Commission, the Financial Industry Regulatory Authority, and in California, by DBO.

The penalty for engaging in broker-dealer activities without the proper registration or license can be severe. Both the state and federal law allow persons who purchased securities from an unlicensed broker-dealer to rescind their sales and seek any consequential damages, causing potentially catastrophic losses to issuers. Unlicensed broker-dealers can also be subject to substantial civil and criminal penalties.

3) Finders. Neither federal nor state law currently define securities "finders" as a separate class of person or regulated activity. "Finder" is a term commonly used in securities offerings to refer to unlicensed individuals who introduce investors to issuers in exchange for a fee. So long as the finder does not participate in the actual sale or transfer of securities, and is compensated for the introduction only, it is usually not required to register as a broker-dealer. Conversely, negotiating securities sales, recommending offerings, and transaction-based compensation will often require an individual to register as a broker-dealer.

The SEC granted no-action relief in the 1990s to an individual whose involvement in securities transactions was limited to an instance of providing a list of names and telephone numbers to potential investors for a fee. The no-action position gave rise to the "finder's exemption" in federal securities law. Since that time, the SEC has narrowly interpreted this exemption, enforcing most facilitation activity under the broker-dealer rules.

Three states, Texas, Michigan, and Minnesota, have each enacted securities finder legislation similar to the type proposed in AB 667.

4) Keepers? The central policy question in AB 667 is whether a new regulatory structure for securities finders will bring currently-unregulated activity within the control of DBO, or whether it will incentivize current broker-dealers to re-register as finders. The latter circumstance may be problematic if broker-dealers re-register in order to avoid fiduciary obligations, especially if those obligations are strengthened in the near future. The Committee may wish to consider whether the limited adoption of securities finder laws, particularly at the federal level and the state of New York, suggests sufficient apprehension over the policy among the country's top securities regulators.

On the other hand, California leads the nation, and arguably the world, in start-up company creation and innovation, and this activity has been a major driver of the state's economic performance and success as a magnet for talent. Capital formation is a critical element enabling this activity, and any incremental benefit to the state's capital market could lead to a significant increase in that performance and success.

5) Previous Legislation. AB 713 (Wagner) of 2013-2014 would have established a similar finders program to that proposed here, albeit with a lesser fee regime. AB 713 was held on the Suspense File of the Senate Appropriations Committee.

Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081

Date of Hearing: April 29, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 667

Author:(Wagner) – As Amended Ver:April 6, 2015

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill creates a regulatory regime for securities "finders" under the Corporate Securities Law of 1968 separate from the regulation of securities brokers and dealers. Specifically, this bill:

1) Defines a "finder" as an individual who introduces or refers accredited investors to issuers solely for the purpose of a potential sale of qualified or exempt securities of up to $15 million of the issuer subject to specific restrictions on the manner of participation in the offering and finder disclosures to potential investors.

2) Requires the finder to file an initial statement of information (SOI) with the Department of Business Oversight (DBO) and pay a $300 initial fee, and annually renew the SOI with the DOB along with a $275 annual fee.

3) Establishes procedures for finders to make disclosures of interests and obtain written consent from potential investors, and establishes legal recourse for investors.

FISCAL EFFECT:

Administrative costs of approximately $155,000 annually to DBO, depending on the number of individuals filing as finders, including costs to establish program and develop regulations, some of which may be recoverable through program fees.

COMMENTS:

1) Purpose. According to the sponsor, the Corporations Committee of the Business Law Section of the State Bar of California, finders play a critical role in capital raising efforts by start-up and other small to mid-sized companies. The sponsor believes there are many finders currently operating in California, facilitating a majority of the capital raised for early stage businesses. Under current law, the scope of permitted activities for finders is not well defined, often resulting in finders inadvertently violating broker-dealer requirements. The sponsor asserts AB 667 is an effort to regulate finders and finder activity, creating clear guidance for finders and the businesses that rely on their services.

2) Broker-Dealers. Traditional intermediaries that facilitate and effect securities transactions between issuers and purchasers are regulated as broker-dealers. Broker-dealers may effect transactions on behalf of clients (broking), or their own account (dealing). Broker-dealers are commonly involved in the distribution of securities in an offering, and are regulated by the federal Securities and Exchange Commission, the Financial Industry Regulatory Authority, and in California, by DBO.

The penalty for engaging in broker-dealer activities without the proper registration or license can be severe. Both the state and federal law allow persons who purchased securities from an unlicensed broker-dealer to rescind their sales and seek any consequential damages, causing potentially catastrophic losses to issuers. Unlicensed broker-dealers can also be subject to substantial civil and criminal penalties.

3) Finders. Neither federal nor state law currently define securities "finders" as a separate class of person or regulated activity. "Finder" is a term commonly used in securities offerings to refer to unlicensed individuals who introduce investors to issuers in exchange for a fee. So long as the finder does not participate in the actual sale or transfer of securities, and is compensated for the introduction only, it is usually not required to register as a broker-dealer. Conversely, negotiating securities sales, recommending offerings, and transaction-based compensation will often require an individual to register as a broker-dealer.

The SEC granted no-action relief in the 1990s to an individual whose involvement in securities transactions was limited to an instance of providing a list of names and telephone numbers to potential investors for a fee. The no-action position gave rise to the "finder's exemption" in federal securities law. Since that time, the SEC has narrowly interpreted this exemption, enforcing most facilitation activity under the broker-dealer rules.

Three states, Texas, Michigan, and Minnesota, have each enacted securities finder legislation similar to the type proposed in AB 667.

4) Keepers? The central policy question in AB 667 is whether a new regulatory structure for securities finders will bring currently-unregulated activity within the control of DBO, or whether it will incentivize current broker-dealers to re-register as finders. The latter circumstance may be problematic if broker-dealers re-register in order to avoid fiduciary obligations, especially if those obligations are strengthened in the near future. The Committee may wish to consider whether the limited adoption of securities finder laws, particularly at the federal level and the state of New York, suggests sufficient apprehension over the policy among the country's top securities regulators.

On the other hand, California leads the nation, and arguably the world, in start-up company creation and innovation, and this activity has been a major driver of the state's economic performance and success as a magnet for talent. Capital formation is a critical element enabling this activity, and any incremental benefit to the state's capital market could lead to a significant increase in that performance and success.

5) Previous Legislation. AB 713 (Wagner) of 2013-2014 would have established a similar finders program to that proposed here, albeit with a lesser fee regime. AB 713 was held on the Suspense File of the Senate Appropriations Committee.

Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081

Date of Hearing: April 20, 2015

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Matthew Dababneh, Chair

ABPCA Bill Id:AB 667

Author:Wagner – As Amended Ver:April 6, 2015

SUBJECT: Broker-dealers: finders

SUMMARY: Creates an exemption for "finders" under the Corporate Securities Law of 1968. Specifically, this bill:

1. Defines a "finder" as an individual who introduces or refers one or more accredited investors to an issuer or an issuer to one or more accredited investors, solely for the purpose of a potential sale of securities of the issuer.
   
   

2. Prohibits a "finder" from:
   
   

   1. Providing services to an issuer for a transaction or a series of related transactions for the offer or sale of securities exceeding a securities purchase price of $15,000,000 in the aggregate;
      
      

   2. Negotiating any of the terms of the securities transaction;
      
      

   3. Advising any party to the securities transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities;
      
      

   4. Conducting any due diligence on the part of any party to the transaction;

5. Selling or offering to sell in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder;
   
   

6. Receiving directly or indirectly, possession or custody of any funds in connection with the issuer transaction;
   
   

7. Knowingly receive compensation in connection with any offer or sale of securities unless the sale is qualified or unless the security or the transaction is exempt or not otherwise subject to qualification; and,
   
   

8. Making any disclosure to a potential purchaser other than:
   
   

   1. The name, address, and contact information of the issuer;
      
      

   2. The name, type, price, and aggregate amount of any securities being offered in the issuer transaction; and,
      
      

   3. The issuer's industry, location, and years in business.
      
      

1. Requires the "finder" to file an initial statement of information (SOI) (created by the Department of Business Oversight (DBO)) with the DBO prior to engaging in any activities that includes the following:
   
   

   1. The name and complete business or residential address of the finder; and,
      
      

   2. The mailing address of the finder, if different from the business or residential address.
      
      

2. Requires the "finder" to pay a filing fee of $300 to DBO with the SOI.
   
   

3. Requires the "finder" to file within 30 days of the anniversary of the finder's initial SOI and annually thereafter a renewal SOI with the DBO that includes all of the following:
   
   

   1. Representations that:
      
      

      1. The finder has complied and will continue to comply with (2, a-h) listed above;
         
         

      2. The finder has not performed any acts or satisfied any circumstances prohibited by Corporations Code Section 25212 or been sanctioned by the commissioner; and,
         
         

      3. The finder has obtained the written agreement with respect to each transaction in which the finder has participated in the prior 12 months.
         
         

   2. An indication by the finder as to whether the finder has received transaction-based compensation that is subject to the actual sale of securities by the issuer in any transaction in which the finder participated in the prior 12 months.

6. Requires a filing fee of $275 with the renewal SOI.
   
   

7. Requires the finder with each introduction to obtain the informed written consent of each person introduced or referred by the finder to an issuer. The written agreement must be signed by the finder, the issuer, and the person introduced or referred disclosing the following:
   
   

   1. The type and amount of compensation that has been or will be paid to the finder and the conditions for the payment of that compensation;
      
      

   2. That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities;
      
      

   3. Whether the finder is also an owner, directly or indirectly of the securities being offered or sold;
      
      

   4. Any actual and potential conflict of interest in connection with the finder's activities related to the issuer transaction;
      
      

   5. That the parties to the agreement shall have the right to pursue any available remedies at law or otherwise for any breach of the agreement; and,
      
      

   6. Requires representation that the person introduced in an accredited investor.
      
      

8. Requires the "finder" to maintain and preserve for 5 years from the date of the filing of the notice, a copy of the notice, the written consent and all other records relating to any securities transaction in connection with which the finder receives compensation.
   
   

9. Provides that if a natural person does not meet the definition of finder, any person introduced or referred by that natural person to an issue shall have the right to pursue any applicable remedy afforded under state law.

EXISTING FEDERAL LAW:

1. Establishes the federal Securities Exchange Act of 1934 which prohibits any broker or dealer from effecting, inducing, or attempting to induce the purchase or sale of any security unless such person is registered with the Securities and Exchange Commission (SEC). (Section 15 (a) (1)
   
   

2. Defines "accredited investor," as:(17 C.F.R 230.501 (a))
   
   

   1. Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1 million at the time of their purchase of securities, exclusive of their primary residence; or,
      
      

   2. Any natural person with 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, together with a reasonable expectation of reaching the same income level in the current year.

EXISTING STATE LAW:

1. Provides a broker licensed by the Real Estate Commissioner is exempt from the provisions of Section 25210 when engaged in transactions in any interest in any general or limited partnership, joint venture, unincorporated association, or similar organization (but not a corporation) owned beneficially by no more than 100 persons and formed for the sole purpose of, and engaged solely in, investment in or gain from an interest in real property, including, but not limited to, a sale, exchange, trade, or development. An interest held by a husband and wife shall be considered held by one person for the purposes of this section. [Corporations Code, Section 25206]
   
   

2. Defines a "broker-dealer" as any person engaged in the business of effecting transactions in securities in this state for the account of others or for his own account. A broker-dealer also includes a person engaged in the regular business of issuing or guaranteeing options with regard to securities not of his own issue. [Corporations Code, Section 25004]
   
   

3. Requires a broker-dealer to apply and obtain a certificate from the DBO to as a broker-dealer in California. [Corporations Code, Section 25210]
   
   

4. Defines “issuer” as any person who issues or proposes to issue any security, with exceptions. [Corporations Code, Section 25010]
   
   

5. Provides that “broker-dealer” does not include several persons, including, among others, banks; trust companies; savings and loan companies; real estate brokers; options exchanges certified by DBO; individuals who trade for their own accounts or in some fiduciary capacity, but not as part of a regular business; issuers; and agents, when they are employees of broker-dealers or issuers. [Corporations Code, Section 25004]
   
   

6. Authorizes DBO to pursue the following types of enforcement actions against persons who are not licensed as broker-dealers, but who are acting in a manner that requires such licensure. DBO may:
   
   

   1. Issue an order to desist and refrain from the activity or activities that warrant licensure, until the required license is obtained. [Corporations Code, Section 25532]
      
      

   2. Levy an administrative penalty of up to $5,000 for a first violation, up to $10,000 for a second violation, and up to $15,000 for a third and subsequent violation (Section 25252), and include in the administrative action imposing such penalty a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice giving rise to the action. [Corporations Code, Section 25254]
      
      

   3. Take possession of the property, business, and assets of such person. [Corporations Code, Section 25253]
      
      

   4. Bring an action in the name of the people of the State of California in Superior Court to enjoin the acts or practices of the person violating the law and enforce compliance, and, if the commissioner determines it is in the public interest, to include in that action a claim for ancillary relief, including but not limited to a claim for restitution or disgorgement or damages on behalf of persons injured by the act or practice constituting the subject matter of the action. [Corporations Code, Section 25530]
      
      

7. Provides that a person who purchases a security from or sells a security to a broker-dealer that is required to be licensed and who has not, at the time of the sale or purchase, applied for and secured from the commissioner a certificate in effect at the time of sale or purchase, may bring an action for rescission of the sale or purchase, or, if the plaintiff or the defendant no longer owns the security, for damages, as specified. [Corporations Code, Section 25501.5]

FISCAL EFFECT: Unknown.

COMMENTS:

Currently, California does not have a clear statutory regime surrounding finders. About the only protection a purchaser has against an unregistered broker-dealer is Corporations Code, Section 25501.5, stated above. AB 667 puts in statute, regulations regarding finders whom lurk in a grey area of securities law. AB 667 will exempt from certain broker-dealer requirements those persons who satisfy the statutory definition of finder and act in compliance with certain requirements. The requirements consist of: filing initial and subsequent statements of information and paying related filing fees as set by DBO, obtaining the informed written consent of each investor; and, maintaining certain records. AB 667 defines a finder, in order to meet the definition of finder, investors introduced by the finder must be accredited investors, and the finder must not participate in negotiating any terms of the investment, advise any party regarding the investment, or sell any securities owned by the finder.

Need for the bill:

According to the sponsor, the Corporations Committee of the Business Law Section of the State Bar of California, "Finders are often critical to the success of capital-raising efforts by start-up companies and other small to mid-sized companies that would otherwise be unable to engage a broker-dealer or access needed capital. Indeed, it is widely acknowledged that many individuals act as finders in the State of California and that this is the method by which a vast majority of capital is raised to fund early stage businesses. Under current law, however, the scope of permitted activities for a finder is poorly defined, often resulting in inadvertent violations of broker-dealer registration requirements. In fact, there is no statutory definition of finder, nor is there any regulation of finders. This lack of clear guidance puts finders and the businesses that rely upon them for crucial funding in jeopardy. It also impedes the State’s ability to regulate finders and to hold them accountable. "

Finders

Currently, both federally and at the state level, the law is vague on the issue of "finders." Finders do not fall within the definition of broker-dealer because they are limited to certain activities. "Finders" is a common term used in the securities environment as an unlicensed individual who introduces an accredited investor to an issuer. In exchange for bringing in a potential accredited investor, the finder receives compensation. The only role of a finder in a securities transaction is the introduction; therefore, finders are not required to register as a broker-dealer. Questions that should be considered when determining whether or not a finder should register as a broker- dealer include:

• Is the finder planning on being involved in the negotiations for the sale of securities? The more involved the finder, the more likely the finder should register as a broker-dealer.
  
  

• Is the finder intending to discuss with potential accredited investors the details of the securities sold, or otherwise make any recommendations? If yes, the finder should register as a broker-dealer.
  
  

• Will the finder be compensated by a transaction-based compensation with the respect to a securities transaction? If yes, the finder should register as a broker-dealer.
  
  

• Has the finder previously been involved with effecting securities transactions? Any previous compensation or other evidence of previous involvement in effecting securities transaction increases the likelihood that a finder should register as a broker-dealer.

Finders fall in a gray area of the law, which increases the liability of using one and potentially unnecessary litigation. A finder, if found to act as an unregistered broker-dealer could come with grave consequences such as: investor rescission right, the issuer could be found as an aider and abettor, negative publicity, as well as, be subject to criminal penalties, fines, suspension and disbarment.

Federal Regulations

Section 15(a) of the Securities Exchange Act (The Act) of 1934 requires that persons engaged in broker or dealer activity must register with the SEC pursuant to Section 15(b) of the e Act unless an applicable exemption is available. In general, federally, a “broker” is any person "engaged in the business of effecting transactions in securities for the account of others” and a “dealer” is any person “engaged in the business of buying and selling securities for such person’s own account.” Although the Act and the rules promulgated thereunder do not specifically define “effecting transactions” or “engaged in the business,” the SEC has taken a very expansive view of the scope of those terms. Based on no-action guidance from the SEC, activities that may be deemed (alone or in combination) to confer “broker” status include, among other things:

• Soliciting investors to enter into securities transactions;
  
  

• Assisting issuers in structuring prospective securities transactions or helping issuers to identify potential purchasers of securities;
  
  

• Participating in the negotiating process or otherwise bringing buyers and sellers of securities together; and;
  
  

• Receiving compensation contingent on the success of a securities transaction or based on the amount or value of a securities transaction.

Activities that have been identified (alone or in combination) by the SEC as indicators of “dealer” status include, among other things:

• Participating in a selling group, underwriting securities or purchasing or selling securities as principal from or to customers rather than from or to only brokers or dealers;
  
  

• Carrying a dealer inventory (positions intended to be used directly or indirectly to trade with customers) or holding oneself out as a dealer or market-maker or as otherwise willing to buy or sell particular securities on a continuous basis;
  
  

• Obtaining a regular clientele of customers, issuing or originating securities or rendering incidental investment advice to others; and,
  
  

• Engaging in trading transactions for the benefit of others (including for an affiliate or for an affiliate’s customers), rather than consistently with one’s own judgment and investment and liquidity objectives.

On April 5, 2013, the SEC addressed the potential application of the broker-dealer registration requirements under Section 15(a) of the Act in the context of fundraising activities and other services for private funds. The SEC has observed that certain private fund advisers are paying transaction-based compensation to their personnel for selling interests in a fund and private fund advisers, their personnel and/or their affiliates are receiving transaction-based compensation “for purported investment banking or other broker activities relating to one or more of the fund’s portfolio companies.” The SEC has consistently viewed transaction-based compensation as broker-dealer activity. The SEC cautioned that the receipt of transaction-based compensation coupled with the types of activities being performed may trigger the requirement to register with the SEC as broker-dealers.

In the early 1990s, the SEC granted no-action relief to an individual whose involvement in securities transactions was limited to one instance of providing a list of names and telephone numbers of potential investors and receiving a success fee for doing so. This no-action position gave rise to the notion that a so-called “finder’s exemption” exists in the law. Nonetheless, despite this very limited fact pattern, the SEC has subsequently indicated its disapproval of this no-action position, and has in fact stated that even one instance of transaction-based compensation may be enough for a finding that a person was “engaged in the business” of broker activity, and thus subject to registration. Notably, while the SEC has taken an extremely expansive view of the concept of being “engaged in the business,” some courts have been more lenient in this regard, finding that something more than just transaction-based compensation is necessary to require broker registration.

Other States

Three other states have enacted finder legislation, Texas, Michigan and Minnesota.

Michigan requires a “finder” (as defined under Michigan law) to register as an investment adviser and finder activities are limited to “locating, introducing, or referring potential purchasers or sellers.”

The Texas State Securities Board adopted regulations to provide for a restricted registration system for finders (as defined by regulation). A finder would be limited to introducing only accredited investors and would not be permitted to negotiate the terms of any investment or give any advice about entering the investment. Securities examination requirements would be waived for finders.

In adopting the Uniform Securities Act of 2002, Minnesota included a non-standard provision, which exempted private placement broker-dealers representing issuers in connection with any exempt transaction from registering as agents. Minnesota conditioned the availability on the absence of any disciplinary history, prohibited the handling or possession of funds and securities, and required a notice filing and consent to service of process. Minnesota’s provision permits a private placement broker-dealer to register only once with the state securities regulator but allows the private placement broker-dealer to represent multiple issuers.

Previous Legislation:

AB 713 (Wagner) 2013-2014 Legislative Year. Would have provided that any person who meets the definition of a finder, and who satisfies all of the conditions established for finders, is deemed to be a finder and not a broker-dealer. Died in Senate Appropriations Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Bar (Sponsor)

Opposition

None on file.

Analysis Prepared by: Kathleen O'Malley / B. & F. / (916) 319-3081