AB 1517: Securities transactions: qualifications by permit: liability.
- Session Year: 2017-2018
- House: Assembly
- Latest Version Date: 2017-04-05
Existing law, the Corporate Securities Law of 1968, requires securities offered or sold in this state in an issuer or nonissuer transaction to be qualified through an application filed with the Commissioner of Business Oversight, unless exempt from the qualification requirements. That law makes it unlawful, for a person in connection with the offer, sale, or purchase of a security, to engage in fraudulent or misleading acts or omissions.
This bill would authorize an applicant to file an application for qualification of the offer or sale of a security by crowdfunding permit if certain conditions are met, including that the total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to $1,000,000, $2,000,000, less a specified amount; the aggregate amount of securities sold to any investor, including any amount sold during the 12-month period preceding the date of the transaction, does not exceed the lesser of $5,000 or 10% of the net worth of that natural person; the transaction is conducted through an intermediary, the issuer will not, directly or indirectly, conduct any unsolicited telephone solicitation of the securities offered; and the issuer will not require specified dispute procedures. This bill would impose a filing fee of $200 plus 1/5 of 2% of the aggregate value of the securities sought to be sold in this state.
Existing law provides that any person who violates a condition of qualification of the offer or sale of a security is liable to any person acquiring the security sold in violation, who may sue to recover the consideration paid for such security with interest thereon at the legal rate or for damages, as specified.
This bill would provide for the recovery of reasonable attorneys fees, as specified. The bill would extend that provision to a violation of a condition of qualification by permit authorized by this bill. The bill would authorize the award of treble and punitive damages, damages against any person who violates those conditions of qualification by permit authorized by this bill if the court determines that the violation was willful.
Existing law imposes liability on any person who engages in specified unlawful activity to the person who purchases a security from him or her or sells a security to him or her, and authorizes the purchaser or seller to sue either for rescission or for damages.
This bill would provide that the plaintiff is not required to plead or prove that the defendant acted with scienter. The bill would provide for the recovery of require the court to award reasonable attorneys fees, as specified. The bill also would authorize the court to award treble and punitive damages against a person who violates the above provision in an offer or sale of a security as authorized by this bill if the court determines the violation was willful.
Existing law, the Corporate Securities Law of 1968, requires securities offered or sold in this state in an issuer or nonissuer transaction to be qualified through an application filed with the Commissioner of Business Oversight, unless exempt from the qualification requirements. That law makes it unlawful, for a person in connection with the offer, sale, or purchase of a security, to engage in fraudulent or misleading acts or omissions.
This bill would authorize an applicant to file an application for qualification of the offer or sale of a security by crowdfunding permit if certain conditions are met, including that the total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to $1,000,000, less a specified amount; the aggregate amount of securities sold to any investor, including any amount sold during the 12-month period preceding the date of the transaction, does not exceed the lesser of $5,000 or 10% of the net worth of that natural person; the transaction is conducted through an intermediary, and the issuer will not, directly or indirectly, conduct any unsolicited telephone solicitation of the securities offered. offered; and the issuer will not require specified dispute procedures. This bill would impose a filing fee of $200 plus 1/5 of 2% of the aggregate value of the securities sought to be sold in this state.
Existing law provides that any person who violates a condition of qualification of the offer or sale of a security is liable to any person acquiring the security sold in violation, who may sue to recover the consideration paid for such security with interest thereon at the legal rate or for damages, as specified.
This bill would provide for the recovery of reasonable attorneys fees, as specified. The bill would extend that provision to a violation of a condition of qualification by permit authorized by this bill. This bill would also require a court to award reasonable attorneys fees and costs, and The bill would authorize the award of treble and punitive damages, to a prevailing purchaser in an action brought against any person who violates those conditions of qualification by permit authorized by this bill. bill if the court determines that the violation was willful.
Existing law imposes liability on any person who engages in specified unlawful activity to the person who purchases a security from him or her or sells a security to him or her, and authorizes the purchaser or seller to sue either for rescission or for damages.
This bill would provide that the plaintiff is not required to plead or prove that the defendant acted with scienter. The bill would provide for the recovery of reasonable attorneys fees, as specified. The bill also would authorize the court to award treble and punitive damages against a person who violates the above provision in an offer or sale of a security as authorized by this bill if the court determines the violation was willful.
Existing law, the Corporate Securities Law of 1968, requires securities offered or sold in this state in an issuer or nonissuer transaction to be qualified through an application filed with the Commissioner of Business Oversight, unless exempt from the qualification requirements. That law makes it unlawful, for a person in connection with the offer, sale, or purchase of a security, to engage in fraudulent or misleading acts or omissions.
This bill would authorize an applicant to file an application for qualification of the offer or sale of a security by crowdfunding permit if certain conditions are met, including that the total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to $1,000,000, less a specified amount; the aggregate amount of securities sold to any investor, including any amount sold during the 12-month period preceding the date of the transaction, does not exceed the lesser of $5,000 or 10% of the net worth of that natural person; the transaction is conducted through an intermediary, and the issuer will not, directly or indirectly, conduct any unsolicited telephone solicitation of the securities offered. This bill would impose a filing fee of $200 plus 1/5 of 2% of the aggregate value of the securities sought to be sold in this state.
Existing law provides that any person who violates a condition of qualification of the offer or sale of a security is liable to any person acquiring the security sold in violation, who may sue to recover the consideration paid for such security with interest thereon at the legal rate or for damages, as specified.
This bill would extend that provision to a violation of a condition of qualification by permit authorized by this bill. This bill would also require a court to award reasonable attorneys fees and costs, and authorize the award of treble and punitive damages, to a prevailing purchaser in an action brought against any person who violates those conditions of qualification by permit authorized by this bill.
Existing law imposes liability on any person who engages in specified unlawful activity to the person who purchases a security from him or her or sells a security to him or her, and authorizes the purchaser or seller to sue either for rescission or for damages.
This bill would provide that the plaintiff is not required to plead or prove that the defendant acted with scienter.
The following transactions are exempted from the provisions of Section 25110:
(a)Any offer (but not a sale) not involving any public offering and the execution and delivery of any agreement for the sale of securities pursuant to the offer if (1) the agreement contains substantially the following provision: The sale of the securities that are the subject of this agreement has not been qualified with the Commissioner of Corporations of the State of California and the issuance of the securities or the payment or receipt of any part of the consideration therefor prior to the qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditioned upon the qualification being obtained, unless the sale is so exempt; and (2) no part of the purchase price is paid or received and none of the securities are issued until the sale of the securities is qualified under this law unless the sale of securities is exempt from the qualification by this section, Section 25100, or 25105.
(b)Any offer (but not a sale) of a security for which (1) a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and (2) no public proceeding or examination looking towards an order is pending under Section 8 of the act and no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this law.
(c)Any offer (but not a sale) and the execution and delivery of any agreement for the sale of securities pursuant to the offer as may be permitted by the commissioner upon application. Any negotiating permit under this subdivision shall be conditioned to the effect that none of the securities may be issued and none of the consideration therefor may be received or accepted until the sale of the securities is qualified under this law.
(d)Any transaction or agreement between the issuer and an underwriter or among underwriters if the sale of the securities is qualified, or exempt from qualification, at the time of distribution thereof in this state, if any.
(e)Any offer or sale of any evidence of indebtedness, whether secured or unsecured, and any guarantee thereof, in a transaction not involving any public offering.
(f)Any offer or sale of any security in a transaction (other than an offer or sale to a pension or profit-sharing trust of the issuer) that meets each of the following criteria:
(1)Sales of the security are not made to more than 35 persons, including persons not in this state.
(2)All purchasers either have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors or controlling persons, or managers (as appointed or elected by the members) if the offeror is a limited liability company, or by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction.
(3)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or a trust account if the purchaser is a trustee) and not with a view to or for sale in connection with any distribution of the security.
(4)The offer and sale of the security is not accomplished by the publication of any advertisement. The number of purchasers referred to above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limited liability company, and any other purchaser who the commissioner designates by rule. For purposes of this section, a husband and wife (together with any custodian or trustee acting for the account of their minor children) are counted as one person and a partnership, corporation, or other organization that was not specifically formed for the purpose of purchasing the security offered in reliance upon this exemption, is counted as one person. The commissioner shall by rule require the issuer to file a notice of transactions under this subdivision.
The failure to file the notice or the failure to file the notice within the time specified by the rule of the commissioner shall not affect the availability of the exemption. Any issuer that fails to file the notice as provided by rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Neither the filing of the notice nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action that the commissioner deems necessary or appropriate under this division with respect to the offer and sale of the securities.
(g)Any offer or sale of conditional sale agreements, equipment trust certificates, or certificates of interest or participation therein or partial assignments thereof, covering the purchase of railroad rolling stock or equipment or the purchase of motor vehicles, aircraft, or parts thereof, in a transaction not involving any public offering.
(h)Any offer or sale of voting common stock by a corporation incorporated in any state if, immediately after the proposed sale and issuance, there will be only one class of stock of the corporation outstanding that is owned beneficially by no more than 35 persons, provided all of the following requirements have been met:
(1)The offer and sale of the stock is not accompanied by the publication of any advertisement, and no selling expenses have been given, paid, or incurred in connection therewith.
(2)The consideration to be received by the issuer for the stock to be issued consists of any of the following:
(A)Only assets (which may include cash) of an existing business enterprise transferred to the issuer upon its initial organization, of which all of the persons who are to receive the stock to be issued pursuant to this exemption were owners during, and the enterprise was operated for, a period of not less than one year immediately preceding the proposed issuance, and the ownership of the enterprise immediately prior to the proposed issuance was in the same proportions as the shares of stock are to be issued.
(B)Only cash or cancellation of indebtedness for money borrowed, or both, upon the initial organization of the issuer, provided all of the stock is issued for the same price per share.
(C)Only cash, provided the sale is approved in writing by each of the existing shareholders and the purchaser or purchasers are existing shareholders.
(D)In a case where after the proposed issuance there will be only one owner of the stock of the issuer, only any legal consideration.
(3)No promotional consideration has been given, paid, or incurred in connection with the issuance. Promotional consideration means any consideration paid directly or indirectly to a person who, acting alone or in conjunction with one or more other persons, takes the initiative in founding and organizing the business or enterprise of an issuer for services rendered in connection with the founding or organizing.
(4)A notice in a form prescribed by rule of the commissioner, signed by an active member of the State Bar of California, is filed with or mailed for filing to the commissioner not later than 10 business days after receipt of consideration for the securities by the issuer. That notice shall contain an opinion of the member of the State Bar of California that the exemption provided by this subdivision is available for the offer and sale of the securities. The failure to file the notice as required by this subdivision and the rules of the commissioner shall not affect the availability of this exemption. An issuer who fails to file the notice within the time specified by this subdivision shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. The notice, except when filed on behalf of a California corporation, shall be accompanied by an irrevocable consent, in the form that the commissioner by rule prescribes, appointing the commissioner or his or her successor in office to be the issuers attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against it or its successor that arises under this law or any rule or order hereunder after the consent has been filed, with the same force and validity as if served personally on the issuer. An issuer on whose behalf a consent has been filed in connection with a previous qualification or exemption from qualification under this law (or application for a permit under any prior law if the application or notice under this law states that the consent is still effective) need not file another. Service may be made by leaving a copy of the process in the office of the commissioner, but it is not effective unless (A) the plaintiff, who may be the commissioner in a suit, action, or proceeding instituted by him or her, forthwith sends notice of the service and a copy of the process by registered or certified mail to the defendant or respondent at its last address on file with the commissioner, and (B) the plaintiffs affidavit of compliance with this section is filed in the case on or before the return day of the process, if any, or within the further time as the court allows.
(5)Each purchaser represents that the purchaser is purchasing for the purchasers own account, or a trust account if the purchaser is a trustee, and not with a view to or for sale in connection with any distribution of the stock.
For the purposes of this subdivision, all securities held by a husband and wife, whether or not jointly, shall be considered to be owned by one person, and all securities held by a corporation that has issued stock pursuant to this exemption shall be considered to be held by the shareholders to whom it has issued the stock.
All stock issued by a corporation pursuant to this subdivision as it existed prior to the effective date of the amendments to this section made during the 1996 portion of the 199596 Regular Session that required the issuer to have stamped or printed prominently on the face of the stock certificate a legend in a form prescribed by rule of the commissioner restricting transfer of the stock in a manner provided for by that rule shall not be subject to the transfer restriction legend requirement and, by operation of law, the corporation is authorized to remove that transfer restriction legend from the certificates of those shares of stock issued by the corporation pursuant to this subdivision as it existed prior to the effective date of the amendments to this section made during the 1996 portion of the 199596 Regular Session.
(i)Any offer or sale (1) to a bank, savings and loan association, trust company, insurance company, investment company registered under the Investment Company Act of 1940, pension or profit-sharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or individual retirement account), or other institutional investor or governmental agency or instrumentality that the commissioner may designate by rule, whether the purchaser is acting for itself or as trustee, or (2) to any corporation with outstanding securities registered under Section 12 of the Securities Exchange Act of 1934 or any wholly owned subsidiary of the corporation that after the offer and sale will own directly or indirectly 100 percent of the outstanding capital stock of the issuer, provided the purchaser represents that it is purchasing for its own account (or for the trust account) for investment and not with a view to or for sale in connection with any distribution of the security.
(j)Any offer or sale of any certificate of interest or participation in an oil or gas title or lease (including subsurface gas storage and payments out of production) if either of the following apply:
(1)All of the purchasers meet one of the following requirements:
(A)Are and have been during the preceding two years engaged primarily in the business of drilling for, producing, or refining oil or gas (or whose corporate predecessor, in the case of a corporation, has been so engaged).
(B)Are persons described in paragraph (1) of subdivision (i).
(C)Have been found by the commissioner upon written application to be substantially engaged in the business of drilling for, producing, or refining oil or gas so as not to require the protection provided by this law (which finding shall be effective until rescinded).
(2)The security is concurrently hypothecated to a bank in the ordinary course of business to secure a loan made by the bank, provided that each purchaser represents that it is purchasing for its own account for investment and not with a view to or for sale in connection with any distribution of the security.
(k)Any offer or sale of any security under, or pursuant to, a plan of reorganization under Chapter 11 of the federal bankruptcy law that has been confirmed or is subject to confirmation by the decree or order of a court of competent jurisdiction.
(l)Any offer or sale of an option, warrant, put, call, or straddle, and any guarantee of any of these securities, by a person who is not the issuer of the security subject to the right, if the transaction, had it involved an offer or sale of the security subject to the right by the person, would not have violated Section 25110 or 25130.
(m)Any offer or sale of a stock to a pension, profit-sharing, stock bonus, or employee stock ownership plan, provided that (1) the plan meets the requirements for qualification under Section 401 of the Internal Revenue Code, and (2) the employees are not required or permitted individually to make any contributions to the plan. The exemption provided by this subdivision shall not be affected by whether the stock is contributed to the plan, purchased from the issuer with contributions by the issuer or an affiliate of the issuer, or purchased from the issuer with funds borrowed from the issuer, an affiliate of the issuer, or any other lender.
(n)Any offer or sale of any security in a transaction, other than an offer or sale of a security in a rollup transaction, that meets all of the following criteria:
(1)The issuer is (A) a California corporation or foreign corporation that, at the time of the filing of the notice required under this subdivision, is subject to Section 2115, or (B) any other form of business entity, including without limitation a partnership or trust organized under the laws of this state. The exemption provided by this subdivision is not available to a blind pool issuer, as that term is defined by the commissioner, or to an investment company subject to the Investment Company Act of 1940.
(2)Sales of securities are made only to qualified purchasers or other persons the issuer reasonably believes, after reasonable inquiry, to be qualified purchasers. A corporation, partnership, or other organization specifically formed for the purpose of acquiring the securities offered by the issuer in reliance upon this exemption may be a qualified purchaser if each of the equity owners of the corporation, partnership, or other organization is a qualified purchaser. Qualified purchasers include the following:
(A)A person designated in Section 260.102.13 of Title 10 of the California Code of Regulations.
(B)A person designated in subdivision (i) or any rule of the commissioner adopted thereunder.
(C)A pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or an individual retirement account, if the investment decisions made on behalf of the trust, plan, or account are made solely by persons who are qualified purchasers.
(D)An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, each with total assets in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
(E)With respect to the offer and sale of one class of voting common stock of an issuer or of preferred stock of an issuer entitling the holder thereof to at least the same voting rights as the issuers one class of voting common stock, provided that the issuer has only one-class voting common stock outstanding upon consummation of the offer and sale, a natural person who, either individually or jointly with the persons spouse, (i) has a minimum net worth of two hundred fifty thousand dollars ($250,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or (ii) has a minimum net worth of five hundred thousand dollars ($500,000). Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her business or financial experience, or the business or financial experience of his or her professional adviser, who is unaffiliated with and who is not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer, can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction. The amount of the investment of each natural person shall not exceed 10 percent of the net worth, as determined by this subparagraph, of that natural person.
(F)Any other purchaser designated as qualified by rule of the commissioner.
(3)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or trust account, if the purchaser is a trustee) and not with a view to or for sale in connection with a distribution of the security.
(4)Each natural person purchaser, including a corporation, partnership, or other organization specifically formed by natural persons for the purpose of acquiring the securities offered by the issuer, receives, at least five business days before securities are sold to, or a commitment to purchase is accepted from, the purchaser, a written offering disclosure statement that shall meet the disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.), and any other information as may be prescribed by rule of the commissioner, provided that the issuer shall not be obligated pursuant to this paragraph to provide this disclosure statement to a natural person qualified under Section 260.102.13 of Title 10 of the California Code of Regulations. The offer or sale of securities pursuant to a disclosure statement required by this paragraph that is in violation of Section 25401, or that fails to meet the disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.), shall not render unavailable to the issuer the claim of an exemption from Section 25110 afforded by this subdivision. This paragraph does not impose, directly or indirectly, any additional disclosure obligation with respect to any other exemption from qualification available under any other provision of this section.
(5)(A)A general announcement of proposed offering may be published by written document only, provided that the general announcement of proposed offering sets forth the following required information:
(i)The name of the issuer of the securities.
(ii)The full title of the security to be issued.
(iii)The anticipated suitability standards for prospective purchasers.
(iv)A statement that (I) no money or other consideration is being solicited or will be accepted, (II) an indication of interest made by a prospective purchaser involves no obligation or commitment of any kind, and, if the issuer is required by paragraph (4) to deliver a disclosure statement to prospective purchasers, (III) no sales will be made or commitment to purchase accepted until five business days after delivery of a disclosure statement and subscription information to the prospective purchaser in accordance with the requirements of this subdivision.
(v)Any other information required by rule of the commissioner.
(vi)The following legend: For more complete information about (Name of Issuer) and (Full Title of Security), send for additional information from (Name and Address) by sending this coupon or calling (Telephone Number).
(B)The general announcement of proposed offering referred to in subparagraph (A) may also set forth the following information:
(i)A brief description of the business of the issuer.
(ii)The geographic location of the issuer and its business.
(iii)The price of the security to be issued, or, if the price is not known, the method of its determination or the probable price range as specified by the issuer, and the aggregate offering price.
(C)The general announcement of proposed offering shall contain only the information that is set forth in this paragraph.
(D)Dissemination of the general announcement of proposed offering to persons who are not qualified purchasers, without more, shall not disqualify the issuer from claiming the exemption under this subdivision.
(6)No telephone solicitation shall be permitted until the issuer has determined that the prospective purchaser to be solicited is a qualified purchaser.
(7)The issuer files a notice of transaction under this subdivision both (A) concurrent with the publication of a general announcement of proposed offering or at the time of the initial offer of the securities, whichever occurs first, accompanied by a filing fee, and (B) within 10 business days following the close or abandonment of the offering, but in no case more than 210 days from the date of filing the first notice. The first notice of transaction under subparagraph (A) shall contain an undertaking, in a form acceptable to the commissioner, to deliver any disclosure statement required by paragraph (4) to be delivered to prospective purchasers, and any supplement thereto, to the commissioner within 10 days of the commissioners request for the information. The exemption from qualification afforded by this subdivision is unavailable if an issuer fails to file the first notice required under subparagraph (A) or to pay the filing fee. The commissioner has the authority to assess an administrative penalty of up to one thousand dollars ($1,000) against an issuer that fails to deliver the disclosure statement required to be delivered to the commissioner upon the commissioners request within the time period set forth above. Neither the filing of the disclosure statement nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action deemed necessary or appropriate under this division with respect to the offer and sale of the securities.
(o)An offer or sale of any security issued by a corporation or limited liability company pursuant to a purchase plan or agreement, or issued pursuant to an option plan or agreement, where the security at the time of issuance or grant is exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 701 adopted pursuant to that act (17 C.F.R. 230.701), the provisions of which are hereby incorporated by reference into this section, provided that (1) the terms of any purchase plan or agreement shall comply with Sections 260.140.42, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, (2) the terms of any option plan or agreement shall comply with Sections 260.140.41, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, and (3) the issuer files a notice of transaction in accordance with rules adopted by the commissioner no later than 30 days after the initial issuance of any security under that plan, accompanied by a filing fee as prescribed by subdivision (y) of Section 25608. The failure to file the notice of transaction within the time specified in this subdivision shall not affect the availability of this exemption. An issuer that fails to file the notice shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay the commissioner a fee equal to the maximum aggregate fee payable had the transaction been qualified under Section 25110.
Offers and sales exempt pursuant to this subdivision shall be deemed to be part of a single, discrete offering and are not subject to integration with any other offering or sale, whether qualified under Chapter 2 (commencing with Section 25110), or otherwise exempt, or not subject to qualification.
(p)An offer or sale of nonredeemable securities to accredited investors (Section 28031) by a person licensed under the Capital Access Company Law (Division 3 (commencing with Section 28000) of Title 4), provided that all purchasers either (1) have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors, controlling persons, or managers (as appointed or elected by the members), or (2) by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction. All nonredeemable securities shall be evidenced by certificates that shall have stamped or printed prominently on their face a legend in a form to be prescribed by rule or order of the commissioner restricting transfer of the securities in the manner as the rule or order provides. The exemption under this subdivision shall not be available for any offering that is exempt or asserted to be exempt pursuant to Section 3(a)(11) of the Securities Act of 1933 (15 U.S.C. Sec. 77c(a)(11)) or Rule 147 (17 C.F.R. 230.147) thereunder or otherwise is conducted by means of any form of general solicitation or general advertising.
(q)Any offer or sale of any viatical or life settlement contract or fractionalized or pooled interest therein in a transaction that meets all of the following criteria:
(1)Sales of securities described in this subdivision are made only to qualified purchasers or other persons the issuer reasonably believes, after reasonable inquiry, to be qualified purchasers. A corporation, partnership, or other organization specifically formed for the purpose of acquiring the securities offered by the issuer in reliance upon this exemption may be a qualified purchaser only if each of the equity owners of the corporation, partnership, or other organization is a qualified purchaser. Qualified purchasers include the following:
(A)A person designated in Section 260.102.13 of Title 10 of the California Code of Regulations.
(B)A person designated in subdivision (i) or any rule of the commissioner adopted thereunder.
(C)A pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or an individual retirement account, if the investment decisions made on behalf of the trust, plan, or account are made solely by persons who are qualified purchasers.
(D)An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, each with total assets in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
(E)A natural person who, either individually or jointly with the persons spouse, (i) has a minimum net worth of one hundred fifty thousand dollars ($150,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or (ii) has a minimum net worth of two hundred fifty thousand dollars ($250,000). Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her business or financial experience, or the business or financial experience of his or her professional adviser, who is unaffiliated with and who is not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer, can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction.
The amount of the investment of each natural person shall not exceed 10 percent of the net worth, as determined by this subdivision, of that natural person.
(F)Any other purchaser designated as qualified by rule of the commissioner.
(2)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or trust account, if the purchaser is a trustee) and not with a view to or for sale in connection with a distribution of the security.
(3)Each natural person purchaser, including a corporation, partnership, or other organization specifically formed by natural persons for the purpose of acquiring the securities offered by the issuer, receives, at least five business days before securities described in this subdivision are sold to, or a commitment to purchase is accepted from, the purchaser, the following information in writing:
(A)The name, principal business and mailing address, and telephone number of the issuer.
(B)The suitability standards for prospective purchasers as set forth in paragraph (1) of this subdivision.
(C)A description of the issuers type of business organization and the state in which the issuer is organized or incorporated.
(D)A brief description of the business of the issuer.
(E)If the issuer retains ownership or becomes the beneficiary of the insurance policy, an audit report of an independent certified public accountant together with a balance sheet and related statements of income, retained earnings, and cashflows that reflect the issuers financial position, the results of the issuers operations, and the issuers cashflows as of a date within 15 months before the date of the initial issuance of the securities described in this subdivision. The financial statements listed in this subparagraph shall be prepared in conformity with generally accepted accounting principles. If the date of the audit report is more than 120 days before the date of the initial issuance of the securities described in this subdivision, the issuer shall provide unaudited interim financial statements.
(F)The names of all directors, officers, partners, members, or trustees of the issuer.
(G)A description of any order, judgment, or decree that is final as to the issuing entity of any state, federal, or foreign country governmental agency or administrator, or of any state, federal, or foreign country court of competent jurisdiction (i) revoking, suspending, denying, or censuring for cause any license, permit, or other authority of the issuer or of any director, officer, partner, member, trustee, or person owning or controlling, directly or indirectly, 10 percent or more of the outstanding interest or equity securities of the issuer, to engage in the securities, commodities, franchise, insurance, real estate, or lending business or in the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (ii) permanently restraining, enjoining, barring, suspending, or censuring any such person from engaging in or continuing any conduct, practice, or employment in connection with the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (iii) convicting any such person of, or pleading nolo contendere by any such person to, any felony or misdemeanor involving a security, commodity, franchise, insurance, real estate, or loan, or any aspect of the securities, commodities, franchise, insurance, real estate, or lending business, or involving dishonesty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property, or (iv) holding any such person liable in a civil action involving breach of a fiduciary duty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property. This subparagraph does not apply to any order, judgment, or decree that has been vacated, overturned, or is more than 10 years old.
(H)Notice of the purchasers right to rescind or cancel the investment and receive a refund pursuant to Section 25508.5.
(I)The name, address, and telephone number of the issuing insurance company, and the name, address, and telephone number of the state or foreign country regulator of the insurance company.
(J)The total face value of the insurance policy and the percentage of the insurance policy the purchaser will own.
(K)The insurance policy number, issue date, and type.
(L)If a group insurance policy, the name, address, and telephone number of the group, and, if applicable, the material terms and conditions of converting the policy to an individual policy, including the amount of increased premiums.
(M)If a term insurance policy, the term and the name, address, and telephone number of the person who will be responsible for renewing the policy if necessary.
(N)That the insurance policy is beyond the state statute for contestability and the reason therefor.
(O)The insurance policy premiums and terms of premium payments.
(P)The amount of the purchasers moneys that will be set aside to pay premiums.
(Q)The name, address, and telephone number of the person who will be the insurance policy owner and the person who will be responsible for paying premiums.
(R)The date on which the purchaser will be required to pay premiums and the amount of the premium, if known.
(S)A statement to the effect that any projected rate of return to the purchaser from the purchase of a viatical or life settlement contract or a fractionalized or pooled interest therein is based on an estimated life expectancy for the person insured under the life insurance policy; that the return on the purchase may vary substantially from the expected rate of return based upon the actual life expectancy of the insured that may be less than, equal to, or may greatly exceed the estimated life expectancy; and that the rate of return would be higher if the actual life expectancy were less than, and lower if the actual life expectancy were greater than the estimated life expectancy of the insured at the time the viatical or life settlement contract was closed.
(T)A statement that the purchaser should consult with his or her tax adviser regarding the tax consequences of the purchase of the viatical or life settlement contract or fractionalized or pooled interest therein and, if the purchaser is using retirement funds or accounts for that purchase, whether or not any adverse tax consequences might result from the use of those funds for the purchase of that investment.
(U)Any other information as may be prescribed by rule of the commissioner.
SEC. 2.Section 25104 of the Corporations Code is amended to read:25104.The following transactions are exempted from the provisions of Section 25130:
(a)Any offer or sale of a security by the bona fide owner thereof for his or her own account if the sale (1) is not accompanied by the publication of any advertisement and (2) is not effected by or through a broker-dealer in a public offering.
(b)Any offer or sale effected by or through a licensed broker-dealer pursuant to an unsolicited order or offer to buy. For the purpose of this subdivision, an inquiry regarding a written bid for a security or a written solicitation of an offer to sell a security made by another broker-dealer within the previous 60 days shall not be considered the solicitation of an order or offer to buy.
(c)Any offer or sale to a bank, savings and loan association, trust company, insurance company, investment company registered under the Investment Company Act of 1940, pension or profit-sharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or individual retirement account), or such other institutional investor or governmental agency or instrumentality as the commissioner may designate by rule, whether the purchaser is acting for itself or as trustee; provided the purchaser represents that it is purchasing for its own account (or for the trust account) for investment and not with a view to or for sale in connection with any distribution of the security.
(d)Any transaction or agreement between a person on whose behalf an offering is made and an underwriter or among underwriters, if the sale of the securities is exempt from qualification at the time of or qualified prior to distribution in this state, if any.
(e)Any offer or sale of any security by or for the account of a bona fide secured party selling the security in the ordinary course of business to liquidate a bona fide debt.
(f)Any transaction by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator.
(g)Any offer (but not a sale) of a security for which (1) a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and no public proceeding or examination looking toward such an order is pending under Section 8 of that act and (2) no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this division.
(h)Any offer or sale of a security if a qualification under Chapter 2 (commencing with Section 25110) of this part for any securities of the same class has become effective within 18 months, or longer period as the commissioner may order provided that each consecutive order shall be for no more than six months, prior to the offer or sale or if a qualification under Chapter 3 (commencing with Section 25120) or Chapter 4 (commencing with Section 25130) of this part for any securities of the same class has become effective within 12 months prior to that offer or sale, provided no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this division with respect to the qualification, and, provided further, that this exemption does not apply to securities offered pursuant to a registration under the Securities Act of 1933 or pursuant to an exemption under Regulation A under that act if the aggregate offering price of the securities offered under such exemption exceeds fifty thousand dollars ($50,000). The commissioner may, by rule or order, withhold this exemption with respect to securities qualified only pursuant to a limited offering qualification.
SEC. 3.Section 25110 of the Corporations Code is amended to read:25110.It is unlawful for any person to offer or sell in this state any security in an issuer transaction (other than in a transaction subject to Section 25120), whether or not by or through underwriters, unless such sale has been qualified under Section 25111, 25112, 25113, or 25113.1 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part. The offer or sale of such a security in a manner that varies or differs from, exceeds the scope of, or fails to conform with either a material term or material condition of qualification of the offering as set forth in the permit or qualification order, or a material representation as to the manner of offering which is set forth in the application for qualification, shall be an unqualified offer or sale.
SEC. 4.Section 25113.1 is added to the Corporations Code, to read:25113.1.(a)Any offer or sale of any security that meets all of the conditions in subdivision (b) may be qualified by permit under this section.
(b)(1)An application for a crowdfunding permit under this section shall contain any information and be accompanied by any documents as shall be required by rule of the commissioner, in addition to the information specified in Section 25160 and the consent to service of process required by Section 25165. For this purpose, the commissioner may classify issuers and types of securities.
(2)An applicant may file an application for a crowdfunding permit under this section if it meets all of the following conditions:
(A)The applicant is: (i) a California corporation or a foreign corporation, which at the time of filing an application under this subdivision is subject to Section 2115, and neither corporation is a blind pool company, as that term is defined by the commissioner; (ii) not issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights; (iii) not an investment company subject to the Investment Company Act of 1940; and (iv) not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
(B)The total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to one million dollars ($1,000,000), two million dollars ($2,000,000) less the aggregate offering price for all securities sold (within the 12 months before the start, and during the offering, of the securities) under Rule 504 (17 C.F.R. 230.504) under the Securities Act of 1933 or in violation of subdivision (a) of Section 5 of that act.
(C)Offers and sales made in reliance on this section will not be integrated with: (i) prior offers or sales of securities or (ii) subsequent offers or sales of securities that are (I) registered under the Securities Act of 1933; (II) made pursuant to Rule 701 (17 C.F.R. 230.701) under that act; (III) made pursuant to an employee benefit plan; (IV) made pursuant to Regulation S (17 C.F.R. 230.901-905) under that act; (V) made in reliance on Regulation CF (17 C.F.R. 227.100-503); or (VI) made more than six months after the completion of the offering in reliance on this section.
(D)The aggregate amount of securities sold to any investor in reliance on this section, including any amount sold during the 12-month period preceding the date of the transaction, does not exceed the lesser of five thousand dollars ($5,000) or 10 percent of the net worth of that natural person, or such amount as the commissioner may provide by rule or order. Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
(E)The applicant has taken reasonable steps to ensure that each investor who is a natural person who is not an accredited investor as defined in Rule 501 (17 C.F.R. 230.501) under the Securities Act of 1933 either alone or with his or her purchaser representative or representatives has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.
(F)The applicant files with the commissioner, provides to investors, and makes available to prospective investors: (i) a Small Company Offering Registration disclosure document on Form U-7, as adopted by the North American Securities Administrators Association; and (ii) any other disclosures and documents deemed necessary or desirable by the commissioner.
(G)For any offering made pursuant to this section, the applicant shall provide to a prospective investor a disclosure document meeting the requirements of Section 260.113.1 of Title 10 of the California Code of Regulations, a permit application disclosure document based on the Form U-7, as adopted by the North American Securities Administrators Association, and any additional requirements as the commissioner shall prescribe, that may include, but not be limited to, investor suitability and due diligence investigation requirements.
(H)The investor shall have a three-day right to rescind any investment made in any security offered under this section. The three-day period shall end at 11:59 p.m. Pacific standard time on the third business day after the date on which the issuers confirmation of its acceptance of the investors investment is communicated in writing and received by the investor.
(I)The applicant sets aside in a separate third-party escrow account all funds raised as part of the offering, to be held in escrow until the time that the minimum offering amount is reached. If the minimum offering amount is not reached within one year of the effective date of the offering, the applicant shall return all funds to investors.
(J)The applicant shall not, itself or through any third party, conduct any direct solicitation of the securities offered by this section. For purposes of this subparagraph, direct solicitation means and includes the following: any in-person or face-to-face conversation between the applicant or any of its founders, promoters, officers, directors, controlling persons, agents, or other persons acting directly or indirectly on behalf of the applicant and any investor or prospective investor or any person acting directly or indirectly on behalf of, or in regular communication with, the investor. The applicant shall not, itself or through any third party, conduct any unsolicited telephone solicitation of the securities offered by this section.
(K)Each sales transaction shall meet the following requirements:
(i)The transaction is conducted through an intermediary that complies with the requirements in Section 4A(a) of the Securities Act (15 U.S.C. 77d1(a)).
(ii)The transaction is conducted exclusively through the intermediarys platform.
(L)The applicant shall not conduct an offering or concurrent offerings in reliance on this section using more than one intermediary.
(M)The applicant shall comply with the following requirements regarding its advertisements, as that term is defined in Section 25002, including, but not limited to, advertisement that is published by electronic means:
(i)No applicant shall publish any advertisement in this state concerning any security sold or offered for sale in this state unless a true copy of the advertisement has first been filed in the office of the commissioner at least three business days prior to the publication or such shorter period as the commissioner may by rule or order allow.
(ii)No applicant shall advertise, print, display, publish, distribute, or broadcast, or cause or permit to be advertised, printed, displayed, published, distributed, or broadcast, in any manner, any statement or representation with regard to the business subject to the provisions of this section, including the rates, terms, or conditions for an offering or transaction that is false, misleading, or deceptive, or that omits any statement necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading.
(iii)No applicant shall place an advertisement disseminated primarily in this state unless the applicant discloses in the printed text of the advertisement, or the oral text in the case of a radio or television advertisement, that the applicant has a permit issued by the department pursuant to this section.
(iv)The commissioner may require that rates of charges or fees, if stated by the applicant, be stated fully and clearly in the manner that the commissioner deems necessary to give adequate information to, or to prevent misunderstanding by, prospective investors.
(v)No advertisement shall be used after its use has been disapproved by the commissioner and the applicant is notified in writing of the disapproval. Such notification may be given summarily without notice or hearing. At any time after the issuance of a notification under this section, the person desiring to use the advertisement may in writing request that the order be rescinded. Upon the receipt of such a written request, the matter shall be set down for hearing to commence within 15 business days after such receipt unless the person making the request consents to a later date. After such hearing, which shall be conducted in accordance with the provisions of the Administrative Procedure Act (Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code) the commissioner shall determine whether to affirm and continue or to rescind such order, and the commissioner shall have all the powers granted under such act.
(vi)The commissioner may require applicants to maintain a file of all advertisements for a period of three years from the date of their use, unless by regulation, the commissioner specifies a different period of time for retaining such advertisements. The file shall be available to the commissioner upon request.
(N)The applicant or any person or entity selling an investment to an investor pursuant to this section, including without limitation, any issuer, securities broker-dealer, agent, or officer, director, founder, promoter, controlling person, or other persons acting directly or indirectly on behalf of the applicant shall have a fiduciary obligation to any investor or prospective investor.
(O)The applicant, a predecessor of the applicant, an affiliated applicant, a director, executive officer, or other officer participating in the offering, a general partner or managing member of the applicant, a beneficial owner of 20 percent or more of the applicants outstanding voting equity securities, calculated on the basis of voting power, a promoter connected with the issuer in any capacity at the time of the sale, an investment manager of an applicant that is a pooled investment fund, a person that has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in connection with the sale of securities, a general partner or managing member of the investment manager or solicitor, or any director, executive officer, or other officer participating in the offering of the investment manager or solicitor or general partner or managing member of the investment manager or solicitor shall not be disqualified as a bad actor under Rule 506(d) (17 C.F.R. 230.506(d)) under the Securities Act of 1933.
(P)The applicant undertakes that there will be no stock splits, stock dividends, spinoffs, or mergers for a period of two years from the close of the offering.
(Q)The applicant shall not require or impose an obligation on any investor or potential investor to do any of the following:
(i)Arbitrate any claim or dispute.
(ii)Waive his or her right to file or participate in a class action involving any claim or dispute.
(iii)Waive his or her right to a jury trial.
(iv)Be bound by or subject to any law other than California law.
(v)File or resolve any claim or dispute in any forum other than California.
(R)Any other requirement set forth by rule adopted by the commissioner.
(c)The Department of Business Oversight shall either issue or deny the permit within 60 days of the receipt of the application. If the Department of Business Oversight fails to either issue or deny the permit within 60 days, the applicant may demand a hearing with the Department of Business Oversight. Upon the receipt of such a written request, the matter shall be set down for hearing to commence within 15 business days after such receipt unless the person making the request consents to a later date. After such hearing, which shall be conducted in accordance with the provisions of the Administrative Procedure Act (Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code) the commissioner shall determine whether to affirm and continue or to rescind such order denying the permit, and the commissioner shall have all the powers granted under such act.
SEC. 5.Section 25501 of the Corporations Code is amended to read:25501.Any person who violates Section 25401 shall be liable to the person who purchases a security from him or her or sells a security to him or her, who may sue either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security), unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know (or if he or she had exercised reasonable care would not have known) of the untruth or omission. The plaintiff shall not be required to plead or prove that the defendant acted with scienter. Upon rescission, a purchaser shall recover the consideration paid for the security, plus interest at the legal rate, less the amount of any income received on the security, upon tender of the security, and shall recover reasonable attorneys fees determined by the court. security. Upon rescission, a seller shall recover the security, upon tender of the consideration paid for the security plus interest at the legal rate, less the amount of any income received by the defendant on the security. Damages recoverable under this section by a purchaser shall be an amount equal to the difference between (a) the price at which the security was bought plus interest at the legal rate from the date of purchase and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received on the security by the plaintiff. Damages recoverable under this section by a seller shall be an amount equal to the difference between (1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security plus reasonable attorneys fees determined by the court, and (2) the price at which the security was sold plus interest at the legal rate from the date of sale. Any tender specified in this section may be made at any time before entry of judgment. The In addition to any of the relief described above, the court shall award reasonable attorneys fees to a prevailing purchaser or seller under this section. Additionally, the court may in its discretion award three times the damages (other than attorneys fees) determined as set forth above and award punitive damages, in addition to those treble damages, against any person who violates Section 25401 if the court determines that the violation was willful.
SEC. 6.Section 25503 of the Corporations Code is amended to read:25503.Any person who violates Section 25110, 25130, or 25133, or a condition of qualification under Chapter 2 (commencing with Section 25110) of this part, imposed pursuant to Section 25141, or an order suspending trading issued pursuant to Section 25219, shall be liable to any person acquiring from him or her the security sold in violation of that section, who may sue to recover the consideration he or she paid for such security with interest thereon at the legal rate, and reasonable attorneys fees determined by the court, less the amount of any income received therefrom, upon the tender of such security, or for damages, if he or she no longer owns the security, or if the consideration given for the security is not capable of being returned. Damages, if the plaintiff no longer owns the security, shall be equal to the difference between (a) his or her purchase price plus interest at the legal rate from the date of purchase plus reasonable attorneys fees determined by the court, and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff.
Damages, if the consideration given for the security is not capable of being returned, shall be equal to the value of that consideration plus interest at the legal rate from the date of purchase, provided the security is tendered, plus reasonable attorneys fees determined by the court; and if the plaintiff no longer owns the security, damages in such case shall be equal to the difference between (a) the value of the consideration given for the security plus interest at the legal rate from the date of purchase plus reasonable attorneys fees determined by the court; and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff. Any person who violates Section 25120 or a condition of qualification under Chapter 3 (commencing with Section 25120) of this part imposed pursuant to Section 25141, shall be liable to any person acquiring from him or her the security sold in violation of such section who may sue to recover the difference between (a) the value of the consideration received by the seller and (b) the value of the security at the time it was received by the buyer, with interest thereon at the legal rate from the date of purchase plus reasonable attorneys fees determined by the court. Any person on whose behalf an offering is made and any underwriter of the offering, whether on a best efforts or a firm commitment basis, shall be jointly and severally liable under this section, but in no event shall any underwriter (unless such underwriter knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly situated did not share in proportion to their respective interest in the underwriting) be liable in any suit or suits authorized under this section for damages in excess of the total price at which the securities underwritten by him or her and distributed to the public were offered to the public. Any tender specified in this section may be made at any time before entry of judgment. No person shall be liable under this section for violation of Section 25110, 25120, or 25130 if the sale of the security is qualified prior to the payment or receipt of any part of the consideration for the security sold, even though an offer to sell or a contract of sale may have been made or entered into without qualification. The court may in its discretion award three times the damages (other than attorneys fees) determined as set forth above and award punitive damages, in addition to those treble damages, against any person who violates Section 25110 in any offering qualified under Section 25113.1 if the court determines that the violation was willful.
SEC. 7.Section 25608 of the Corporations Code is amended to read:25608.(a)The commissioner shall charge and collect the fees fixed in this section and Section 25608.1. All fees charged and collected under this section and Section 25608.1 shall be transmitted to the Treasurer at least weekly, accompanied by a detailed statement thereof and shall be credited to the State Corporations Fund.
(b)The fee for filing an application for a negotiating permit under subdivision (c) of Section 25102 is fifty dollars ($50).
(c)The fee for filing a notice pursuant to paragraph (5) of subdivision (h) of Section 25102 and the fee for filing a notice pursuant to paragraph (4) of subdivision (f) of Section 25102, in addition to the fee prescribed in those paragraphs, if applicable, shall be determined based on the value of the securities proposed to be sold in the transaction for which the notice is filed and in accordance with subdivision (g), and shall be as follows:
Value of Securities | Filing Fee |
$25,000 or less | $25 |
$25,001 to $100,000 | $35 |
$100,001 to $500,000 | $50 |
$500,001 to $1,000,000 | $150 |
Over $1,000,000 | $300 |
(d)The fee for filing an application for designation of an issuer pursuant to subdivision (k) of Section 25100 is fifty dollars ($50).
(e)The fee for filing an application for qualification of the sale of securities by notification under Section 25112 or by permit under paragraph (1) of subdivision (b) of Section 25113 (except applications for qualification by permit of the sale of any guarantee of any security, the fees for which applications are fixed in subdivision (k)) is two hundred dollars ($200) plus one-fifth of 1 percent of the aggregate value of the securities sought to be sold in this state up to a maximum aggregate fee of two thousand five hundred dollars ($2,500).
The fee for filing a small company application for qualification of the sale of securities by permit under paragraph (2) of subdivision (b) of Section 25113 is two thousand five hundred dollars ($2,500). In the case where the costs of processing a small company application exceed the filing fee, an additional fee shall be charged, not to exceed one thousand dollars ($1,000), over and above the filing fee based on the costs of the salary or other compensation paid to persons processing the application plus overhead costs reasonably incurred in the performance of the work. In determining the costs, the commissioner may use the estimated average hourly cost for all persons processing applications for the fiscal year.
The fee for filing a crowdfunding application for qualification of the sale of securities by permit under Section 25113.1 is two hundred dollars ($200) plus one-fifth of 2 percent of the aggregate value of the securities sought to be sold in this state.
(f)The fee for filing an application for qualification of the sale of securities by coordination under Section 25111 or a notice of intention to sell under subdivision (t) of Section 25100 is two hundred dollars ($200) plus one-fifth of 1 percent of the aggregate value of the securities sought to be sold in this state up to a maximum aggregate fee of two thousand five hundred dollars ($2,500).
(g)For the purpose of determining the fees fixed in subdivisions (e) and (f):
(1)The value of the securities shall be the price at which the company proposes to sell the securities, or the value, as alleged in the application, or the actual value, as determined by the commissioner, of the consideration (if other than money) to be received in exchange therefor, or of the securities when sold, whichever is greater.
(2)Interim or voting trust certificates shall have a value equal to the aggregate value of the securities to be represented by the interim or voting trust certificates.
(3)The value of a warrant or right to purchase or subscribe to another security of the same or another issuer shall be an amount equal to the consideration to be paid for that warrant or right plus an amount equal to the consideration to be paid upon purchase of the additional securities, provided that if the latter amount is not determinable at the time of qualification, that amount shall then be the value of the additional securities as determined by the commissioner.
(4)In the case of a share dividend where the shareholders are given an option to accept either cash or additional shares of common stock, the value of the securities to be sold shall be the maximum amount of cash that would be payable in the event that all shareholders elected to accept cash.
(h)The fee for filing an application for qualification of the sale of securities by permit under Section 25121 is:
(1)Two hundred dollars ($200) in connection with any change (including any stock split or reverse stock split or stock dividend, except a stock dividend where the shareholders are given an option to accept either cash or additional shares of common stock) in the rights, preferences, privileges, or restrictions of or on outstanding securities.
(2)Two hundred dollars ($200) plus one-fifth of 1 percent of the value, as alleged in the application, or the actual value, as determined by the commissioner, of the consideration to be received in exchange therefor, up to a maximum aggregate fee of two thousand five hundred dollars ($2,500), in any exchange of securities by the issuer with its existing security holders exclusively, or in any exchange in connection with any merger or consolidation or purchase of corporate assets in consideration of the issuance of securities, or any entity conversion transaction.
(i)The fee for filing an application for qualification of the sale of securities by notification under Section 25131 shall be one hundred dollars ($100).
(j)The fee for an application for the removal of any condition under Section 25141 is fifty dollars ($50).
(k)The fee for filing any application for a permit to execute or issue any guarantee of any security is fifty dollars ($50).
(l)The fee for acting as escrowholder for securities under Section 25149 is fifty dollars ($50). In addition, a fee of two dollars and fifty cents ($2.50) shall be paid for the deposit with the commissioner of each new certificate or other document resulting from a transfer in escrow.
(m)The fee for filing an application for an order (1) consenting to the transfer in escrow of securities or (2) consenting to the transfer of securities subject to any condition imposed by the commissioner requiring the commissioners consent to the transfer is twenty dollars ($20) for each transfer.
(n)The filing fee for an amendment to an application filed after the effective date of the qualification of the sale of securities is fifty dollars ($50) plus any additional fee that would have been required to be paid with the original application for qualification of the sale of securities under this section if the matters set forth in the amendment had been included in the original application.
(o)(1)The fee for filing an application for a broker-dealer certificate under Section 25211 is three hundred dollars ($300).
(2)Each broker-dealer shall pay to the commissioner its pro rata share of all costs and expenses, reasonably incurred in the administration of the broker-dealer program under this division, as estimated by the commissioner for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in the year in which the assessment is made. The pro rata share shall be the proportion that the broker-dealer and the number of its agents in this state bears to the aggregate number of broker-dealers and agents in this state as shown by records maintained by or on behalf of the commissioner. The pro rata share may include the costs of any examinations, audit, or investigation provided for in subdivision (r).
(3)Every broker-dealer who has secured from the commissioner a certificate shall, in order to keep the certificate in effect for an additional period, pay a minimum assessment of seventy-five dollars ($75) on or before the 31st of December in each year.
(4)The commissioner may assess and levy against each broker-dealer any additional amount above the minimum assessment amount of seventy-five dollars ($75) that is reasonable and necessary to support the broker-dealer program under this division. If an additional amount is assessed, the commissioner shall notify each broker-dealer by mail of any additional amount assessed and levied against it on or before the 30th day of May in each year, and that amount shall be paid within 20 days thereafter. If payment is not made within 20 days, the commissioner shall assess and collect a penalty in addition to the assessment of 1 percent of the assessment for each month or part of a month that the payment is delayed or withheld.
(5)If a broker-dealer fails to pay any assessment on or before the 30th day of the month following the day upon which payment is due, the commissioner may by order summarily suspend or revoke the certificate issued to the broker-dealer. If, after that order is made, a request for hearing is filed in writing and a hearing is not held within 60 days thereafter, the order is deemed rescinded as of its effective date. During any period when its certificate is revoked or suspended, a broker-dealer shall not conduct business pursuant to this division except as may be permitted by order of the commissioner; provided, however, that the revocation, suspension, or surrender of a certificate shall not affect the powers of the commissioner as provided under this division.
(6)In determining the amount assessed, the commissioner shall consider all appropriations from the State Corporations Fund for the support of the broker-dealer program under this division and all reimbursements applicable to the administration of the broker-dealer program under this division.
(p)(1)The commissioner shall charge a fee of twenty-five dollars ($25) for the filing of a notice or report required by rules adopted pursuant to subdivision (b) of Section 25210 or subdivision (b) of Section 25230.
(2)The commissioner may charge a fee up to thirty-five dollars ($35) to keep in effect for the following year any notice or report required by rules adopted pursuant to subdivision (b) of Section 25210 or subdivision (b) of Section 25230.
(3)No person shall, on behalf of a broker-dealer licensed pursuant to Section 25211, effect any transaction in, or induce or attempt to induce the purchase or sale of, any security in this state unless the broker-dealer pays the annual fee required by paragraph (2) of this subdivision on or before the day upon which payment is due.
(4)No person may, in this state, on behalf of an investment adviser licensed pursuant to Section 25231, offer or negotiate for the sale of investment advisory services of the investment adviser, determine which recommendations shall be made to, make recommendations to, or manage the accounts of, clients of the investment adviser, or determine the reports or analyses concerning securities to be published by the investment adviser, unless the investment adviser pays the annual fee required by paragraph (2) on or before the day upon which payment is due.
(5)The commissioner may by order summarily enjoin an individual from performing any activity under paragraph (3) or (4) if the annual fee in paragraph (2) is not paid on or before the day upon which payment is due. An order under this paragraph may not be made before 10 days after notice by the commissioner that the fee is due and unpaid.
(q)(1)Except as provided for in paragraph (2), the fee for filing an application for an investment adviser under Section 25231 is one hundred twenty-five dollars ($125), and payment of this amount shall keep the certificate, if granted, in effect during the calendar year during which it is granted. Every investment adviser who has secured from the commissioner a certificate shall, in order to keep the certificate in effect for an additional period, pay a renewal fee of one hundred twenty-five dollars ($125) on or before the 31st day of December.
(2)Paragraph (1) shall not apply to a broker-dealer licensed under Section 25210.
(r)(1)Except as provided for in paragraph (2), the fee for any routine or nonroutine regulatory examination, audit, or investigation is the amount of the salary or other compensation paid to the persons making the examination, audit, or investigation plus the amount of expenses including overhead reasonably incurred in the performance of the work. In determining the costs associated with an examination, audit, or investigation, the commissioner may use the estimated average hourly cost for all persons performing examinations, audits, or investigations for the fiscal year.
(2)An investment adviser licensed under Section 25230 pursuant to the Investment Adviser Registration Depository shall not be subject to paragraph (1) only in regard to the fee for a routine regulatory examination of its investment advisory services for which it is licensed under Section 25230.
(s)The fee for any hearing held by the commissioner pursuant to Section 25142 shall be the sum determined by the commissioner to cover the actual expense of noticing and holding the hearing.
(t)The commissioner may fix by rule a reasonable charge for any publications issued under his or her authority. The charges shall not apply to reports of the commissioner in the ordinary course of distribution.
(u)The fee for filing an offer under subdivision (b) of Section 25507 shall be the amount of filing fee payable under subdivision (e), (f), (h), or (i) of this section if an application had been filed to qualify the transaction in which the securities upon which the offer is to be made were sold in violation of the qualification provisions of this law.
(v)The fee for filing an application for exemption pursuant to subdivision (l) of Section 25100 is two hundred fifty dollars ($250).
(w)The commissioner may by rule require payment of a fee for filing a notice or report required by a rule adopted pursuant to Section 25105. The fee required in connection with a transaction as defined by that rule shall not exceed the fees specified in subdivision (c) based on the value of the securities sold, but the commissioner may permit a single notice for more than one transaction.
(x)The fee for filing the first notice of transaction under subdivision (n) of Section 25102 is six hundred dollars ($600).
(y)The fee for filing a notice of transaction under subdivision (o) of Section 25102 shall be the fee for filing an application for qualification of the sale of securities by permit under paragraph (1) of subdivision (b) of Section 25113 as set forth in subdivision (e) of this section.
(z)The fee for filing a notice of transaction under subdivision (h) of Section 25103 shall be six hundred dollars ($600).
The following transactions are exempted from the provisions of Section 25110:
(a)Any offer (but not a sale) not involving any public offering and the execution and delivery of any agreement for the sale of securities pursuant to the offer if (1) the agreement contains substantially the following provision: The sale of the securities that are the subject of this agreement has not been qualified with the Commissioner of Corporations of the State of California and the issuance of the securities or the payment or receipt of any part of the consideration therefor prior to the qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditioned upon the qualification being obtained, unless the sale is so exempt; and (2) no part of the purchase price is paid or received and none of the securities are issued until the sale of the securities is qualified under this law unless the sale of securities is exempt from the qualification by this section, Section 25100, or 25105.
(b)Any offer (but not a sale) of a security for which (1) a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and (2) no public proceeding or examination looking towards an order is pending under Section 8 of the act and no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this law.
(c)Any offer (but not a sale) and the execution and delivery of any agreement for the sale of securities pursuant to the offer as may be permitted by the commissioner upon application. Any negotiating permit under this subdivision shall be conditioned to the effect that none of the securities may be issued and none of the consideration therefor may be received or accepted until the sale of the securities is qualified under this law.
(d)Any transaction or agreement between the issuer and an underwriter or among underwriters if the sale of the securities is qualified, or exempt from qualification, at the time of distribution thereof in this state, if any.
(e)Any offer or sale of any evidence of indebtedness, whether secured or unsecured, and any guarantee thereof, in a transaction not involving any public offering.
(f)Any offer or sale of any security in a transaction (other than an offer or sale to a pension or profit-sharing trust of the issuer) that meets each of the following criteria:
(1)Sales of the security are not made to more than 35 persons, including persons not in this state.
(2)All purchasers either have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors or controlling persons, or managers (as appointed or elected by the members) if the offeror is a limited liability company, or by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction.
(3)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or a trust account if the purchaser is a trustee) and not with a view to or for sale in connection with any distribution of the security.
(4)The offer and sale of the security is not accomplished by the publication of any advertisement. The number of purchasers referred to above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limited liability company, and any other purchaser who the commissioner designates by rule. For purposes of this section, a husband and wife (together with any custodian or trustee acting for the account of their minor children) are counted as one person and a partnership, corporation, or other organization that was not specifically formed for the purpose of purchasing the security offered in reliance upon this exemption, is counted as one person. The commissioner shall by rule require the issuer to file a notice of transactions under this subdivision.
The failure to file the notice or the failure to file the notice within the time specified by the rule of the commissioner shall not affect the availability of the exemption. Any issuer that fails to file the notice as provided by rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Neither the filing of the notice nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action that the commissioner deems necessary or appropriate under this division with respect to the offer and sale of the securities.
(g)Any offer or sale of conditional sale agreements, equipment trust certificates, or certificates of interest or participation therein or partial assignments thereof, covering the purchase of railroad rolling stock or equipment or the purchase of motor vehicles, aircraft, or parts thereof, in a transaction not involving any public offering.
(h)Any offer or sale of voting common stock by a corporation incorporated in any state if, immediately after the proposed sale and issuance, there will be only one class of stock of the corporation outstanding that is owned beneficially by no more than 35 persons, provided all of the following requirements have been met:
(1)The offer and sale of the stock is not accompanied by the publication of any advertisement, and no selling expenses have been given, paid, or incurred in connection therewith.
(2)The consideration to be received by the issuer for the stock to be issued consists of any of the following:
(A)Only assets (which may include cash) of an existing business enterprise transferred to the issuer upon its initial organization, of which all of the persons who are to receive the stock to be issued pursuant to this exemption were owners during, and the enterprise was operated for, a period of not less than one year immediately preceding the proposed issuance, and the ownership of the enterprise immediately prior to the proposed issuance was in the same proportions as the shares of stock are to be issued.
(B)Only cash or cancellation of indebtedness for money borrowed, or both, upon the initial organization of the issuer, provided all of the stock is issued for the same price per share.
(C)Only cash, provided the sale is approved in writing by each of the existing shareholders and the purchaser or purchasers are existing shareholders.
(D)In a case where after the proposed issuance there will be only one owner of the stock of the issuer, only any legal consideration.
(3)No promotional consideration has been given, paid, or incurred in connection with the issuance. Promotional consideration means any consideration paid directly or indirectly to a person who, acting alone or in conjunction with one or more other persons, takes the initiative in founding and organizing the business or enterprise of an issuer for services rendered in connection with the founding or organizing.
(4)A notice in a form prescribed by rule of the commissioner, signed by an active member of the State Bar of California, is filed with or mailed for filing to the commissioner not later than 10 business days after receipt of consideration for the securities by the issuer. That notice shall contain an opinion of the member of the State Bar of California that the exemption provided by this subdivision is available for the offer and sale of the securities. The failure to file the notice as required by this subdivision and the rules of the commissioner shall not affect the availability of this exemption. An issuer who fails to file the notice within the time specified by this subdivision shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. The notice, except when filed on behalf of a California corporation, shall be accompanied by an irrevocable consent, in the form that the commissioner by rule prescribes, appointing the commissioner or his or her successor in office to be the issuers attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against it or its successor that arises under this law or any rule or order hereunder after the consent has been filed, with the same force and validity as if served personally on the issuer. An issuer on whose behalf a consent has been filed in connection with a previous qualification or exemption from qualification under this law (or application for a permit under any prior law if the application or notice under this law states that the consent is still effective) need not file another. Service may be made by leaving a copy of the process in the office of the commissioner, but it is not effective unless (A) the plaintiff, who may be the commissioner in a suit, action, or proceeding instituted by him or her, forthwith sends notice of the service and a copy of the process by registered or certified mail to the defendant or respondent at its last address on file with the commissioner, and (B) the plaintiffs affidavit of compliance with this section is filed in the case on or before the return day of the process, if any, or within the further time as the court allows.
(5)Each purchaser represents that the purchaser is purchasing for the purchasers own account, or a trust account if the purchaser is a trustee, and not with a view to or for sale in connection with any distribution of the stock.
For the purposes of this subdivision, all securities held by a husband and wife, whether or not jointly, shall be considered to be owned by one person, and all securities held by a corporation that has issued stock pursuant to this exemption shall be considered to be held by the shareholders to whom it has issued the stock.
All stock issued by a corporation pursuant to this subdivision as it existed prior to the effective date of the amendments to this section made during the 1996 portion of the 199596 Regular Session that required the issuer to have stamped or printed prominently on the face of the stock certificate a legend in a form prescribed by rule of the commissioner restricting transfer of the stock in a manner provided for by that rule shall not be subject to the transfer restriction legend requirement and, by operation of law, the corporation is authorized to remove that transfer restriction legend from the certificates of those shares of stock issued by the corporation pursuant to this subdivision as it existed prior to the effective date of the amendments to this section made during the 1996 portion of the 199596 Regular Session.
(i)Any offer or sale (1) to a bank, savings and loan association, trust company, insurance company, investment company registered under the Investment Company Act of 1940, pension or profit-sharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or individual retirement account), or other institutional investor or governmental agency or instrumentality that the commissioner may designate by rule, whether the purchaser is acting for itself or as trustee, or (2) to any corporation with outstanding securities registered under Section 12 of the Securities Exchange Act of 1934 or any wholly owned subsidiary of the corporation that after the offer and sale will own directly or indirectly 100 percent of the outstanding capital stock of the issuer, provided the purchaser represents that it is purchasing for its own account (or for the trust account) for investment and not with a view to or for sale in connection with any distribution of the security.
(j)Any offer or sale of any certificate of interest or participation in an oil or gas title or lease (including subsurface gas storage and payments out of production) if either of the following apply:
(1)All of the purchasers meet one of the following requirements:
(A)Are and have been during the preceding two years engaged primarily in the business of drilling for, producing, or refining oil or gas (or whose corporate predecessor, in the case of a corporation, has been so engaged).
(B)Are persons described in paragraph (1) of subdivision (i).
(C)Have been found by the commissioner upon written application to be substantially engaged in the business of drilling for, producing, or refining oil or gas so as not to require the protection provided by this law (which finding shall be effective until rescinded).
(2)The security is concurrently hypothecated to a bank in the ordinary course of business to secure a loan made by the bank, provided that each purchaser represents that it is purchasing for its own account for investment and not with a view to or for sale in connection with any distribution of the security.
(k)Any offer or sale of any security under, or pursuant to, a plan of reorganization under Chapter 11 of the federal bankruptcy law that has been confirmed or is subject to confirmation by the decree or order of a court of competent jurisdiction.
(l)Any offer or sale of an option, warrant, put, call, or straddle, and any guarantee of any of these securities, by a person who is not the issuer of the security subject to the right, if the transaction, had it involved an offer or sale of the security subject to the right by the person, would not have violated Section 25110 or 25130.
(m)Any offer or sale of a stock to a pension, profit-sharing, stock bonus, or employee stock ownership plan, provided that (1) the plan meets the requirements for qualification under Section 401 of the Internal Revenue Code, and (2) the employees are not required or permitted individually to make any contributions to the plan. The exemption provided by this subdivision shall not be affected by whether the stock is contributed to the plan, purchased from the issuer with contributions by the issuer or an affiliate of the issuer, or purchased from the issuer with funds borrowed from the issuer, an affiliate of the issuer, or any other lender.
(n)Any offer or sale of any security in a transaction, other than an offer or sale of a security in a rollup transaction, that meets all of the following criteria:
(1)The issuer is (A) a California corporation or foreign corporation that, at the time of the filing of the notice required under this subdivision, is subject to Section 2115, or (B) any other form of business entity, including without limitation a partnership or trust organized under the laws of this state. The exemption provided by this subdivision is not available to a blind pool issuer, as that term is defined by the commissioner, or to an investment company subject to the Investment Company Act of 1940.
(2)Sales of securities are made only to qualified purchasers or other persons the issuer reasonably believes, after reasonable inquiry, to be qualified purchasers. A corporation, partnership, or other organization specifically formed for the purpose of acquiring the securities offered by the issuer in reliance upon this exemption may be a qualified purchaser if each of the equity owners of the corporation, partnership, or other organization is a qualified purchaser. Qualified purchasers include the following:
(A)A person designated in Section 260.102.13 of Title 10 of the California Code of Regulations.
(B)A person designated in subdivision (i) or any rule of the commissioner adopted thereunder.
(C)A pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or an individual retirement account, if the investment decisions made on behalf of the trust, plan, or account are made solely by persons who are qualified purchasers.
(D)An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, each with total assets in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
(E)With respect to the offer and sale of one class of voting common stock of an issuer or of preferred stock of an issuer entitling the holder thereof to at least the same voting rights as the issuers one class of voting common stock, provided that the issuer has only one-class voting common stock outstanding upon consummation of the offer and sale, a natural person who, either individually or jointly with the persons spouse, (i) has a minimum net worth of two hundred fifty thousand dollars ($250,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or (ii) has a minimum net worth of five hundred thousand dollars ($500,000). Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her business or financial experience, or the business or financial experience of his or her professional adviser, who is unaffiliated with and who is not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer, can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction. The amount of the investment of each natural person shall not exceed 10 percent of the net worth, as determined by this subparagraph, of that natural person.
(F)Any other purchaser designated as qualified by rule of the commissioner.
(3)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or trust account, if the purchaser is a trustee) and not with a view to or for sale in connection with a distribution of the security.
(4)Each natural person purchaser, including a corporation, partnership, or other organization specifically formed by natural persons for the purpose of acquiring the securities offered by the issuer, receives, at least five business days before securities are sold to, or a commitment to purchase is accepted from, the purchaser, a written offering disclosure statement that shall meet the disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.), and any other information as may be prescribed by rule of the commissioner, provided that the issuer shall not be obligated pursuant to this paragraph to provide this disclosure statement to a natural person qualified under Section 260.102.13 of Title 10 of the California Code of Regulations. The offer or sale of securities pursuant to a disclosure statement required by this paragraph that is in violation of Section 25401, or that fails to meet the disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.), shall not render unavailable to the issuer the claim of an exemption from Section 25110 afforded by this subdivision. This paragraph does not impose, directly or indirectly, any additional disclosure obligation with respect to any other exemption from qualification available under any other provision of this section.
(5)(A)A general announcement of proposed offering may be published by written document only, provided that the general announcement of proposed offering sets forth the following required information:
(i)The name of the issuer of the securities.
(ii)The full title of the security to be issued.
(iii)The anticipated suitability standards for prospective purchasers.
(iv)A statement that (I) no money or other consideration is being solicited or will be accepted, (II) an indication of interest made by a prospective purchaser involves no obligation or commitment of any kind, and, if the issuer is required by paragraph (4) to deliver a disclosure statement to prospective purchasers, (III) no sales will be made or commitment to purchase accepted until five business days after delivery of a disclosure statement and subscription information to the prospective purchaser in accordance with the requirements of this subdivision.
(v)Any other information required by rule of the commissioner.
(vi)The following legend: For more complete information about (Name of Issuer) and (Full Title of Security), send for additional information from (Name and Address) by sending this coupon or calling (Telephone Number).
(B)The general announcement of proposed offering referred to in subparagraph (A) may also set forth the following information:
(i)A brief description of the business of the issuer.
(ii)The geographic location of the issuer and its business.
(iii)The price of the security to be issued, or, if the price is not known, the method of its determination or the probable price range as specified by the issuer, and the aggregate offering price.
(C)The general announcement of proposed offering shall contain only the information that is set forth in this paragraph.
(D)Dissemination of the general announcement of proposed offering to persons who are not qualified purchasers, without more, shall not disqualify the issuer from claiming the exemption under this subdivision.
(6)No telephone solicitation shall be permitted until the issuer has determined that the prospective purchaser to be solicited is a qualified purchaser.
(7)The issuer files a notice of transaction under this subdivision both (A) concurrent with the publication of a general announcement of proposed offering or at the time of the initial offer of the securities, whichever occurs first, accompanied by a filing fee, and (B) within 10 business days following the close or abandonment of the offering, but in no case more than 210 days from the date of filing the first notice. The first notice of transaction under subparagraph (A) shall contain an undertaking, in a form acceptable to the commissioner, to deliver any disclosure statement required by paragraph (4) to be delivered to prospective purchasers, and any supplement thereto, to the commissioner within 10 days of the commissioners request for the information. The exemption from qualification afforded by this subdivision is unavailable if an issuer fails to file the first notice required under subparagraph (A) or to pay the filing fee. The commissioner has the authority to assess an administrative penalty of up to one thousand dollars ($1,000) against an issuer that fails to deliver the disclosure statement required to be delivered to the commissioner upon the commissioners request within the time period set forth above. Neither the filing of the disclosure statement nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action deemed necessary or appropriate under this division with respect to the offer and sale of the securities.
(o)An offer or sale of any security issued by a corporation or limited liability company pursuant to a purchase plan or agreement, or issued pursuant to an option plan or agreement, where the security at the time of issuance or grant is exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 701 adopted pursuant to that act (17 C.F.R. 230.701), the provisions of which are hereby incorporated by reference into this section, provided that (1) the terms of any purchase plan or agreement shall comply with Sections 260.140.42, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, (2) the terms of any option plan or agreement shall comply with Sections 260.140.41, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, and (3) the issuer files a notice of transaction in accordance with rules adopted by the commissioner no later than 30 days after the initial issuance of any security under that plan, accompanied by a filing fee as prescribed by subdivision (y) of Section 25608. The failure to file the notice of transaction within the time specified in this subdivision shall not affect the availability of this exemption. An issuer that fails to file the notice shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay the commissioner a fee equal to the maximum aggregate fee payable had the transaction been qualified under Section 25110.
Offers and sales exempt pursuant to this subdivision shall be deemed to be part of a single, discrete offering and are not subject to integration with any other offering or sale, whether qualified under Chapter 2 (commencing with Section 25110), or otherwise exempt, or not subject to qualification.
(p)An offer or sale of nonredeemable securities to accredited investors (Section 28031) by a person licensed under the Capital Access Company Law (Division 3 (commencing with Section 28000) of Title 4), provided that all purchasers either (1) have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors, controlling persons, or managers (as appointed or elected by the members), or (2) by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction. All nonredeemable securities shall be evidenced by certificates that shall have stamped or printed prominently on their face a legend in a form to be prescribed by rule or order of the commissioner restricting transfer of the securities in the manner as the rule or order provides. The exemption under this subdivision shall not be available for any offering that is exempt or asserted to be exempt pursuant to Section 3(a)(11) of the Securities Act of 1933 (15 U.S.C. Sec. 77c(a)(11)) or Rule 147 (17 C.F.R. 230.147) thereunder or otherwise is conducted by means of any form of general solicitation or general advertising.
(q)Any offer or sale of any viatical or life settlement contract or fractionalized or pooled interest therein in a transaction that meets all of the following criteria:
(1)Sales of securities described in this subdivision are made only to qualified purchasers or other persons the issuer reasonably believes, after reasonable inquiry, to be qualified purchasers. A corporation, partnership, or other organization specifically formed for the purpose of acquiring the securities offered by the issuer in reliance upon this exemption may be a qualified purchaser only if each of the equity owners of the corporation, partnership, or other organization is a qualified purchaser. Qualified purchasers include the following:
(A)A person designated in Section 260.102.13 of Title 10 of the California Code of Regulations.
(B)A person designated in subdivision (i) or any rule of the commissioner adopted thereunder.
(C)A pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or an individual retirement account, if the investment decisions made on behalf of the trust, plan, or account are made solely by persons who are qualified purchasers.
(D)An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, each with total assets in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
(E)A natural person who, either individually or jointly with the persons spouse, (i) has a minimum net worth of one hundred fifty thousand dollars ($150,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or (ii) has a minimum net worth of two hundred fifty thousand dollars ($250,000). Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her business or financial experience, or the business or financial experience of his or her professional adviser, who is unaffiliated with and who is not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer, can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction.
The amount of the investment of each natural person shall not exceed 10 percent of the net worth, as determined by this subdivision, of that natural person.
(F)Any other purchaser designated as qualified by rule of the commissioner.
(2)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or trust account, if the purchaser is a trustee) and not with a view to or for sale in connection with a distribution of the security.
(3)Each natural person purchaser, including a corporation, partnership, or other organization specifically formed by natural persons for the purpose of acquiring the securities offered by the issuer, receives, at least five business days before securities described in this subdivision are sold to, or a commitment to purchase is accepted from, the purchaser, the following information in writing:
(A)The name, principal business and mailing address, and telephone number of the issuer.
(B)The suitability standards for prospective purchasers as set forth in paragraph (1) of this subdivision.
(C)A description of the issuers type of business organization and the state in which the issuer is organized or incorporated.
(D)A brief description of the business of the issuer.
(E)If the issuer retains ownership or becomes the beneficiary of the insurance policy, an audit report of an independent certified public accountant together with a balance sheet and related statements of income, retained earnings, and cashflows that reflect the issuers financial position, the results of the issuers operations, and the issuers cashflows as of a date within 15 months before the date of the initial issuance of the securities described in this subdivision. The financial statements listed in this subparagraph shall be prepared in conformity with generally accepted accounting principles. If the date of the audit report is more than 120 days before the date of the initial issuance of the securities described in this subdivision, the issuer shall provide unaudited interim financial statements.
(F)The names of all directors, officers, partners, members, or trustees of the issuer.
(G)A description of any order, judgment, or decree that is final as to the issuing entity of any state, federal, or foreign country governmental agency or administrator, or of any state, federal, or foreign country court of competent jurisdiction (i) revoking, suspending, denying, or censuring for cause any license, permit, or other authority of the issuer or of any director, officer, partner, member, trustee, or person owning or controlling, directly or indirectly, 10 percent or more of the outstanding interest or equity securities of the issuer, to engage in the securities, commodities, franchise, insurance, real estate, or lending business or in the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (ii) permanently restraining, enjoining, barring, suspending, or censuring any such person from engaging in or continuing any conduct, practice, or employment in connection with the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (iii) convicting any such person of, or pleading nolo contendere by any such person to, any felony or misdemeanor involving a security, commodity, franchise, insurance, real estate, or loan, or any aspect of the securities, commodities, franchise, insurance, real estate, or lending business, or involving dishonesty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property, or (iv) holding any such person liable in a civil action involving breach of a fiduciary duty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property. This subparagraph does not apply to any order, judgment, or decree that has been vacated, overturned, or is more than 10 years old.
(H)Notice of the purchasers right to rescind or cancel the investment and receive a refund pursuant to Section 25508.5.
(I)The name, address, and telephone number of the issuing insurance company, and the name, address, and telephone number of the state or foreign country regulator of the insurance company.
(J)The total face value of the insurance policy and the percentage of the insurance policy the purchaser will own.
(K)The insurance policy number, issue date, and type.
(L)If a group insurance policy, the name, address, and telephone number of the group, and, if applicable, the material terms and conditions of converting the policy to an individual policy, including the amount of increased premiums.
(M)If a term insurance policy, the term and the name, address, and telephone number of the person who will be responsible for renewing the policy if necessary.
(N)That the insurance policy is beyond the state statute for contestability and the reason therefor.
(O)The insurance policy premiums and terms of premium payments.
(P)The amount of the purchasers moneys that will be set aside to pay premiums.
(Q)The name, address, and telephone number of the person who will be the insurance policy owner and the person who will be responsible for paying premiums.
(R)The date on which the purchaser will be required to pay premiums and the amount of the premium, if known.
(S)A statement to the effect that any projected rate of return to the purchaser from the purchase of a viatical or life settlement contract or a fractionalized or pooled interest therein is based on an estimated life expectancy for the person insured under the life insurance policy; that the return on the purchase may vary substantially from the expected rate of return based upon the actual life expectancy of the insured that may be less than, equal to, or may greatly exceed the estimated life expectancy; and that the rate of return would be higher if the actual life expectancy were less than, and lower if the actual life expectancy were greater than the estimated life expectancy of the insured at the time the viatical or life settlement contract was closed.
(T)A statement that the purchaser should consult with his or her tax adviser regarding the tax consequences of the purchase of the viatical or life settlement contract or fractionalized or pooled interest therein and, if the purchaser is using retirement funds or accounts for that purchase, whether or not any adverse tax consequences might result from the use of those funds for the purchase of that investment.
(U)Any other information as may be prescribed by rule of the commissioner.
SEC. 2.Section 25104 of the Corporations Code is amended to read:25104.The following transactions are exempted from the provisions of Section 25130:
(a)Any offer or sale of a security by the bona fide owner thereof for his or her own account if the sale (1) is not accompanied by the publication of any advertisement and (2) is not effected by or through a broker-dealer in a public offering.
(b)Any offer or sale effected by or through a licensed broker-dealer pursuant to an unsolicited order or offer to buy. For the purpose of this subdivision, an inquiry regarding a written bid for a security or a written solicitation of an offer to sell a security made by another broker-dealer within the previous 60 days shall not be considered the solicitation of an order or offer to buy.
(c)Any offer or sale to a bank, savings and loan association, trust company, insurance company, investment company registered under the Investment Company Act of 1940, pension or profit-sharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or individual retirement account), or such other institutional investor or governmental agency or instrumentality as the commissioner may designate by rule, whether the purchaser is acting for itself or as trustee; provided the purchaser represents that it is purchasing for its own account (or for the trust account) for investment and not with a view to or for sale in connection with any distribution of the security.
(d)Any transaction or agreement between a person on whose behalf an offering is made and an underwriter or among underwriters, if the sale of the securities is exempt from qualification at the time of or qualified prior to distribution in this state, if any.
(e)Any offer or sale of any security by or for the account of a bona fide secured party selling the security in the ordinary course of business to liquidate a bona fide debt.
(f)Any transaction by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator.
(g)Any offer (but not a sale) of a security for which (1) a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and no public proceeding or examination looking toward such an order is pending under Section 8 of that act and (2) no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this division.
(h)Any offer or sale of a security if a qualification under Chapter 2 (commencing with Section 25110) of this part for any securities of the same class has become effective within 18 months, or longer period as the commissioner may order provided that each consecutive order shall be for no more than six months, prior to the offer or sale or if a qualification under Chapter 3 (commencing with Section 25120) or Chapter 4 (commencing with Section 25130) of this part for any securities of the same class has become effective within 12 months prior to that offer or sale, provided no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this division with respect to the qualification, and, provided further, that this exemption does not apply to securities offered pursuant to a registration under the Securities Act of 1933 or pursuant to an exemption under Regulation A under that act if the aggregate offering price of the securities offered under such exemption exceeds fifty thousand dollars ($50,000). The commissioner may, by rule or order, withhold this exemption with respect to securities qualified only pursuant to a limited offering qualification.
SEC. 3.Section 25110 of the Corporations Code is amended to read:25110.It is unlawful for any person to offer or sell in this state any security in an issuer transaction (other than in a transaction subject to Section 25120), whether or not by or through underwriters, unless such sale has been qualified under Section 25111, 25112, 25113, or 25113.1 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part. The offer or sale of such a security in a manner that varies or differs from, exceeds the scope of, or fails to conform with either a material term or material condition of qualification of the offering as set forth in the permit or qualification order, or a material representation as to the manner of offering which is set forth in the application for qualification, shall be an unqualified offer or sale.
SEC. 4.Section 25113.1 is added to the Corporations Code, to read:25113.1.(a)Any offer or sale of any security that meets all of the conditions in subdivision (b) may be qualified by permit under this section.
(b)(1)An application for a crowdfunding permit under this section shall contain any information and be accompanied by any documents as shall be required by rule of the commissioner, in addition to the information specified in Section 25160 and the consent to service of process required by Section 25165. For this purpose, the commissioner may classify issuers and types of securities.
(2)An applicant may file an application for a crowdfunding permit under this section if it meets all of the following conditions:
(A)The applicant is: (i) a California corporation or a foreign corporation, which at the time of filing an application under this subdivision is subject to Section 2115, and neither corporation is a blind pool company, as that term is defined by the commissioner; (ii) not issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights; (iii) not an investment company subject to the Investment Company Act of 1940; and (iv) not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
(B)The total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to one million dollars ($1,000,000), less the aggregate offering price for all securities sold (within the 12 months before the start, and during the offering, of the securities) under Rule 504 (17 C.F.R. 230.504) under the Securities Act of 1933 or in violation of subdivision (a) of Section 5 of that act.
(C)Offers and sales made in reliance on this section will not be integrated with: (i) prior offers or sales of securities or (ii) subsequent offers or sales of securities that are (I) registered under the Securities Act of 1933; (II) made pursuant to Rule 701 (17 C.F.R. 230.701) under that act; (III) made pursuant to an employee benefit plan; (IV) made pursuant to Regulation S (17 C.F.R. 230.901-905) under that act; (V) made in reliance on Regulation CF (17 C.F.R. 227.100-503); or (VI) made more than six months after the completion of the offering in reliance on this section.
(D)The aggregate amount of securities sold to any investor in reliance on this section, including any amount sold during the 12-month period preceding the date of the transaction, does not exceed the lesser of five thousand dollars ($5,000) or 10 percent of the net worth of that natural person, or such amount as the commissioner may provide by rule or order. Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
(E)The applicant has taken reasonable steps to ensure that each investor who is a natural person who is not an accredited investor as defined in Rule 501 (17 C.F.R. 230.501) under the Securities Act of 1933 either alone or with his or her purchaser representative or representatives has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.
(F)The applicant files with the commissioner, provides to investors, and makes available to prospective investors: (i) a Small Company Offering Registration disclosure document on Form U-7, as adopted by the North American Securities Administrators Association; and (ii) any other disclosures and documents deemed necessary or desirable by the commissioner.
(G)For any offering made pursuant to this section, the applicant shall provide to a prospective investor a disclosure document meeting the requirements of Section 260.113.1 of Title 10 of the California Code of Regulations, a permit application disclosure document based on the Form U-7, as adopted by the North American Securities Administrators Association, and any additional requirements as the commissioner shall prescribe, that may include, but not be limited to, investor suitability and due diligence investigation requirements.
(H)The investor shall have a three-day right to rescind any investment made in any security offered under this section. The three-day period shall end at 11:59 p.m. Pacific standard time on the third business day after the date on which the issuers confirmation of its acceptance of the investors investment is communicated in writing and received by the investor.
(I)The applicant sets aside in a separate third-party escrow account all funds raised as part of the offering, to be held in escrow until the time that the minimum offering amount is reached. If the minimum offering amount is not reached within one year of the effective date of the offering, the applicant shall return all funds to investors.
(J)The applicant shall not, itself or through any third party, conduct any direct solicitation of the securities offered by this section. For purposes of this subparagraph, direct solicitation means and includes the following: any in-person or face-to-face conversation between the applicant or any of its founders, promoters, officers, directors, controlling persons, agents, or other persons acting directly or indirectly on behalf of the applicant and any investor or prospective investor or any person acting directly or indirectly on behalf of, or in regular communication with, the investor. The applicant shall not, itself or through any third party, conduct any unsolicited telephone solicitation of the securities offered by this section.
(K)Each sales transaction shall meet the following requirements:
(i)The transaction is conducted through an intermediary that complies with the requirements in Section 4A(a) of the Securities Act (15 U.S.C. 77d1(a)).
(ii)The transaction is conducted exclusively through the intermediarys platform.
(L)The applicant shall not conduct an offering or concurrent offerings in reliance on this section using more than one intermediary.
(M)The applicant shall comply with the following requirements regarding its advertisements, as that term is defined in Section 25002, including, but not limited to, advertisement that is published by electronic means:
(i)No applicant shall publish any advertisement in this state concerning any security sold or offered for sale in this state unless a true copy of the advertisement has first been filed in the office of the commissioner at least three business days prior to the publication or such shorter period as the commissioner may by rule or order allow.
(ii)No applicant shall advertise, print, display, publish, distribute, or broadcast, or cause or permit to be advertised, printed, displayed, published, distributed, or broadcast, in any manner, any statement or representation with regard to the business subject to the provisions of this section, including the rates, terms, or conditions for an offering or transaction that is false, misleading, or deceptive, or that omits any statement necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading.
(iii)No applicant shall place an advertisement disseminated primarily in this state unless the applicant discloses in the printed text of the advertisement, or the oral text in the case of a radio or television advertisement, that the applicant has a permit issued by the department pursuant to this section.
(iv)The commissioner may require that rates of charges or fees, if stated by the applicant, be stated fully and clearly in the manner that the commissioner deems necessary to give adequate information to, or to prevent misunderstanding by, prospective investors.
(v)No advertisement shall be used after its use has been disapproved by the commissioner and the applicant is notified in writing of the disapproval. Such notification may be given summarily without notice or hearing. At any time after the issuance of a notification under this section, the person desiring to use the advertisement may in writing request that the order be rescinded. Upon the receipt of such a written request, the matter shall be set down for hearing to commence within 15 business days after such receipt unless the person making the request consents to a later date. After such hearing, which shall be conducted in accordance with the provisions of the Administrative Procedure Act (Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code) the commissioner shall determine whether to affirm and continue or to rescind such order, and the commissioner shall have all the powers granted under such act.
(vi)The commissioner may require applicants to maintain a file of all advertisements for a period of three years from the date of their use, unless by regulation, the commissioner specifies a different period of time for retaining such advertisements. The file shall be available to the commissioner upon request.
(N)The applicant or any person or entity selling an investment to an investor pursuant to this section, including without limitation, any issuer, securities broker-dealer, agent, or officer, director, founder, promoter, controlling person, or other persons acting directly or indirectly on behalf of the applicant shall have a fiduciary obligation to any investor or prospective investor.
(O)The applicant, a predecessor of the applicant, an affiliated applicant, a director, executive officer, or other officer participating in the offering, a general partner or managing member of the applicant, a beneficial owner of 20 percent or more of the applicants outstanding voting equity securities, calculated on the basis of voting power, a promoter connected with the issuer in any capacity at the time of the sale, an investment manager of an applicant that is a pooled investment fund, a person that has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in connection with the sale of securities, a general partner or managing member of the investment manager or solicitor, or any director, executive officer, or other officer participating in the offering of the investment manager or solicitor or general partner or managing member of the investment manager or solicitor shall not be disqualified as a bad actor under Rule 506(d) (17 C.F.R. 230.506(d)) under the Securities Act of 1933.
(P)The applicant undertakes that there will be no stock splits, stock dividends, spinoffs, or mergers for a period of two years from the close of the offering.
(Q)The applicant shall not require or impose an obligation on any investor or potential investor to do any of the following:
(i)Arbitrate any claim or dispute.
(ii)Waive his or her right to file or participate in a class action involving any claim or dispute.
(iii)Waive his or her right to a jury trial.
(iv)Be bound by or subject to any law other than California law.
(v)File or resolve any claim or dispute in any forum other than California.
(Q)(R)Any other requirement set forth by rule adopted by the commissioner.
(c)The Department of Business Oversight shall either issue or deny the permit within 60 days of the receipt of the application. If the Department of Business Oversight fails to either issue or deny the permit within 60 days, the applicant may demand a hearing with the Department of Business Oversight. Upon the receipt of such a written request, the matter shall be set down for hearing to commence within 15 business days after such receipt unless the person making the request consents to a later date. After such hearing, which shall be conducted in accordance with the provisions of the Administrative Procedure Act (Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code) the commissioner shall determine whether to affirm and continue or to rescind such order denying the permit, and the commissioner shall have all the powers granted under such act.
SEC. 5.Section 25501 of the Corporations Code is amended to read:25501.Any person who violates Section 25401 shall be liable to the person who purchases a security from him or her or sells a security to him or her, who may sue either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security), unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know (or if he or she had exercised reasonable care would not have known) of the untruth or omission. The plaintiff shall not be required to plead or prove that the defendant acted with scienter. Upon rescission, a purchaser shall recover the consideration paid for the security, plus interest at the legal rate, less the amount of any income received on the security, upon tender of the security. security, and shall recover reasonable attorneys fees determined by the court. Upon rescission, a seller shall recover the security, upon tender of the consideration paid for the security plus interest at the legal rate, less the amount of any income received by the defendant on the security. Damages recoverable under this section by a purchaser shall be an amount equal to the difference between (a) the price at which the security was bought plus interest at the legal rate from the date of purchase and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received on the security by the plaintiff. Damages recoverable under this section by a seller shall be an amount equal to the difference between (1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security plus reasonable attorneys fees determined by the court, and (2) the price at which the security was sold plus interest at the legal rate from the date of sale. Any tender specified in this section may be made at any time before entry of judgment. The court may in its discretion award three times the damages (other than attorneys fees) determined as set forth above and award punitive damages, in addition to those treble damages, against any person who violates Section 25401 if the court determines that the violation was willful.
SEC. 6.Section 25503 of the Corporations Code is amended to read:25503.Any person who violates Section 25110, 25130, or 25133, or a condition of qualification under Chapter 2 (commencing with Section 25110) of this part, imposed pursuant to Section 25141, or an order suspending trading issued pursuant to Section 25219, shall be liable to any person acquiring from him or her the security sold in violation of such that section, who may sue to recover the consideration he or she paid for such security with interest thereon at the legal rate, and reasonable attorneys fees determined by the court, less the amount of any income received therefrom, upon the tender of such security, or for damages, if he or she no longer owns the security, or if the consideration given for the security is not capable of being returned. Damages, if the plaintiff no longer owns the security, shall be equal to the difference between (a) his or her purchase price plus interest at the legal rate from the date of purchase plus reasonable attorneys fees determined by the court, and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff.
Damages, if the consideration given for the security is not capable of being returned, shall be equal to the value of that consideration plus interest at the legal rate from the date of purchase, provided the security is tendered; tendered, plus reasonable attorneys fees determined by the court; and if the plaintiff no longer owns the security, damages in such case shall be equal to the difference between (a) the value of the consideration given for the security plus interest at the legal rate from the date of purchase plus reasonable attorneys fees determined by the court; and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff. Any person who violates Section 25120 or a condition of qualification under Chapter 3 (commencing with Section 25120) of this part imposed pursuant to Section 25141, shall be liable to any person acquiring from him or her the security sold in violation of such section who may sue to recover the difference between (a) the value of the consideration received by the seller and (b) the value of the security at the time it was received by the buyer, with interest thereon at the legal rate from the date of purchase. purchase plus reasonable attorneys fees determined by the court. Any person on whose behalf an offering is made and any underwriter of the offering, whether on a best efforts or a firm commitment basis, shall be jointly and severally liable under this section, but in no event shall any underwriter (unless such underwriter knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly situated did not share in proportion to their respective interest in the underwriting) be liable in any suit or suits authorized under this section for damages in excess of the total price at which the securities underwritten by him or her and distributed to the public were offered to the public. Any tender specified in this section may be made at any time before entry of judgment. No person shall be liable under this section for violation of Section 25110, 25120, or 25130 if the sale of the security is qualified prior to the payment or receipt of any part of the consideration for the security sold, even though an offer to sell or a contract of sale may have been made or entered into without qualification. The court shall award reasonable attorneys fees and costs, and, in its discretion, may award treble and punitive damages, to a prevailing purchaser in an action brought against any person who violates Section 25110 in any offering qualified under Section 25113.1. The court may in its discretion award three times the damages (other than attorneys fees) determined as set forth above and award punitive damages, in addition to those treble damages, against any person who violates Section 25110 in any offering qualified under Section 25113.1 if the court determines that the violation was willful.
SEC. 7.Section 25608 of the Corporations Code is amended to read:25608.(a)The commissioner shall charge and collect the fees fixed in this section and Section 25608.1. All fees charged and collected under this section and Section 25608.1 shall be transmitted to the Treasurer at least weekly, accompanied by a detailed statement thereof and shall be credited to the State Corporations Fund.
(b)The fee for filing an application for a negotiating permit under subdivision (c) of Section 25102 is fifty dollars ($50).
(c)The fee for filing a notice pursuant to paragraph (5) of subdivision (h) of Section 25102 and the fee for filing a notice pursuant to paragraph (4) of subdivision (f) of Section 25102, in addition to the fee prescribed in those paragraphs, if applicable, shall be determined based on the value of the securities proposed to be sold in the transaction for which the notice is filed and in accordance with subdivision (g), and shall be as follows:
Value of Securities | Filing Fee |
$25,000 or less | $25 |
$25,001 to $100,000 | $35 |
$100,001 to $500,000 | $50 |
$500,001 to $1,000,000 | $150 |
Over $1,000,000 | $300 |
(d)The fee for filing an application for designation of an issuer pursuant to subdivision (k) of Section 25100 is fifty dollars ($50).
(e)The fee for filing an application for qualification of the sale of securities by notification under Section 25112 or by permit under paragraph (1) of subdivision (b) of Section 25113 (except applications for qualification by permit of the sale of any guarantee of any security, the fees for which applications are fixed in subdivision (k)) is two hundred dollars ($200) plus one-fifth of 1 percent of the aggregate value of the securities sought to be sold in this state up to a maximum aggregate fee of two thousand five hundred dollars ($2,500).
The fee for filing a small company application for qualification of the sale of securities by permit under paragraph (2) of subdivision (b) of Section 25113 is two thousand five hundred dollars ($2,500). In the case where the costs of processing a small company application exceed the filing fee, an additional fee shall be charged, not to exceed one thousand dollars ($1,000), over and above the filing fee based on the costs of the salary or other compensation paid to persons processing the application plus overhead costs reasonably incurred in the performance of the work. In determining the costs, the commissioner may use the estimated average hourly cost for all persons processing applications for the fiscal year.
The fee for filing a crowdfunding application for qualification of the sale of securities by permit under Section 25113.1 is two hundred dollars ($200) plus one-fifth of 2 percent of the aggregate value of the securities sought to be sold in this state.
(f)The fee for filing an application for qualification of the sale of securities by coordination under Section 25111 or a notice of intention to sell under subdivision (t) of Section 25100 is two hundred dollars ($200) plus one-fifth of 1 percent of the aggregate value of the securities sought to be sold in this state up to a maximum aggregate fee of two thousand five hundred dollars ($2,500).
(g)For the purpose of determining the fees fixed in subdivisions (e) and (f):
(1)The value of the securities shall be the price at which the company proposes to sell the securities, or the value, as alleged in the application, or the actual value, as determined by the commissioner, of the consideration (if other than money) to be received in exchange therefor, or of the securities when sold, whichever is greater.
(2)Interim or voting trust certificates shall have a value equal to the aggregate value of the securities to be represented by the interim or voting trust certificates.
(3)The value of a warrant or right to purchase or subscribe to another security of the same or another issuer shall be an amount equal to the consideration to be paid for that warrant or right plus an amount equal to the consideration to be paid upon purchase of the additional securities, provided that if the latter amount is not determinable at the time of qualification, that amount shall then be the value of the additional securities as determined by the commissioner.
(4)In the case of a share dividend where the shareholders are given an option to accept either cash or additional shares of common stock, the value of the securities to be sold shall be the maximum amount of cash that would be payable in the event that all shareholders elected to accept cash.
(h)The fee for filing an application for qualification of the sale of securities by permit under Section 25121 is:
(1)Two hundred dollars ($200) in connection with any change (including any stock split or reverse stock split or stock dividend, except a stock dividend where the shareholders are given an option to accept either cash or additional shares of common stock) in the rights, preferences, privileges, or restrictions of or on outstanding securities.
(2)Two hundred dollars ($200) plus one-fifth of 1 percent of the value, as alleged in the application, or the actual value, as determined by the commissioner, of the consideration to be received in exchange therefor, up to a maximum aggregate fee of two thousand five hundred dollars ($2,500), in any exchange of securities by the issuer with its existing security holders exclusively, or in any exchange in connection with any merger or consolidation or purchase of corporate assets in consideration of the issuance of securities, or any entity conversion transaction.
(i)The fee for filing an application for qualification of the sale of securities by notification under Section 25131 shall be one hundred dollars ($100).
(j)The fee for an application for the removal of any condition under Section 25141 is fifty dollars ($50).
(k)The fee for filing any application for a permit to execute or issue any guarantee of any security is fifty dollars ($50).
(l)The fee for acting as escrowholder for securities under Section 25149 is fifty dollars ($50). In addition, a fee of two dollars and fifty cents ($2.50) shall be paid for the deposit with the commissioner of each new certificate or other document resulting from a transfer in escrow.
(m)The fee for filing an application for an order (1) consenting to the transfer in escrow of securities or (2) consenting to the transfer of securities subject to any condition imposed by the commissioner requiring the commissioners consent to the transfer is twenty dollars ($20) for each transfer.
(n)The filing fee for an amendment to an application filed after the effective date of the qualification of the sale of securities is fifty dollars ($50) plus any additional fee that would have been required to be paid with the original application for qualification of the sale of securities under this section if the matters set forth in the amendment had been included in the original application.
(o)(1)The fee for filing an application for a broker-dealer certificate under Section 25211 is three hundred dollars ($300).
(2)Each broker-dealer shall pay to the commissioner its pro rata share of all costs and expenses, reasonably incurred in the administration of the broker-dealer program under this division, as estimated by the commissioner for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in the year in which the assessment is made. The pro rata share shall be the proportion that the broker-dealer and the number of its agents in this state bears to the aggregate number of broker-dealers and agents in this state as shown by records maintained by or on behalf of the commissioner. The pro rata share may include the costs of any examinations, audit, or investigation provided for in subdivision (r).
(3)Every broker-dealer who has secured from the commissioner a certificate shall, in order to keep the certificate in effect for an additional period, pay a minimum assessment of seventy-five dollars ($75) on or before the 31st of December in each year.
(4)The commissioner may assess and levy against each broker-dealer any additional amount above the minimum assessment amount of seventy-five dollars ($75) that is reasonable and necessary to support the broker-dealer program under this division. If an additional amount is assessed, the commissioner shall notify each broker-dealer by mail of any additional amount assessed and levied against it on or before the 30th day of May in each year, and that amount shall be paid within 20 days thereafter. If payment is not made within 20 days, the commissioner shall assess and collect a penalty in addition to the assessment of 1 percent of the assessment for each month or part of a month that the payment is delayed or withheld.
(5)If a broker-dealer fails to pay any assessment on or before the 30th day of the month following the day upon which payment is due, the commissioner may by order summarily suspend or revoke the certificate issued to the broker-dealer. If, after that order is made, a request for hearing is filed in writing and a hearing is not held within 60 days thereafter, the order is deemed rescinded as of its effective date. During any period when its certificate is revoked or suspended, a broker-dealer shall not conduct business pursuant to this division except as may be permitted by order of the commissioner; provided, however, that the revocation, suspension, or surrender of a certificate shall not affect the powers of the commissioner as provided under this division.
(6)In determining the amount assessed, the commissioner shall consider all appropriations from the State Corporations Fund for the support of the broker-dealer program under this division and all reimbursements applicable to the administration of the broker-dealer program under this division.
(p) (1)The commissioner shall charge a fee of twenty-five dollars ($25) for the filing of a notice or report required by rules adopted pursuant to subdivision (b) of Section 25210 or subdivision (b) of Section 25230.
(2)The commissioner may charge a fee up to thirty-five dollars ($35) to keep in effect for the following year any notice or report required by rules adopted pursuant to subdivision (b) of Section 25210 or subdivision (b) of Section 25230.
(3)No person shall, on behalf of a broker-dealer licensed pursuant to Section 25211, effect any transaction in, or induce or attempt to induce the purchase or sale of, any security in this state unless the broker-dealer pays the annual fee required by paragraph (2) of this subdivision on or before the day upon which payment is due.
(4)No person may, in this state, on behalf of an investment adviser licensed pursuant to Section 25231, offer or negotiate for the sale of investment advisory services of the investment adviser, determine which recommendations shall be made to, make recommendations to, or manage the accounts of, clients of the investment adviser, or determine the reports or analyses concerning securities to be published by the investment adviser, unless the investment adviser pays the annual fee required by paragraph (2) on or before the day upon which payment is due.
(5)The commissioner may by order summarily enjoin an individual from performing any activity under paragraph (3) or (4) if the annual fee in paragraph (2) is not paid on or before the day upon which payment is due. An order under this paragraph may not be made before 10 days after notice by the commissioner that the fee is due and unpaid.
(q)(1)Except as provided for in paragraph (2), the fee for filing an application for an investment adviser under Section 25231 is one hundred twenty-five dollars ($125), and payment of this amount shall keep the certificate, if granted, in effect during the calendar year during which it is granted. Every investment adviser who has secured from the commissioner a certificate shall, in order to keep the certificate in effect for an additional period, pay a renewal fee of one hundred twenty-five dollars ($125) on or before the 31st day of December.
(2)Paragraph (1) shall not apply to a broker-dealer licensed under Section 25210.
(r)(1)Except as provided for in paragraph (2), the fee for any routine or nonroutine regulatory examination, audit, or investigation is the amount of the salary or other compensation paid to the persons making the examination, audit, or investigation plus the amount of expenses including overhead reasonably incurred in the performance of the work. In determining the costs associated with an examination, audit, or investigation, the commissioner may use the estimated average hourly cost for all persons performing examinations, audits, or investigations for the fiscal year.
(2)An investment adviser licensed under Section 25230 pursuant to the Investment Adviser Registration Depository shall not be subject to paragraph (1) only in regard to the fee for a routine regulatory examination of its investment advisory services for which it is licensed under Section 25230.
(s)The fee for any hearing held by the commissioner pursuant to Section 25142 shall be the sum determined by the commissioner to cover the actual expense of noticing and holding the hearing.
(t)The commissioner may fix by rule a reasonable charge for any publications issued under his or her authority. The charges shall not apply to reports of the commissioner in the ordinary course of distribution.
(u)The fee for filing an offer under subdivision (b) of Section 25507 shall be the amount of filing fee payable under subdivision (e), (f), (h), or (i) of this section if an application had been filed to qualify the transaction in which the securities upon which the offer is to be made were sold in violation of the qualification provisions of this law.
(v)The fee for filing an application for exemption pursuant to subdivision (l) of Section 25100 is two hundred fifty dollars ($250).
(w)The commissioner may by rule require payment of a fee for filing a notice or report required by a rule adopted pursuant to Section 25105. The fee required in connection with a transaction as defined by that rule shall not exceed the fees specified in subdivision (c) based on the value of the securities sold, but the commissioner may permit a single notice for more than one transaction.
(x)The fee for filing the first notice of transaction under subdivision (n) of Section 25102 is six hundred dollars ($600).
(y)The fee for filing a notice of transaction under subdivision (o) of Section 25102 shall be the fee for filing an application for qualification of the sale of securities by permit under paragraph (1) of subdivision (b) of Section 25113 as set forth in subdivision (e) of this section.
(z)The fee for filing a notice of transaction under subdivision (h) of Section 25103 shall be six hundred dollars ($600).
The following transactions are exempted from the provisions of Section 25110:
(a)Any offer (but not a sale) not involving any public offering and the execution and delivery of any agreement for the sale of securities pursuant to the offer if (1) the agreement contains substantially the following provision: The sale of the securities that are the subject of this agreement has not been qualified with the Commissioner of Corporations of the State of California and the issuance of the securities or the payment or receipt of any part of the consideration therefor prior to the qualification is unlawful, unless the sale of securities is exempt from the qualification by Section 25100, 25102, or 25105 of the California Corporations Code. The rights of all parties to this agreement are expressly conditioned upon the qualification being obtained, unless the sale is so exempt; and (2) no part of the purchase price is paid or received and none of the securities are issued until the sale of the securities is qualified under this law unless the sale of securities is exempt from the qualification by this section, Section 25100, or 25105.
(b)Any offer (but not a sale) of a security for which (1) a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and (2) no public proceeding or examination looking towards an order is pending under Section 8 of the act and no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this law.
(c)Any offer (but not a sale) and the execution and delivery of any agreement for the sale of securities pursuant to the offer as may be permitted by the commissioner upon application. Any negotiating permit under this subdivision shall be conditioned to the effect that none of the securities may be issued and none of the consideration therefor may be received or accepted until the sale of the securities is qualified under this law.
(d)Any transaction or agreement between the issuer and an underwriter or among underwriters if the sale of the securities is qualified, or exempt from qualification, at the time of distribution thereof in this state, if any.
(e)Any offer or sale of any evidence of indebtedness, whether secured or unsecured, and any guarantee thereof, in a transaction not involving any public offering.
(f)Any offer or sale of any security in a transaction (other than an offer or sale to a pension or profit-sharing trust of the issuer) that meets each of the following criteria:
(1)Sales of the security are not made to more than 35 persons, including persons not in this state.
(2)All purchasers either have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors or controlling persons, or managers (as appointed or elected by the members) if the offeror is a limited liability company, or by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction.
(3)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or a trust account if the purchaser is a trustee) and not with a view to or for sale in connection with any distribution of the security.
(4)The offer and sale of the security is not accomplished by the publication of any advertisement. The number of purchasers referred to above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limited liability company, and any other purchaser who the commissioner designates by rule. For purposes of this section, spouses a husband and wife (together with any custodian or trustee acting for the account of their minor children) are counted as one person and a partnership, corporation, or other organization that was not specifically formed for the purpose of purchasing the security offered in reliance upon this exemption, is counted as one person. The commissioner shall by rule require the issuer to file a notice of transactions under this subdivision.
The failure to file the notice or the failure to file the notice within the time specified by the rule of the commissioner shall not affect the availability of the exemption. Any issuer that fails to file the notice as provided by rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. Neither the filing of the notice nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action that the commissioner deems necessary or appropriate under this division with respect to the offer and sale of the securities.
(g)Any offer or sale of conditional sale agreements, equipment trust certificates, or certificates of interest or participation therein or partial assignments thereof, covering the purchase of railroad rolling stock or equipment or the purchase of motor vehicles, aircraft, or parts thereof, in a transaction not involving any public offering.
(h)Any offer or sale of voting common stock by a corporation incorporated in any state if, immediately after the proposed sale and issuance, there will be only one class of stock of the corporation outstanding that is owned beneficially by no more than 35 persons, provided all of the following requirements have been met:
(1)The offer and sale of the stock is not accompanied by the publication of any advertisement, and no selling expenses have been given, paid, or incurred in connection therewith.
(2)The consideration to be received by the issuer for the stock to be issued consists of any of the following:
(A)Only assets (which may include cash) of an existing business enterprise transferred to the issuer upon its initial organization, of which all of the persons who are to receive the stock to be issued pursuant to this exemption were owners during, and the enterprise was operated for, a period of not less than one year immediately preceding the proposed issuance, and the ownership of the enterprise immediately prior to the proposed issuance was in the same proportions as the shares of stock are to be issued.
(B)Only cash or cancellation of indebtedness for money borrowed, or both, upon the initial organization of the issuer, provided all of the stock is issued for the same price per share.
(C)Only cash, provided the sale is approved in writing by each of the existing shareholders and the purchaser or purchasers are existing shareholders.
(D)In a case where after the proposed issuance there will be only one owner of the stock of the issuer, only any legal consideration.
(3)No promotional consideration has been given, paid, or incurred in connection with the issuance. Promotional consideration means any consideration paid directly or indirectly to a person who, acting alone or in conjunction with one or more other persons, takes the initiative in founding and organizing the business or enterprise of an issuer for services rendered in connection with the founding or organizing.
(4)A notice in a form prescribed by rule of the commissioner, signed by an active member of the State Bar of California, is filed with or mailed for filing to the commissioner not later than 10 business days after receipt of consideration for the securities by the issuer. That notice shall contain an opinion of the member of the State Bar of California that the exemption provided by this subdivision is available for the offer and sale of the securities. The failure to file the notice as required by this subdivision and the rules of the commissioner shall not affect the availability of this exemption. An issuer who fails to file the notice within the time specified by this subdivision shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110. The notice, except when filed on behalf of a California corporation, shall be accompanied by an irrevocable consent, in the form that the commissioner by rule prescribes, appointing the commissioner or his or her successor in office to be the issuers attorney to receive service of any lawful process in any noncriminal suit, action, or proceeding against it or its successor that arises under this law or any rule or order hereunder after the consent has been filed, with the same force and validity as if served personally on the issuer. An issuer on whose behalf a consent has been filed in connection with a previous qualification or exemption from qualification under this law (or application for a permit under any prior law if the application or notice under this law states that the consent is still effective) need not file another. Service may be made by leaving a copy of the process in the office of the commissioner, but it is not effective unless (A) the plaintiff, who may be the commissioner in a suit, action, or proceeding instituted by him or her, forthwith sends notice of the service and a copy of the process by registered or certified mail to the defendant or respondent at its last address on file with the commissioner, and (B) the plaintiffs affidavit of compliance with this section is filed in the case on or before the return day of the process, if any, or within the further time as the court allows.
(5)Each purchaser represents that the purchaser is purchasing for the purchasers own account, or a trust account if the purchaser is a trustee, and not with a view to or for sale in connection with any distribution of the stock.
For the purposes of this subdivision, all securities held by spouses, a husband and wife, whether or not jointly, shall be considered to be owned by one person, and all securities held by a corporation that has issued stock pursuant to this exemption shall be considered to be held by the shareholders to whom it has issued the stock.
All stock issued by a corporation pursuant to this subdivision as it existed prior to the effective date of the amendments to this section made during the 1996 portion of the 199596 Regular Session that required the issuer to have stamped or printed prominently on the face of the stock certificate a legend in a form prescribed by rule of the commissioner restricting transfer of the stock in a manner provided for by that rule shall not be subject to the transfer restriction legend requirement and, by operation of law, the corporation is authorized to remove that transfer restriction legend from the certificates of those shares of stock issued by the corporation pursuant to this subdivision as it existed prior to the effective date of the amendments to this section made during the 1996 portion of the 199596 Regular Session.
(i)Any offer or sale (1) to a bank, savings and loan association, trust company, insurance company, investment company registered under the Investment Company Act of 1940, pension or profit-sharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or individual retirement account), or other institutional investor or governmental agency or instrumentality that the commissioner may designate by rule, whether the purchaser is acting for itself or as trustee, or (2) to any corporation with outstanding securities registered under Section 12 of the Securities Exchange Act of 1934 or any wholly owned subsidiary of the corporation that after the offer and sale will own directly or indirectly 100 percent of the outstanding capital stock of the issuer, provided the purchaser represents that it is purchasing for its own account (or for the trust account) for investment and not with a view to or for sale in connection with any distribution of the security.
(j)Any offer or sale of any certificate of interest or participation in an oil or gas title or lease (including subsurface gas storage and payments out of production) if either of the following apply:
(1)All of the purchasers meet one of the following requirements:
(A)Are and have been during the preceding two years engaged primarily in the business of drilling for, producing, or refining oil or gas (or whose corporate predecessor, in the case of a corporation, has been so engaged).
(B)Are persons described in paragraph (1) of subdivision (i).
(C)Have been found by the commissioner upon written application to be substantially engaged in the business of drilling for, producing, or refining oil or gas so as not to require the protection provided by this law (which finding shall be effective until rescinded).
(2)The security is concurrently hypothecated to a bank in the ordinary course of business to secure a loan made by the bank, provided that each purchaser represents that it is purchasing for its own account for investment and not with a view to or for sale in connection with any distribution of the security.
(k)Any offer or sale of any security under, or pursuant to, a plan of reorganization under Chapter 11 of the federal bankruptcy law that has been confirmed or is subject to confirmation by the decree or order of a court of competent jurisdiction.
(l)Any offer or sale of an option, warrant, put, call, or straddle, and any guarantee of any of these securities, by a person who is not the issuer of the security subject to the right, if the transaction, had it involved an offer or sale of the security subject to the right by the person, would not have violated Section 25110 or 25130.
(m)Any offer or sale of a stock to a pension, profit-sharing, stock bonus, or employee stock ownership plan, provided that (1) the plan meets the requirements for qualification under Section 401 of the Internal Revenue Code, and (2) the employees are not required or permitted individually to make any contributions to the plan. The exemption provided by this subdivision shall not be affected by whether the stock is contributed to the plan, purchased from the issuer with contributions by the issuer or an affiliate of the issuer, or purchased from the issuer with funds borrowed from the issuer, an affiliate of the issuer, or any other lender.
(n)Any offer or sale of any security in a transaction, other than an offer or sale of a security in a rollup transaction, that meets all of the following criteria:
(1)The issuer is (A) a California corporation or foreign corporation that, at the time of the filing of the notice required under this subdivision, is subject to Section 2115, or (B) any other form of business entity, including without limitation a partnership or trust organized under the laws of this state. The exemption provided by this subdivision is not available to a blind pool issuer, as that term is defined by the commissioner, or to an investment company subject to the Investment Company Act of 1940.
(2)Sales of securities are made only to qualified purchasers or other persons the issuer reasonably believes, after reasonable inquiry, to be qualified purchasers. A corporation, partnership, or other organization specifically formed for the purpose of acquiring the securities offered by the issuer in reliance upon this exemption may be a qualified purchaser if each of the equity owners of the corporation, partnership, or other organization is a qualified purchaser. Qualified purchasers include the following:
(A)A person designated in Section 260.102.13 of Title 10 of the California Code of Regulations.
(B)A person designated in subdivision (i) or any rule of the commissioner adopted thereunder.
(C)A pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or an individual retirement account, if the investment decisions made on behalf of the trust, plan, or account are made solely by persons who are qualified purchasers.
(D)An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, each with total assets in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
(E)With respect to the offer and sale of one class of voting common stock of an issuer or of preferred stock of an issuer entitling the holder thereof to at least the same voting rights as the issuers one class of voting common stock, provided that the issuer has only one-class voting common stock outstanding upon consummation of the offer and sale, a natural person who, either individually or jointly with the persons spouse, (i) has a minimum net worth of two hundred fifty thousand dollars ($250,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or (ii) has a minimum net worth of five hundred thousand dollars ($500,000). Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her business or financial experience, or the business or financial experience of his or her professional adviser, who is unaffiliated with and who is not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer, can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction. The amount of the investment of each natural person shall not exceed 10 percent of the net worth, as determined by this subparagraph, of that natural person.
(F)Any other purchaser designated as qualified by rule of the commissioner.
(3)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or trust account, if the purchaser is a trustee) and not with a view to or for sale in connection with a distribution of the security.
(4)Each natural person purchaser, including a corporation, partnership, or other organization specifically formed by natural persons for the purpose of acquiring the securities offered by the issuer, receives, at least five business days before securities are sold to, or a commitment to purchase is accepted from, the purchaser, a written offering disclosure statement that shall meet the disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.), and any other information as may be prescribed by rule of the commissioner, provided that the issuer shall not be obligated pursuant to this paragraph to provide this disclosure statement to a natural person qualified under Section 260.102.13 of Title 10 of the California Code of Regulations. The offer or sale of securities pursuant to a disclosure statement required by this paragraph that is in violation of Section 25401, or that fails to meet the disclosure requirements of Regulation D (17 C.F.R. 230.501 et seq.), shall not render unavailable to the issuer the claim of an exemption from Section 25110 afforded by this subdivision. This paragraph does not impose, directly or indirectly, any additional disclosure obligation with respect to any other exemption from qualification available under any other provision of this section.
(5)(A)A general announcement of proposed offering may be published by written document only, provided that the general announcement of proposed offering sets forth the following required information:
(i)The name of the issuer of the securities.
(ii)The full title of the security to be issued.
(iii)The anticipated suitability standards for prospective purchasers.
(iv)A statement that (I) no money or other consideration is being solicited or will be accepted, (II) an indication of interest made by a prospective purchaser involves no obligation or commitment of any kind, and, if the issuer is required by paragraph (4) to deliver a disclosure statement to prospective purchasers, (III) no sales will be made or commitment to purchase accepted until five business days after delivery of a disclosure statement and subscription information to the prospective purchaser in accordance with the requirements of this subdivision.
(v)Any other information required by rule of the commissioner.
(vi)The following legend: For more complete information about (Name of Issuer) and (Full Title of Security), send for additional information from (Name and Address) by sending this coupon or calling (Telephone Number).
(B)The general announcement of proposed offering referred to in subparagraph (A) may also set forth the following information:
(i)A brief description of the business of the issuer.
(ii)The geographic location of the issuer and its business.
(iii)The price of the security to be issued, or, if the price is not known, the method of its determination or the probable price range as specified by the issuer, and the aggregate offering price.
(C)The general announcement of proposed offering shall contain only the information that is set forth in this paragraph.
(D)Dissemination of the general announcement of proposed offering to persons who are not qualified purchasers, without more, shall not disqualify the issuer from claiming the exemption under this subdivision.
(6)No telephone solicitation shall be permitted until the issuer has determined that the prospective purchaser to be solicited is a qualified purchaser.
(7)The issuer files a notice of transaction under this subdivision both (A) concurrent with the publication of a general announcement of proposed offering or at the time of the initial offer of the securities, whichever occurs first, accompanied by a filing fee, and (B) within 10 business days following the close or abandonment of the offering, but in no case more than 210 days from the date of filing the first notice. The first notice of transaction under subparagraph (A) shall contain an undertaking, in a form acceptable to the commissioner, to deliver any disclosure statement required by paragraph (4) to be delivered to prospective purchasers, and any supplement thereto, to the commissioner within 10 days of the commissioners request for the information. The exemption from qualification afforded by this subdivision is unavailable if an issuer fails to file the first notice required under subparagraph (A) or to pay the filing fee. The commissioner has the authority to assess an administrative penalty of up to one thousand dollars ($1,000) against an issuer that fails to deliver the disclosure statement required to be delivered to the commissioner upon the commissioners request within the time period set forth above. Neither the filing of the disclosure statement nor the failure by the commissioner to comment thereon precludes the commissioner from taking any action deemed necessary or appropriate under this division with respect to the offer and sale of the securities.
(o)An offer or sale of any security issued by a corporation or limited liability company pursuant to a purchase plan or agreement, or issued pursuant to an option plan or agreement, where the security at the time of issuance or grant is exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 701 adopted pursuant to that act (17 C.F.R. 230.701), the provisions of which are hereby incorporated by reference into this section, provided that (1) the terms of any purchase plan or agreement shall comply with Sections 260.140.42, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, (2) the terms of any option plan or agreement shall comply with Sections 260.140.41, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, and (3) the issuer files a notice of transaction in accordance with rules adopted by the commissioner no later than 30 days after the initial issuance of any security under that plan, accompanied by a filing fee as prescribed by subdivision (y) of Section 25608. The failure to file the notice of transaction within the time specified in this subdivision shall not affect the availability of this exemption. An issuer that fails to file the notice shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay the commissioner a fee equal to the maximum aggregate fee payable had the transaction been qualified under Section 25110.
Offers and sales exempt pursuant to this subdivision shall be deemed to be part of a single, discrete offering and are not subject to integration with any other offering or sale, whether qualified under Chapter 2 (commencing with Section 25110), or otherwise exempt, or not subject to qualification.
(p)An offer or sale of nonredeemable securities to accredited investors (Section 28031) by a person licensed under the Capital Access Company Law (Division 3 (commencing with Section 28000) of Title 4), provided that all purchasers either (1) have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors, controlling persons, or managers (as appointed or elected by the members), or (2) by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction. All nonredeemable securities shall be evidenced by certificates that shall have stamped or printed prominently on their face a legend in a form to be prescribed by rule or order of the commissioner restricting transfer of the securities in the manner as the rule or order provides. The exemption under this subdivision shall not be available for any offering that is exempt or asserted to be exempt pursuant to Section 3(a)(11) of the Securities Act of 1933 (15 U.S.C. Sec. 77c(a)(11)) or Rule 147 (17 C.F.R. 230.147) thereunder or otherwise is conducted by means of any form of general solicitation or general advertising.
(q)Any offer or sale of any viatical or life settlement contract or fractionalized or pooled interest therein in a transaction that meets all of the following criteria:
(1)Sales of securities described in this subdivision are made only to qualified purchasers or other persons the issuer reasonably believes, after reasonable inquiry, to be qualified purchasers. A corporation, partnership, or other organization specifically formed for the purpose of acquiring the securities offered by the issuer in reliance upon this exemption may be a qualified purchaser only if each of the equity owners of the corporation, partnership, or other organization is a qualified purchaser. Qualified purchasers include the following:
(A)A person designated in Section 260.102.13 of Title 10 of the California Code of Regulations.
(B)A person designated in subdivision (i) or any rule of the commissioner adopted thereunder.
(C)A pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or an individual retirement account, if the investment decisions made on behalf of the trust, plan, or account are made solely by persons who are qualified purchasers.
(D)An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, each with total assets in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
(E)A natural person who, either individually or jointly with the persons spouse, (i) has a minimum net worth of one hundred fifty thousand dollars ($150,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year or (ii) has a minimum net worth of two hundred fifty thousand dollars ($250,000). Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
Each natural person specified above, by reason of his or her business or financial experience, or the business or financial experience of his or her professional adviser, who is unaffiliated with and who is not compensated, directly or indirectly, by the issuer or any affiliate or selling agent of the issuer, can be reasonably assumed to have the capacity to protect his or her interests in connection with the transaction.
The amount of the investment of each natural person shall not exceed 10 percent of the net worth, as determined by this subdivision, of that natural person.
(F)Any other purchaser designated as qualified by rule of the commissioner.
(2)Each purchaser represents that the purchaser is purchasing for the purchasers own account (or trust account, if the purchaser is a trustee) and not with a view to or for sale in connection with a distribution of the security.
(3)Each natural person purchaser, including a corporation, partnership, or other organization specifically formed by natural persons for the purpose of acquiring the securities offered by the issuer, receives, at least five business days before securities described in this subdivision are sold to, or a commitment to purchase is accepted from, the purchaser, the following information in writing:
(A)The name, principal business and mailing address, and telephone number of the issuer.
(B)The suitability standards for prospective purchasers as set forth in paragraph (1) of this subdivision.
(C)A description of the issuers type of business organization and the state in which the issuer is organized or incorporated.
(D)A brief description of the business of the issuer.
(E)If the issuer retains ownership or becomes the beneficiary of the insurance policy, an audit report of an independent certified public accountant together with a balance sheet and related statements of income, retained earnings, and cashflows that reflect the issuers financial position, the results of the issuers operations, and the issuers cashflows as of a date within 15 months before the date of the initial issuance of the securities described in this subdivision. The financial statements listed in this subparagraph shall be prepared in conformity with generally accepted accounting principles. If the date of the audit report is more than 120 days before the date of the initial issuance of the securities described in this subdivision, the issuer shall provide unaudited interim financial statements.
(F)The names of all directors, officers, partners, members, or trustees of the issuer.
(G)A description of any order, judgment, or decree that is final as to the issuing entity of any state, federal, or foreign country governmental agency or administrator, or of any state, federal, or foreign country court of competent jurisdiction (i) revoking, suspending, denying, or censuring for cause any license, permit, or other authority of the issuer or of any director, officer, partner, member, trustee, or person owning or controlling, directly or indirectly, 10 percent or more of the outstanding interest or equity securities of the issuer, to engage in the securities, commodities, franchise, insurance, real estate, or lending business or in the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (ii) permanently restraining, enjoining, barring, suspending, or censuring any such person from engaging in or continuing any conduct, practice, or employment in connection with the offer or sale of securities, commodities, franchises, insurance, real estate, or loans, (iii) convicting any such person of, or pleading nolo contendere by any such person to, any felony or misdemeanor involving a security, commodity, franchise, insurance, real estate, or loan, or any aspect of the securities, commodities, franchise, insurance, real estate, or lending business, or involving dishonesty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property, or (iv) holding any such person liable in a civil action involving breach of a fiduciary duty, fraud, deceit, embezzlement, fraudulent conversion, or misappropriation of property. This subparagraph does not apply to any order, judgment, or decree that has been vacated, overturned, or is more than 10 years old.
(H)Notice of the purchasers right to rescind or cancel the investment and receive a refund pursuant to Section 25508.5.
(I)The name, address, and telephone number of the issuing insurance company, and the name, address, and telephone number of the state or foreign country regulator of the insurance company.
(J)The total face value of the insurance policy and the percentage of the insurance policy the purchaser will own.
(K)The insurance policy number, issue date, and type.
(L)If a group insurance policy, the name, address, and telephone number of the group, and, if applicable, the material terms and conditions of converting the policy to an individual policy, including the amount of increased premiums.
(M)If a term insurance policy, the term and the name, address, and telephone number of the person who will be responsible for renewing the policy if necessary.
(N)That the insurance policy is beyond the state statute for contestability and the reason therefor.
(O)The insurance policy premiums and terms of premium payments.
(P)The amount of the purchasers moneys that will be set aside to pay premiums.
(Q)The name, address, and telephone number of the person who will be the insurance policy owner and the person who will be responsible for paying premiums.
()(R)The date on which the purchaser will be required to pay premiums and the amount of the premium, if known.
(S)A statement to the effect that any projected rate of return to the purchaser from the purchase of a viatical or life settlement contract or a fractionalized or pooled interest therein is based on an estimated life expectancy for the person insured under the life insurance policy; that the return on the purchase may vary substantially from the expected rate of return based upon the actual life expectancy of the insured that may be less than, equal to, or may greatly exceed the estimated life expectancy; and that the rate of return would be higher if the actual life expectancy were less than, and lower if the actual life expectancy were greater than the estimated life expectancy of the insured at the time the viatical or life settlement contract was closed.
(T)A statement that the purchaser should consult with his or her tax adviser regarding the tax consequences of the purchase of the viatical or life settlement contract or fractionalized or pooled interest therein and, if the purchaser is using retirement funds or accounts for that purchase, whether or not any adverse tax consequences might result from the use of those funds for the purchase of that investment.
(U)Any other information as may be prescribed by rule of the commissioner.
SEC. 2.Section 25104 of the Corporations Code is amended to read:25104.The following transactions are exempted from the provisions of Section 25130:
(a)Any offer or sale of a security by the bona fide owner thereof for his or her own account if the sale (1) is not accompanied by the publication of any advertisement and (2) is not effected by or through a broker-dealer in a public offering.
(b)Any offer or sale effected by or through a licensed broker-dealer pursuant to an unsolicited order or offer to buy. For the purpose of this subdivision, an inquiry regarding a written bid for a security or a written solicitation of an offer to sell a security made by another broker-dealer within the previous 60 days shall not be considered the solicitation of an order or offer to buy.
(c)Any offer or sale to a bank, savings and loan association, trust company, insurance company, investment company registered under the Investment Company Act of 1940, pension or profit-sharing trust (other than a pension or profit-sharing trust of the issuer, a self-employed individual retirement plan, or individual retirement account), or such other institutional investor or governmental agency or instrumentality as the commissioner may designate by rule, whether the purchaser is acting for itself or as trustee; provided the purchaser represents that it is purchasing for its own account (or for the trust account) for investment and not with a view to or for sale in connection with any distribution of the security.
(d)Any transaction or agreement between a person on whose behalf an offering is made and an underwriter or among underwriters, if the sale of the securities is exempt from qualification at the time of or qualified prior to distribution in this state, if any.
(e)Any offer or sale of any security by or for the account of a bona fide secured party selling the security in the ordinary course of business to liquidate a bona fide debt.
(f)Any transaction by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator.
(g)Any offer (but not a sale) of a security for which (1) a registration statement has been filed under the Securities Act of 1933 but has not yet become effective, or for which an offering statement under Regulation A has been filed but has not yet been qualified, if no stop order or refusal order is in effect and no public proceeding or examination looking toward such an order is pending under Section 8 of that act and (2) no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this division.
(h)Any offer or sale of a security if a qualification under Chapter 2 (commencing with Section 25110) of this part for any securities of the same class has become effective within 18 months, or longer period as the commissioner may order provided that each consecutive order shall be for no more than six months, prior to the offer or sale or if a qualification under Chapter 3 (commencing with Section 25120) or Chapter 4 (commencing with Section 25130) of this part for any securities of the same class has become effective within 12 months prior to that offer or sale, provided no order under Section 25140 or subdivision (a) of Section 25143 is in effect under this division with respect to the qualification, and, provided further, that this exemption does not apply to securities offered pursuant to a registration under the Securities Act of 1933 or pursuant to an exemption under Regulation A under that act if the aggregate offering price of the securities offered under such exemption exceeds fifty thousand dollars ($50,000). The commissioner may, by rule or order, withhold this exemption with respect to securities qualified only pursuant to a limited offering qualification.
SEC. 3.Section 25110 of the Corporations Code is amended to read:25110.It is unlawful for any person to offer or sell in this state any security in an issuer transaction (other than in a transaction subject to Section 25120), whether or not by or through underwriters, unless such sale has been qualified under Section 25111, 25112 25112, 25113, or 25113 25113.1 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part. The offer or sale of such a security in a manner that varies or differs from, exceeds the scope of, or fails to conform with either a material term or material condition of qualification of the offering as set forth in the permit or qualification order, or a material representation as to the manner of offering which is set forth in the application for qualification, shall be an unqualified offer or sale.
SEC. 4.Section 25113.1 is added to the Corporations Code, to read:25113.1.(a)Any offer or sale of any security that meets all of the conditions in subdivision (b) may be qualified by permit under this section.
(b)(1)An application for a crowdfunding permit under this section shall contain any information and be accompanied by any documents as shall be required by rule of the commissioner, in addition to the information specified in Section 25160 and the consent to service of process required by Section 25165. For this purpose, the commissioner may classify issuers and types of securities.
(2)An applicant may file an application for a crowdfunding permit under this section if it meets all of the following conditions:
(A)The applicant is: (i) a California corporation or a foreign corporation, which at the time of filing an application under this subdivision is subject to Section 2115, and neither corporation is a blind pool company, as that term is defined by the commissioner; (ii) not issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights; (iii) not an investment company subject to the Investment Company Act of 1940; and (iv) not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
(B)The total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to one million dollars ($1,000,000), less the aggregate offering price for all securities sold (within the 12 months before the start, and during the offering, of the securities) under Rule 504 (17 C.F.R. 230.504) under the Securities Act of 1933 or in violation of subdivision (a) of Section 5 of that act.
(C)Offers and sales made in reliance on this section will not be integrated with: (i) prior offers or sales of securities or (ii) subsequent offers or sales of securities that are (I) registered under the Securities Act of 1933; (II) made pursuant to Rule 701 (17 C.F.R. 230.701) under that act; (III) made pursuant to an employee benefit plan; (IV) made pursuant to Regulation S (17 C.F.R. 230.901-905) under that act; (V) made in reliance on Regulation CF (17 C.F.R. 227.100-503); or (VI) made more than six months after the completion of the offering in reliance on this section.
(D)The aggregate amount of securities sold to any investor in reliance on this section, including any amount sold during the 12-month period preceding the date of the transaction, does not exceed the lesser of five thousand dollars ($5,000) or 10 percent of the net worth of that natural person, or such amount as the commissioner may provide by rule or order. Net worth shall be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at fair market value.
(E)The applicant has taken reasonable steps to ensure that each investor who is a natural person who is not an accredited investor as defined in Rule 501 (17 C.F.R. 230.501) under the Securities Act of 1933 either alone or with his or her purchaser representative or representatives has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.
(F)The applicant files with the commissioner, provides to investors, and makes available to prospective investors: (i) a Small Company Offering Registration disclosure document on Form U-7, as adopted by the North American Securities Administrators Association; and (ii) any other disclosures and documents deemed necessary or desirable by the commissioner.
(G)For any offering made pursuant to this section, the applicant shall provide to a prospective investor a disclosure document meeting the requirements of Section 260.113.1 of Title 10 of the California Code of Regulations, a permit application disclosure document based on the Form U-7, as adopted by the North American Securities Administrators Association, and any additional requirements as the commissioner shall prescribe, that may include, but not be limited to, investor suitability and due diligence investigation requirements.
(H)The investor shall have a three-day right to rescind any investment made in any security offered under this section. The three-day period shall end at 11:59 p.m. Pacific standard time on the third business day after the date on which the issuers confirmation of its acceptance of the investors investment is communicated in writing and received by the investor.
(I)The applicant sets aside in a separate third-party escrow account all funds raised as part of the offering, to be held in escrow until the time that the minimum offering amount is reached. If the minimum offering amount is not reached within one year of the effective date of the offering, the applicant shall return all funds to investors.
(J)The applicant shall not, itself or through any third party, conduct any direct solicitation of the securities offered by this section. For purposes of this subparagraph, direct solicitation means and includes the following: any in-person or face-to-face conversation between the applicant or any of its founders, promoters, officers, directors, controlling persons, agents, or other persons acting directly or indirectly on behalf of the applicant and any investor or prospective investor or any person acting directly or indirectly on behalf of, or in regular communication with, the investor. The applicant shall not, itself or through any third party, conduct any unsolicited telephone solicitation of the securities offered by this section.
(K)Each sales transaction shall meet the following requirements:
(i)The transaction is conducted through an intermediary that complies with the requirements in Section 4A(a) of the Securities Act (15 U.S.C. 77d1(a)).
(ii)The transaction is conducted exclusively through the intermediarys platform.
(L)The applicant shall not conduct an offering or concurrent offerings in reliance on this section using more than one intermediary.
(M)The applicant shall comply with the following requirements regarding its advertisements, as that term is defined in Section 25002, including, but not limited to, advertisement that is published by electronic means:
(i)No applicant shall publish any advertisement in this state concerning any security sold or offered for sale in this state unless a true copy of the advertisement has first been filed in the office of the commissioner at least three business days prior to the publication or such shorter period as the commissioner may by rule or order allow.
(ii)No applicant shall advertise, print, display, publish, distribute, or broadcast, or cause or permit to be advertised, printed, displayed, published, distributed, or broadcast, in any manner, any statement or representation with regard to the business subject to the provisions of this section, including the rates, terms, or conditions for an offering or transaction that is false, misleading, or deceptive, or that omits any statement necessary in order to make the statement made, in the light of the circumstances under which they were made, not misleading.
(iii)No applicant shall place an advertisement disseminated primarily in this state unless the applicant discloses in the printed text of the advertisement, or the oral text in the case of a radio or television advertisement, that the applicant has a permit issued by the department pursuant to this section.
(iv)The commissioner may require that rates of charges or fees, if stated by the applicant, be stated fully and clearly in the manner that the commissioner deems necessary to give adequate information to, or to prevent misunderstanding by, prospective investors.
(v)No advertisement shall be used after its use has been disapproved by the commissioner and the applicant is notified in writing of the disapproval. Such notification may be given summarily without notice or hearing. At any time after the issuance of a notification under this section, the person desiring to use the advertisement may in writing request that the order be rescinded. Upon the receipt of such a written request, the matter shall be set down for hearing to commence within 15 business days after such receipt unless the person making the request consents to a later date. After such hearing, which shall be conducted in accordance with the provisions of the Administrative Procedure Act (Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code) the commissioner shall determine whether to affirm and continue or to rescind such order, and the commissioner shall have all the powers granted under such act.
(vi)The commissioner may require applicants to maintain a file of all advertisements for a period of three years from the date of their use, unless by regulation, the commissioner specifies a different period of time for retaining such advertisements. The file shall be available to the commissioner upon request.
(N)The applicant or any person or entity selling an investment to an investor pursuant to this section, including without limitation, any issuer, securities broker-dealer, agent, or officer, director, founder, promoter, controlling person, or other persons acting directly or indirectly on behalf of the applicant shall have a fiduciary obligation to any investor or prospective investor.
(O)The applicant, a predecessor of the applicant, an affiliated applicant, a director, executive officer, or other officer participating in the offering, a general partner or managing member of the applicant, a beneficial owner of 20 percent or more of the applicants outstanding voting equity securities, calculated on the basis of voting power, a promoter connected with the issuer in any capacity at the time of the sale, an investment manager of an applicant that is a pooled investment fund, a person that has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in connection with the sale of securities, a general partner or managing member of the investment manager or solicitor, or any director, executive officer, or other officer participating in the offering of the investment manager or solicitor or general partner or managing member of the investment manager or solicitor shall not be disqualified as a bad actor under Rule 506(d) (17 C.F.R. 230.506(d)) under the Securities Act of 1933.
(P)The applicant undertakes that there will be no stock splits, stock dividends, spinoffs, or mergers for a period of two years from the close of the offering.
(Q)Any other requirement set forth by rule adopted by the commissioner.
(c)The Department of Business Oversight shall either issue or deny the permit within 60 days of the receipt of the application. If the Department of Business Oversight fails to either issue or deny the permit within 60 days, the applicant may demand a hearing with the Department of Business Oversight. Upon the receipt of such a written request, the matter shall be set down for hearing to commence within 15 business days after such receipt unless the person making the request consents to a later date. After such hearing, which shall be conducted in accordance with the provisions of the Administrative Procedure Act (Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code) the commissioner shall determine whether to affirm and continue or to rescind such order denying the permit, and the commissioner shall have all the powers granted under such act.
SEC. 5.Section 25501 of the Corporations Code is amended to read:25501.Any person who violates Section 25401 shall be liable to the person who purchases a security from him or her or sells a security to him, him or her, who may sue either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security), unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know (or if he or she had exercised reasonable care would not have known) of the untruth or omission. The plaintiff shall not be required to plead or prove that the defendant acted with scienter. Upon rescission, a purchaser may shall recover the consideration paid for the security, plus interest at the legal rate, less the amount of any income received on the security, upon tender of the security. Upon rescission, a seller may shall recover the security, upon tender of the consideration paid for the security plus interest at the legal rate, less the amount of any income received by the defendant on the security. Damages recoverable under this section by a purchaser shall be an amount equal to the difference between (a) the price at which the security was bought plus interest at the legal rate from the date of purchase and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received on the security by the plaintiff. Damages recoverable under this section by a seller shall be an amount equal to the difference between (1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security and (2) the price at which the security was sold plus interest at the legal rate from the date of sale. Any tender specified in this section may be made at any time before entry of judgment.
SEC. 6.Section 25503 of the Corporations Code is amended to read:25503.Any person who violates Section 25110, 25130 25130, or 25133, or a condition of qualification under Chapter 2 (commencing with Section 25110) of this part, imposed pursuant to Section 25141, or an order suspending trading issued pursuant to Section 25219, shall be liable to any person acquiring from him or her the security sold in violation of such section, who may sue to recover the consideration he or she paid for such security with interest thereon at the legal rate, less the amount of any income received therefrom, upon the tender of such security, or for damages, if he or she no longer owns the security, or if the consideration given for the security is not capable of being returned. Damages, if the plaintiff no longer owns the security, shall be equal to the difference between (a) his or her purchase price plus interest at the legal rate from the date of purchase and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff.
Damages, if the consideration given for the security is not capable of being returned, shall be equal to the value of that consideration plus interest at the legal rate from the date of purchase, provided the security is tendered; and if the plaintiff no longer owns the security, damages in such case shall be equal to the difference between (a) the value of the consideration given for the security plus interest at the legal rate from the date of purchase and (b) the value of the security at the time it was disposed of by the plaintiff plus the amount of any income received therefrom by the plaintiff. Any person who violates Section 25120 or a condition of qualification under Chapter 3 (commencing with Section 25120) of this part imposed pursuant to Section 25141, shall be liable to any person acquiring from him or her the security sold in violation of such section who may sue to recover the difference between (a) the value of the consideration received by the seller and (b) the value of the security at the time it was received by the buyer, with interest thereon at the legal rate from the date of purchase. Any person on whose behalf an offering is made and any underwriter of the offering, whether on a best efforts or a firm commitment basis, shall be jointly and severally liable under this section, but in no event shall any underwriter (unless such underwriter shall have knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly situated did not share in proportion to their respective interest in the underwriting) be liable in any suit or suits authorized under this section for damages in excess of the total price at which the securities underwritten by him or her and distributed to the public were offered to the public. Any tender specified in this section may be made at any time before entry of judgment. No person shall be liable under this section for violation of Section 25110, 25120 25120, or 25130 if the sale of the security is qualified prior to the payment or receipt of any part of the consideration for the security sold, even though an offer to sell or a contract of sale may have been made or entered into without qualification. The court shall award reasonable attorneys fees and costs, and, in its discretion, may award treble and punitive damages, to a prevailing purchaser in an action brought against any person who violates Section 25110 in any offering qualified under Section 25113.1.
SEC. 7.Section 25608 of the Corporations Code is amended to read:25608.(a)The commissioner shall charge and collect the fees fixed in this section and Section 25608.1. All fees charged and collected under this section and Section 25608.1 shall be transmitted to the Treasurer at least weekly, accompanied by a detailed statement thereof and shall be credited to the State Corporations Fund.
(b)The fee for filing an application for a negotiating permit under subdivision (c) of Section 25102 is fifty dollars ($50).
(c)The fee for filing a notice pursuant to paragraph (5) of subdivision (h) of Section 25102 and the fee for filing a notice pursuant to paragraph (4) of subdivision (f) of Section 25102, in addition to the fee prescribed in those paragraphs, if applicable, shall be determined based on the value of the securities proposed to be sold in the transaction for which the notice is filed and in accordance with subdivision (g), and shall be as follows:
Value of Securities | Filing Fee |
$25,000 or less | $25 |
$25,001 to $100,000 | $35 |
$100,001 to $500,000 | $50 |
$500,001 to $1,000,000 | $150 |
Over $1,000,000 | $300 |
(d)The fee for filing an application for designation of an issuer pursuant to subdivision (k) of Section 25100 is fifty dollars ($50).
(e)The fee for filing an application for qualification of the sale of securities by notification under Section 25112 or by permit under paragraph (1) of subdivision (b) of Section 25113 (except applications for qualification by permit of the sale of any guarantee of any security, the fees for which applications are fixed in subdivision (k)) is two hundred dollars ($200) plus one-fifth of 1 percent of the aggregate value of the securities sought to be sold in this state up to a maximum aggregate fee of two thousand five hundred dollars ($2,500).
The fee for filing a small company application for qualification of the sale of securities by permit under paragraph (2) of subdivision (b) of Section 25113 is two thousand five hundred dollars ($2,500). In the case where the costs of processing a small company application exceed the filing fee, an additional fee shall be charged, not to exceed one thousand dollars ($1,000), over and above the filing fee based on the costs of the salary or other compensation paid to persons processing the application plus overhead costs reasonably incurred in the performance of the work. In determining the costs, the commissioner may use the estimated average hourly cost for all persons processing applications for the fiscal year.
The fee for filing a crowdfunding application for qualification of the sale of securities by permit under Section 25113.1 is two hundred dollars ($200) plus one-fifth of 2 percent of the aggregate value of the securities sought to be sold in this state.
(f)The fee for filing an application for qualification of the sale of securities by coordination under Section 25111 or a notice of intention to sell under subdivision (t) of Section 25100 is two hundred dollars ($200) plus one-fifth of 1 percent of the aggregate value of the securities sought to be sold in this state up to a maximum aggregate fee of two thousand five hundred dollars ($2,500).
(g)For the purpose of determining the fees fixed in subdivisions (e) and (f):
(1)The value of the securities shall be the price at which the company proposes to sell the securities, or the value, as alleged in the application, or the actual value, as determined by the commissioner, of the consideration (if other than money) to be received in exchange therefor, or of the securities when sold, whichever is greater.
(2)Interim or voting trust certificates shall have a value equal to the aggregate value of the securities to be represented by the interim or voting trust certificates.
(3)The value of a warrant or right to purchase or subscribe to another security of the same or another issuer shall be an amount equal to the consideration to be paid for that warrant or right plus an amount equal to the consideration to be paid upon purchase of the additional securities, provided that if the latter amount is not determinable at the time of qualification, that amount shall then be the value of the additional securities as determined by the commissioner.
(4)In the case of a share dividend where the shareholders are given an option to accept either cash or additional shares of common stock, the value of the securities to be sold shall be the maximum amount of cash that would be payable in the event that all shareholders elected to accept cash.
(h)The fee for filing an application for qualification of the sale of securities by permit under Section 25121 is:
(1)Two hundred dollars ($200) in connection with any change (including any stock split or reverse stock split or stock dividend, except a stock dividend where the shareholders are given an option to accept either cash or additional shares of common stock) in the rights, preferences, privileges, or restrictions of or on outstanding securities.
(2)Two hundred dollars ($200) plus one-fifth of 1 percent of the value, as alleged in the application, or the actual value, as determined by the commissioner, of the consideration to be received in exchange therefor, up to a maximum aggregate fee of two thousand five hundred dollars ($2,500), in any exchange of securities by the issuer with its existing security holders exclusively, or in any exchange in connection with any merger or consolidation or purchase of corporate assets in consideration of the issuance of securities, or any entity conversion transaction.
(i)The fee for filing an application for qualification of the sale of securities by notification under Section 25131 shall be one hundred dollars ($100).
(j)The fee for an application for the removal of any condition under Section 25141 is fifty dollars ($50).
(k)The fee for filing any application for a permit to execute or issue any guarantee of any security is fifty dollars ($50).
(l)The fee for acting as escrowholder for securities under Section 25149 is fifty dollars ($50). In addition, a fee of two dollars and fifty cents ($2.50) shall be paid for the deposit with the commissioner of each new certificate or other document resulting from a transfer in escrow.
(m)The fee for filing an application for an order (1) consenting to the transfer in escrow of securities or (2) consenting to the transfer of securities subject to any condition imposed by the commissioner requiring the commissioners consent to the transfer is twenty dollars ($20) for each transfer.
(n)The filing fee for an amendment to an application filed after the effective date of the qualification of the sale of securities is fifty dollars ($50) plus any additional fee that would have been required to be paid with the original application for qualification of the sale of securities under this section if the matters set forth in the amendment had been included in the original application.
(o)(1)The fee for filing an application for a broker-dealer certificate under Section 25211 is three hundred dollars ($300).
(2)Each broker-dealer shall pay to the commissioner its pro rata share of all costs and expenses, reasonably incurred in the administration of the broker-dealer program under this division, as estimated by the commissioner for the ensuing year and any deficit actually incurred or anticipated in the administration of the program in the year in which the assessment is made. The pro rata share shall be the proportion that the broker-dealer and the number of its agents in this state bears to the aggregate number of broker-dealers and agents in this state as shown by records maintained by or on behalf of the commissioner. The pro rata share may include the costs of any examinations, audit, or investigation provided for in subdivision (r).
(3)Every broker-dealer who has secured from the commissioner a certificate shall, in order to keep the certificate in effect for an additional period, pay a minimum assessment of seventy-five dollars ($75) on or before the 31st of December in each year.
(4)The commissioner may assess and levy against each broker-dealer any additional amount above the minimum assessment amount of seventy-five dollars ($75) that is reasonable and necessary to support the broker-dealer program under this division. If an additional amount is assessed, the commissioner shall notify each broker-dealer by mail of any additional amount assessed and levied against it on or before the 30th day of May in each year, and that amount shall be paid within 20 days thereafter. If payment is not made within 20 days, the commissioner shall assess and collect a penalty in addition to the assessment of 1 percent of the assessment for each month or part of a month that the payment is delayed or withheld.
(5)If a broker-dealer fails to pay any assessment on or before the 30th day of the month following the day upon which payment is due, the commissioner may by order summarily suspend or revoke the certificate issued to the broker-dealer. If, after that order is made, a request for hearing is filed in writing and a hearing is not held within 60 days thereafter, the order is deemed rescinded as of its effective date. During any period when its certificate is revoked or suspended, a broker-dealer shall not conduct business pursuant to this division except as may be permitted by order of the commissioner; provided, however, that the revocation, suspension, or surrender of a certificate shall not affect the powers of the commissioner as provided under this division.
(6)In determining the amount assessed, the commissioner shall consider all appropriations from the State Corporations Fund for the support of the broker-dealer program under this division and all reimbursements applicable to the administration of the broker-dealer program under this division.
(p) (1)The commissioner shall charge a fee of twenty-five dollars ($25) for the filing of a notice or report required by rules adopted pursuant to subdivision (b) of Section 25210 or subdivision (b) of Section 25230.
(2)The commissioner may charge a fee up to thirty-five dollars ($35) to keep in effect for the following year any notice or report required by rules adopted pursuant to subdivision (b) of Section 25210 or subdivision (b) of Section 25230.
(3)No person shall, on behalf of a broker-dealer licensed pursuant to Section 25211, effect any transaction in, or induce or attempt to induce the purchase or sale of, any security in this state unless the broker-dealer pays the annual fee required by paragraph (2) of this subdivision on or before the day upon which payment is due.
(4)No person may, in this state, on behalf of an investment adviser licensed pursuant to Section 25231, offer or negotiate for the sale of investment advisory services of the investment adviser, determine which recommendations shall be made to, make recommendations to, or manage the accounts of, clients of the investment adviser, or determine the reports or analyses concerning securities to be published by the investment adviser, unless the investment adviser pays the annual fee required by paragraph (2) on or before the day upon which payment is due.
(5)The commissioner may by order summarily enjoin an individual from performing any activity under paragraph (3) or (4) if the annual fee in paragraph (2) is not paid on or before the day upon which payment is due. An order under this paragraph may not be made before 10 days after notice by the commissioner that the fee is due and unpaid.
(q)(1)Except as provided for in paragraph (2), the fee for filing an application for an investment adviser under Section 25231 is one hundred twenty-five dollars ($125), and payment of this amount shall keep the certificate, if granted, in effect during the calendar year during which it is granted. Every investment adviser who has secured from the commissioner a certificate shall, in order to keep the certificate in effect for an additional period, pay a renewal fee of one hundred twenty-five dollars ($125) on or before the 31st day of December.
(2)Paragraph (1) shall not apply to a broker-dealer licensed under Section 25210.
(r)(1)Except as provided for in paragraph (2), the fee for any routine or nonroutine regulatory examination, audit, or investigation is the amount of the salary or other compensation paid to the persons making the examination, audit, or investigation plus the amount of expenses including overhead reasonably incurred in the performance of the work. In determining the costs associated with an examination, audit, or investigation, the commissioner may use the estimated average hourly cost for all persons performing examinations, audits, or investigations for the fiscal year.
(2)An investment adviser licensed under Section 25230 pursuant to the Investment Adviser Registration Depository shall not be subject to paragraph (1) only in regard to the fee for a routine regulatory examination of its investment advisory services for which it is licensed under Section 25230.
(s)The fee for any hearing held by the commissioner pursuant to Section 25142 shall be the sum determined by the commissioner to cover the actual expense of noticing and holding the hearing.
(t)The commissioner may fix by rule a reasonable charge for any publications issued under his or her authority. The charges shall not apply to reports of the commissioner in the ordinary course of distribution.
(u)The fee for filing an offer under subdivision (b) of Section 25507 shall be the amount of filing fee payable under subdivision (e), (f), (h), or (i) of this section if an application had been filed to qualify the transaction in which the securities upon which the offer is to be made were sold in violation of the qualification provisions of this law.
(v)The fee for filing an application for exemption pursuant to subdivision (l) of Section 25100 is two hundred fifty dollars ($250).
(w)The commissioner may by rule require payment of a fee for filing a notice or report required by a rule adopted pursuant to Section 25105. The fee required in connection with a transaction as defined by that rule shall not exceed the fees specified in subdivision (c) based on the value of the securities sold, but the commissioner may permit a single notice for more than one transaction.
(x)The fee for filing the first notice of transaction under subdivision (n) of Section 25102 is six hundred dollars ($600).
(y)The fee for filing a notice of transaction under subdivision (o) of Section 25102 shall be the fee for filing an application for qualification of the sale of securities by permit under paragraph (1) of subdivision (b) of Section 25113 as set forth in subdivision (e) of this section.
(z)The fee for filing a notice of transaction under subdivision (h) of Section 25103 shall be six hundred dollars ($600).
|
Date
|
Status
|
|---|---|
| Feb 1, 2018 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
| Jan 31, 2018 | Died pursuant to Art. IV, Sec. 10(c) of the Constitution. |
| May 26, 2017 | In committee: Held under submission. |
| May 10, 2017 | In committee: Set, first hearing. Referred to APPR. suspense file. |
| Apr 25, 2017 | From committee: Do pass and re-refer to Com. on APPR. (Ayes 9. Noes 0.) (April 25). Re-referred to Com. on APPR. |
| Apr 18, 2017 | From committee: Do pass and re-refer to Com. on JUD. (Ayes 8. Noes 1.) (April 17). Re-referred to Com. on JUD. |
| Apr 6, 2017 | Re-referred to Com. on B. & F. |
| Apr 5, 2017 | From committee chair, with author's amendments: Amend, and re-refer to Com. on B. & F. Read second time and amended. |
| Mar 27, 2017 | From committee chair, with author's amendments: Amend, and re-refer to Com. on B. & F. Read second time and amended. |
| Mar 28, 2017 | Re-referred to Com. on B. & F. |
| Mar 27, 2017 | In committee: Hearing postponed by committee. |
| Mar 16, 2017 | Referred to Coms. on B. & F. and JUD. |
| Feb 19, 2017 | From printer. May be heard in committee March 21. |
| Feb 17, 2017 | Read first time. To print. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| Apr 25, 2017 | Do pass and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Judiciary |
Passed |
|
| Apr 17, 2017 | Do pass and be re-referred to the Committee on [Judiciary] | Assembly Standing Committee on Banking and Finance |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| California Asian Pacific Chamber Of Commerce | ** Support | Apr 23, 2017 |
| California Association of Competitive Telecommunications Companies | ** Support | Apr 23, 2017 |
| California Association of Micro-economic Opportunity | ** Support | Apr 23, 2017 |
| California Black Chamber of Commerce | ** Support | Apr 23, 2017 |
| California Chamber Of Commerce | * Indeterminate | Apr 25, 2017 |
| California Metals Coalition | ** Support | Apr 23, 2017 |
| Civil Justice Association Of California | * Indeterminate | Apr 25, 2017 |
| Flasher Barricade Association | ** Support | Apr 23, 2017 |
| Golden Gate Restaurant Association | ** Support | Apr 23, 2017 |
| Greater Geary Boulevard Merchants & Property Owners Association | ** Support | Apr 23, 2017 |
| National Association of Women Business Owners | * Support | Apr 25, 2017 |
| National Federation Of Independent Business | ** Support | Apr 23, 2017 |
| North East Mission Business Association | ** Support | Apr 14, 2017 |
| North East Mission Business Association Opportunity Fund | ** Support | Apr 23, 2017 |
| Northern California Independent Booksellers Association | ** Support | Apr 23, 2017 |
| Opportunity Fund | ** Support | Apr 14, 2017 |
| Oppose | ** Against | Apr 23, 2017 |
| Pacific Coast Regional Small Business Development Corporation | ** Support | Apr 14, 2017 |
| Plumbing Heating Cooling Contractors Of California | ** Support | Apr 23, 2017 |
| Plumbing-Heating-Cooling Contractors Association of California | ** Support | Apr 14, 2017 |
| Public Investors Arbitration Bar Association | ** Support | Apr 23, 2017 |
| San Francisco Builders Exchange | ** Support | Apr 23, 2017 |
| San Francisco Chamber of Commerce | ** Support | Apr 23, 2017 |
| San Francisco Council of District Merchants Association | ** Support | Apr 23, 2017 |
| San Francisco Locally Owned Merchants Alliance | ** Support | Apr 23, 2017 |
| San Francisco Small Business Network | ** Support | Apr 23, 2017 |
| Sierra Business Council | ** Support | Apr 23, 2017 |
| Small Business California | * Support | Apr 25, 2017 |
| Small Business Majority | * Support | Apr 25, 2017 |
| Small Manufacturers Association of California | ** Support | Apr 23, 2017 |
Date of Hearing: May 10, 2017
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez Fletcher, Chair
ABPCA Bill Id:AB 1517
Author:(Muratsuchi) – As Amended Ver:April 5, 2017
Policy Committee: | Banking and Finance | Vote: | 8 - 1 |
Judiciary | 9 - 0 | ||
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Urgency: No State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill amends the rules governing the qualification to offer or sell a security by allowing crowdfunding to “qualify by permit” under California’s Corporate Securities Law. Specifically, this bill:
- Provides that an applicant may file an application for a "crowdfunding" permit if the applicant meets specified conditions, including any requirements established by a rule of the Commissioner of the Department of Business Oversight (DBO). This bill requires DBO to either issue or deny the permit within 60 days of receipt of the application otherwise the applicant can demand a hearing with DBO within 15 days.
- Requires an application to comply with specified requirements related to advertising. This bill contemplates that DBO would review advertisements and approve or disapprove them.
- Imposes a filing fee, payable to DBO, of $200 plus one-fifth of two percent of the aggregate value of the securities sought to be sold in California for qualification of the sale of securities by permit.
- Requires DBO to perform various other tasks related to the oversight and administration of this program.
- Establishes various other requirements governing crowdfunding under the provisions of this bill.
FISCAL EFFECT:
Costs of $1.5 million annually to DBO for administration of the program, such as reviewing and acting upon applications, reviewing advertisements and promulgating regulations. These costs would be partially offset by the fee authorized under this bill and remaining costs would likely be paid from the GF or result in reductions to existing DBO programs.
COMMENTS:
- Background. Existing law authorizes the qualification by notification of any security issued by a person that is the issuer of a security registered under Section 12 of the Securities Exchange Act of 1934 or issued by an investment company registered under the Investment Company Act of 1940. Existing law also establishes "qualification by permit" which states that all securities, whether or not eligible for qualification by coordination, or qualification by notification, may be qualified by permit, as specified.
- Purpose. According to the author, “AB 1517 would allow start-up and emerging small businesses to find investors who can provide capital to help them grow and create jobs, while providing greater protections to California investors participating in crowdfunding. This bill would add to the California Corporate Securities Laws specific conditions under which the Department of Business Oversight will review and issue a permit for a crowdfunding offering in California. This bill offers both entrepreneurs and investors a safer means of filling the ‘capital gap’ that exists for smaller early-stage seed capital offerings while helping to jumpstart companies so that they can become candidates for larger rounds of financing.”
Analysis Prepared by: Jessica Peters / APPR. / (916) 319-2081
Date of Hearing: April 25, 2017
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
ABPCA Bill Id:AB 1517
Author:(Muratsuchi) – As Amended Ver:April 5, 2017
SUBJECT: SECURITIES TRANSACTIONS: QUALIFICATIONS BY PERMIT: LIABILITY
KEY ISSUE: SHOULD CALIFORNIA CREATE A NEW “CROWDFUNDING” PERMIT, ALLOWING FOR THE OFFER AND SALE OF RELATIVELY INEXPENSIVE EQUITY-BASED SECURITIES UNDER THE STATE’S CORPORATE SECURITIES LAW AND PROVIDING MORE CONSUMER PROTECTIONS THAN THE FEDERAL “JOBS ACT” WHICH ALSO FACILITATES “CROWDFUNDING,” PROVIDES TO POTENTIAL INVESTORS?
SYNOPSIS
Under existing law, there are three ways to qualify a securities offering to the public, all of which require significant review by either the federal SEC, or the state’s DBO: coordination; notification; and permitting. Permitting is a rigorous process in which applicants apply to the DBO for a permit that is good for one year. According to the California Department of Business Oversight (DBO), only 130 permit applications were filed with the DBO in 2013. AB 1517 seeks to amend the rules governing qualification by permit under state law in order to generally encourage such offerings and specifically to facilitate “crowdfunding.” According to the author, this bill, sponsored by Small Business California, seeks to allow small businesses and start-ups to more readily access capital while protecting investors who are interested in this type of investment. It is similar to bills advanced by the same sponsors in previous years, including last year’s AB 2178 (Chiu). Like that measure, this bill proposes a new category of "qualification by permit" under which issuers can use general solicitation and general advertising materials and methods (excluding unsolicited telephone calls) to attract both accredited and non-accredited investors. However, as explained in this analysis, the bill differs from AB 2178 in several ways, most of which offer consumers additional rights and protections.
Crowdfunding is a popular term that is generally used to describe a method of raising money from a group of people who network and pool their resources but not to offer securities (i.e. an ownership interest or right to a share of profits in a business) or equities (i.e. proof of an investor’s or owner’s security interest). This bill, on the other hand, deals with an entirely different premise: providing startup funds to businesses ventures while providing the public with an investment opportunity that all would expect—or at least hope—to provide at least a modest return on such investment. The federal JOBS Act became effective in late 2015 after the Securities and Exchange Commission adopted final regulations regarding the Act. However, critics allege that the JOBS Act lacks regulatory oversight, exposing investors to unreasonable danger of losing substantial amounts of money in relatively risky investment vehicles. Given both the popularity of the crowdfunding concept and the apparent risks of securities offered under the JOBS Act, it may be appropriate for California investors to have an alternative investment option for crowdfunding under conditions that are more favorable for both startup businesses and their potential investors. The author, sponsor, and supporters of AB 1517 believe this bill will offer such an opportunity.
This bill is very similar to last year’s AB 2178 (Chiu), which was passed by this Committee, but held on the Assembly Appropriations Committee’s suspense file. However, this year’s AB 1517 differs from last year’s AB 2178 in a few key ways, most of which offer additional protections to the state’s potential investors. It provides significant new consumer protections and remedies to consumers. This bill specifically prohibits an issuer of a crowdfunding investment pursuant to its provisions from requiring or imposing an obligation on any investor or potential investor to do any of the following: (1) Arbitrate any claim or dispute; (2) Waive his or her right to file or participate in a class action involving any claim or dispute; (3) Waive his or her right to a jury trial; (4) Be bound by or subject to any law other than California law; (5) File or resolve any claim or dispute in any forum other than California. This bill prohibits provisions that often are used to strip investors, consumers and workers of important rights: including forced arbitration clauses, class action waivers, choice-of-law clauses, choice-of-forum clauses. AB 1517 also introduces better investor remedies. It contains a one-way attorney’s fee shift that should make it possible for an investor with smaller losses to get an attorney. Finally, it doubles the maximum amount of the security that can be issued during a 12-month period from $1 million to $2 million. Given the additional consumer protections and remedies, described above, and the alternatives available via the JOBS Act, which may create a much greater risk of loss to consumers, this appears to be an appropriate trade-off, allowing issuers to raise a more significant amount of start-up funds. The bill was previously approved by the Assembly Banking and Finance Committee by a vote of eight to one (with two abstentions). The bill is supported by dozens of local chambers of commerce and small business organizations, as well as the Public Investors Arbitration Bar Association, which has never previously supported a past crowdfunding or permitting bill similar to this one. AB 1517 has no opposition on file.
SUMMARY: Seeks to amend the rules governing qualification by permit under state law in order to generally encourage such offerings and specifically to facilitate a form of investing that is characterized as “crowdfunding.” Specifically, this bill:
- Provides that an applicant may file an application for a "crowdfunding" permit if the applicant meets the following conditions:
- The applicant is a California corporation or a foreign corporation, as specified; the applicant is not issuing fractional undivided interests in oil and gas rights, or a similar interest in other mineral rights; the applicant is not an investment company subject to the Investment Company Act of 1940; and the applicant is not subject to the reporting requirements specified in the Securities Exchange Act of 1934.
- The total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to $2,000,000, less the aggregate offering price for all securities sold within the 12 months before the start, and during the offering of the securities.
- Offers and sales cannot be integrated with prior offers or sales of securities or subsequent offers or sales of securities, as specified.
- The securities sold during a 12-month period to any investor do not exceed the lesser of $5,000 or 10% of the net worth of that natural person or such amount as the Commissioner of the Department of Business Oversight (DBO) may provide by rule or order. (“Net worth" is required to be determined exclusive of home, home furnishings, and automobiles. Other assets included in the computation of net worth may be valued at the fair market value.)
- The applicant must take reasonable steps to ensure that each investor who is a natural person who is not an accredited investor has knowledge and experience in financial business matters that he or she is capable of evaluating the merits and risks of the prospective investment.
- The applicant must file with the commissioner and provide to investors a disclosure document, as defined, and a Small Company Offering Registration (SCOR) disclosure document on Form U-7, no less than 10 business days prior to the commencement of the offering of securities.
- The buyer has a three-day right of rescission.
- An applicant itself, or through a third party, does not engage in direct solicitation.
("Direct solicitation" is defined as any in person face to face conversation between the applicant or any of its founder, promoters, officers, directors, controlling persons, agents, or other persons acting directly or indirectly on behalf of the applicant and any investor or prospective investor or any person acting directly or indirectly on behalf of, or in regular communication with, the investor.)
- The applicant sets aside, in a separate third-party escrow account, all funds raised as part of the offering to be held in escrow until that time the minimum offering amount is reached; and returns all funds if the minimum offering amount is not reached within one year.
- An applicant does not conduct by itself, or through a third party, unsolicited telephone calls.
- The applicant has a fiduciary obligation to any investor or prospective investor.
- No one connected with the offering in specified capacities already is or has been disqualified under the “bad actor” provisions under federal regulations.
- There are no stock splits, stock dividends, spinoffs, or mergers for a period of two years from the close of the offering.
- Any other requirement set forth by rule adopted by the commissioner of DBO.
- Requires DBO to either issue or deny the permit within 60 days of receipt of the application otherwise the applicant can demand a hearing with DBO within 15 days.
- Imposes a filing fee of $200 plus 1/5th of 2% of the aggregate value of the securities sought to be sold in California for qualification of the sale of securities by permit.
- Requires the court to award reasonable attorney's fees and costs, and authorizes the award of treble and punitive damages, to a prevailing purchaser in an action brought against any person who violates conditions of qualification by permit.
- Requires an investor, upon recession of contract after an issuer is found to be in violation of permit requirements, to reimburse investors for all their investments, plus interest.
- Provides that a plaintiff is not required to plead or prove that the defendant acted with scienter.
- Requires sales to be conducted through an intermediary (an SEC- registered portal or broker).
- Requires an applicant to comply with the following requirements related to advertisements:
- Prohibits an issuer from placing an advertisement disseminated primarily in this state unless the issuer discloses in the printed text of the advertisement, or the oral text in the case of a radio or television advertisement, that the issuer has a permit issued by DBO.
- Allows DBO to require that rates of charges or fees, if stated by the applicant, be stated fully and clearly in the manner that DBO deems necessary to give adequate information to, or to prevent misunderstanding by, prospective investors.
- Prohibits an issuer from using advertising material after its use has been disapproved by DBO and the applicant is notified in writing of the disapproval.
- Requires the issuer to maintain a file of all advertising copy for a period of three years from the date of its use and to make the file available to DBO upon request.
EXISTING FEDERAL LAW:
- Authorizes, pursuant to the Jumpstart Our Business Startups (JOBS) Act (Public Law 112-106), the use of general solicitation and general advertising in certain circumstances not previously authorized.
- Lifts, pursuant to Title II of the JOBS Act, operative September 23, 2013, the restriction against use of general solicitation and general advertising, when sales are made only to accredited investors and other requirements are met.
- Lifts, pursuant to Title III of the JOBS Act, otherwise known as the CROWDFUND Act, the restriction against use of general solicitation and general advertising to both accredited and non-accredited investors.
- Provides for the Securities Act of 1933, which establishes a framework for regulating the offer and sale of securities and ensuring the protection of investors that purchase those securities.
- Generally requires, pursuant to the Securities Act of 1933, the offer or sale of all securities to be registered with the Securities and Exchange Commission (SEC) and to be structured as prescribed in federal law and regulation, unless the offer or sale is covered by an exemption.
- Requires, pursuant to the Securities Act of 1933, those who offer and sell securities to be licensed as investment advisers or broker-dealers, unless either the transaction or the activity being undertaken is exempt.
- Provides for Regulation D, one of the regulations promulgated by the SEC to implement the Securities Act of 1933, which authorizes a series of exemptions from the registration requirements of the Securities Act of 1933, including for the offer and sale of up to $5 million in securities by an issuer, as long as the offer and sale are made exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before the sale of the securities.
EXISTING STATE LAW:
- Provides that it is unlawful for any person to offer or sell any security in this state, unless such offering or sale has been qualified by the commissioner, as specified, or unless the offering or sale is covered by an express exemption. (Corporations Code Section 25110. All further statutory references are to this code, unless otherwise indicated.)
- Authorizes the qualification by notification of any security issued by a person that is the issuer of a security registered under Section 12 of the Securities Exchange Act of 1934 or issued by an investment company registered under the Investment Company Act of 1940. (Section 25112.)
- Establishes "qualification by permit" which states that all securities, whether or not eligible for qualification by coordination, or qualification by notification, may be qualified by permit under this section. (Ibid.)
- Requires an application for a permit under 3), above, to contain any information and be accompanied by any documents that are required by regulation of the Commissioner, in addition to the information required by law, and the consent to service of process. (Section 25113.)
- Allows the Commissioner to classify issuers and types of securities. (Ibid.)
- Contains several exemptions from the requirement in 5), above, including the following two most relevant exemptions:
- Small offerings made to fewer than 35 persons who are personally known to the issuer that comply with a number of other requirements. (Section 25102 (f).)
- Any offer or sale of a security by a California corporation, or a corporation organized outside of California that complies with various California laws and the offer or sale is made to only “qualified purchasers” who invest no more than 10% of their net worth in the investment and the issuer complies with a number of other requirements. (Section 25102 (n).)
- Defines “qualified purchasers” as those who meet one or more of several criteria, including one of the following:
- The person individually, or jointly with their spouse, has a minimum net worth of $250,000 and had, during the immediately preceding tax year, gross income in excess of $100,000, and reasonably expects gross income in excess of $100,000 during the current tax year.
- The person individually, or jointly with their spouse, has a minimum net worth of $500,000, exclusive of their home, home furnishings, and automobiles. (Section 25102 (q)(1).)
- Provides a fee of $2,500 for filing an application for qualification of the sale of securities by permit. (Section 25608.)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
COMMENTS: Under existing law, there are three ways to qualify a securities offering to the public, all of which require significant review by either the federal SEC, or the state’s Department of Business Oversight (DBO): coordination; notification; and permitting. Coordination occurs when offerings are registered under the Federal Securities Act of 1933. Notification occurs when securities are registered under Section 12 of the Securities Exchange Act of 1934, or sold by investment companies registered under the Investment Company Act of 1940. Permitting is a rigorous process in which applicants apply to the DBO for a permit that is good for one year. (Sections 25211-25213.) According to DBO, only 130 permit applications were filed (under Section 25213) with the DBO in 2013.
AB 1517 seeks to amend the rules governing qualification by permit under state law in order to generally encourage such offerings and specifically to facilitate “crowdfunding.” According to the author, this bill, sponsored by Small Business California, seeks to allow small businesses and start-ups to more readily access capital while protecting investors who are interested in this type of investment. It is similar to bills advanced by the same sponsors in previous years, including last year’s AB 2178 (Chiu). Like that measure, this bill proposes a new category of "qualification by permit" under which issuers can use general solicitation and general advertising materials and methods (excluding unsolicited telephone calls) to attract both accredited and non-accredited investors. However, as explained below, the bill differs from AB 2178 in several ways, most of which offer consumers additional rights and protections. According to the author:
AB 1517 would allow start-up and emerging small businesses to find investors who can provide capital to help them grow and create jobs, while providing greater protections to California investors participating in crowdfunding. This bill would add to the California Corporate Securities Laws specific conditions under which the Department of Business Oversight will review and issue a permit for a crowdfunding offering in California. This bill offers both entrepreneurs and investors a safer means of filling the “capital gap” that exists for smaller early-stage seed capital offerings while helping to jumpstart companies so that they can become candidates for larger rounds of financing.
Is This Actually “Crowdfunding”? Crowdfunding is a popular term that is generally used to describe a method of raising money from a group of people who network and pool their resources. It is commonly conducted via the Internet, to support efforts of individuals or organizations to develop a product, provide a service, or offer financial support, usually for the benefit of someone other than the person who donates the money, such as a start-up business venture that is trying to bring its idea to the marketplace, or a charitable cause that benefits a third party or organization seeking funds for a specific purpose. Thus, while the person who contributes to an online fundraising campaign may get some tangible benefit for contributing to the fundraising effort (i.e. a prototype of the new product), such benefit is mostly symbolic. Generally, he or she generally contributes a relatively small amount of money, receives good will, and does not expect to get anything of substantial value—certainly nothing that repays or pays a premium--in return. The hallmark of popular “crowdfunding” is the fact that it is more like a donation than an investment. In a Forbes article that was published several years ago about crowdfunding, for example, the author pointed out how crowdfunding differs from traditional investing:
Instead of traditional investors, crowdfunding campaigns are funded by the general public. Typically, most successful startup fundraising efforts receive about 25-40% of their revenue from their first, second and third degree of connections. This could include friends, family, work acquaintances, or anyone that the owner is connected to, including their second and third degree connections. Once a project has seen some traction, unrelated consumers start coming out of the woodwork to support campaigns they believe in. (Prive, Tanya, “What Is Crowdfunding And How Does It Benefit The Economy,” Forbes, Feb. 27, 2012; Available at: https://www.forbes.com/sites/tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefit-the-economy/#47d8a48cbe63)
In recent years, crowdfunding websites--such as gofundme.com and kickstarter,com—that are closely associated with the tech industry have proliferated. They raise funds for charities, artistic endeavors and businesses. These sites do not offer securities (i.e. an ownership interest or right to a share of profits in a business) or equities (i.e. proof of an investor’s or owner’s security interest). Rather, they raise money in the form of donations, or in return for a product being made and delivered to the donor. According to the author, “Crowdfunding enables entrepreneurs to prove a concept, build infrastructure necessary to support a business model and take other steps necessary to attract capital investment. For small businesses and start-ups, however, raising capital frequently can be an overwhelming challenge.”
This bill, on the other hand, deals with an entirely different premise: providing startup funds to business ventures while providing the public with an investment opportunity that all would expect—or at least hope—to provide at least a modest return on such investment. The form of “crowdfunding” therefore envisioned by this bill is more like traditional investing than what has become popularly known as “crowdfunding.” But the type of investment envisioned by this bill are relatively new, or immature, businesses, rather than established businesses that might be listed on one of the major American stock exchanges. Because of the stark reality that most new businesses do not survive after their first two years (with a failure rate ranging from a relatively optimistic estimate of a 50% within one year, according to the Small Business Administration, to a whopping 80% within 18 months, according to Bloomberg), investments in startup businesses are inherently more risky than investments in traditional exchange-traded equities.
Federal Efforts to Facilitate a New Type of “Crowdfunding” On April 5, 2012, President Obama signed landmark legislation, H.R. 3606, the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act makes it easier for startups and small businesses to raise funds. The legislation passed Congress through a 73-26 Senate vote and a 380-41 House vote. Title III of the JOBS Act required the SEC to develop new rules regarding “crowdfunding.”
In October of 2013, the federal Securities and Exchange Commission (SEC) issued proposed crowdfunding rules in a 585-page document. The SEC struggled to create the final rules that respected the flexible and democratic nature of crowdfunding (which makes it so appealing to very small and early stage start-up companies) while also implementing sufficient regulation to satisfy consumer and investor protection critics who fear that investment crowdfunding would be too open to abuse and fraud and could be used to take advantage of unsophisticated consumers who were attracted to the concept of “crowdfunding” because of its common use outside the investment world and association with the tech industry, without realizing the risk of investing in new businesses, the vast majority of which fail within a relatively short time of being launched, regardless of whether they are online or brick and mortar enterprises.
On October 30, 2015, the SEC adopted final rules under Title III of the JOBS Act. The JOBS Act and its regulations provide for a new exemption under the Securities Act of 1933 that will permit securities-based crowdfunding by private companies without registering the offering with the SEC. The final rules became effective in May of 2016. Form enabling funding portals to register with the SEC became effective on January 29, 2016. SEC staff must submit a report to the SEC no later than three years following the effective date of the crowdfunding rules—in other words, by May of 2019--on the impact of the regulation on capital formation and investor protection.
According to Some Critics, the SEC Crowdfunding Regulations Offer Inadequate Protection to Consumers. Title III of the JOBS Act provides an exemption from SEC registration for crowdfunding offerings and preempts state regulation of such offerings. Consequently, for the first time since the federal regulation of securities in 1933, no government agency will be involved in reviewing public securities offerings to unsophisticated investors. This lack of oversight may create an opportunity for some to take advantage of unsophisticated investors, especially given the following features of the JOBS:
- Individual Investor Limits
Under the Title III of the JOBS Act non-accredited investors are subject to investment caps on investments in crowdfunding offering. If the investors net income and annual net worth is equal to or greater than $100K, they may invest up to 10% of the lesser of their annual income or total net worth (excluding home equity), up to a maximum of $100,000, during any 12 month period. For investors whose annual income and net worth (excluding home equity) is less than $100K, the investment cap is the greater of $2,000 or 5% of the lesser of their annual income or total net worth (excluding home equity). Therefore, investors who are not “accredited” investors may invest up to 10% of their entire net worth in a single speculative early-stage investment.
- Suitability Determination
Title III of the JOBS Act does not require funding portals to conduct a suitability analysis to determine whether an investment for a particular investor is unsuitable (FINRA requires that broker-dealers conduct such suitability analysis and have a reasonable basis before making an investment recommendation to a client).
- Vagueness of provisions relating to general solicitation
Title III of the JOBS Act is a “hybrid” exemption, as it allows solicitation through a crowdfunding intermediary, but it does not allow issuers to conduct any form of general solicitation. The only exception is the publication of a brief notice of the offering with a link to the platform. Although the notice may be published using means of general solicitation, the contents of the notice is limited to a very brief description of the company and the terms of the offering. Title III’s prohibition on an issuer’s ability to communicate with investors presents risks to not only investors—who may not have enough information to know whether they are investing in an appropriate offering—but also the offering companies that may inadvertently violate the statutory prohibition by making ordinary communications. If the federal statute is violated, entrepreneurs who control the company can be subject to draconian statutory securities law liabilities…they can be jointly and severally liable with the company to the investor for rescission of the investment. (Hellum v. Breyer (2011) 194 Cal.App.4th 1300; Section 25400.)
- Intermediary requirement diverts capital from investors and issuers to third parties without giving them corresponding responsibilities.
The JOBS Act requires issuers to use, and pay for, a crowdfunding intermediary (either a registered broker-dealer or a crowdfunding portal). Broker-dealers will not participate in $1 million crowdfunded offerings, as the cost of complying with the investor suitability requirements imposed on broker-dealers by the FINRA do not outweigh the benefits of participating in small offerings. Consequently, substantially all federal crowdfunding offerings will be conducted through non-broker/dealer crowdfunding portals. And although crowd-funding portals must register with the SEC, they are not subject to the suitability requirements imposed on broker-dealers. Thus, the intermediary will have, in effect, an exclusive federal concession to sell crowdfunded offerings without any obligation to conduct any determination that an investment is suitable for a particular investor. Under these circumstances, the JOBS Act requirement that companies conduct an offering through an intermediary imposes an unnecessary, and in many cases prohibitive, cost to companies, without providing adequate protection to consumers.
The combination of these elements, among others, in the JOBS Act has led one critic to conclude that the Act “actually appears to have been specifically written to encourage fraud in the stock markets.” The critic, Matt Taibbi, writes the following about the JOBS Act in Rolling Stone:
Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) to attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.
The law also rolls back rules designed to prevent bank analysts from talking up a stock just to win business, a practice that was so pervasive in the tech-boom years as to be almost industry standard. (Taibbi, Matt, “Why Obama's JOBS Act Couldn't Suck Worse,” Rolling Stone, April 9, 2012; Available at: http://www.rollingstone.com/politics/news/why-obamas-jobs-act-couldnt-suck-worse-20120409.)
In a later article, Taibbi mentions that he is not the only critic of the law:
Columbia Law Professor John Coffee, for instance, who’s not exactly a hair-on-fire, anti-market reformer, told the Senate last year that the removal of the requirement for broker-dealer registrations for those soliciting investment on the internet was so carelessly done, you could have renamed the proposed bill the "Boiler Room Legalization Act of 2011." "It’s not even bringing us back to the nineties," says a former regulator and Washington-based lawyer. "It’s bringing us back to the Twenties. It’s bringing us back to the penny stock era."
One Senate staffer put it to me this way: "Even the people who are rabid supporters of this thing are saying, 'Wow, I didn’t expect it to come out this extreme.'" (Taibbi, Matt, “Yes, Virginia, This Is Obama’s JOBS Act,” Rolling Stone, April 12, 2012; Available at: http://www.rollingstone.com/politics/news/yes-virginia-this-is-obama-s-jobs-act-20120412.)
Given both the popularity of the crowdfunding concept and the apparent risks of securities offered under the JOBS Act, it may be appropriate for California investors to have an alternative investment option for crowdfunding under conditions that are more favorable for both startup businesses and their potential investors. The author, sponsor, and supporters of AB 1517 believe this bill will offer such an opportunity.
Key Differences Between This Bill, as Now in Print, and Last Year’s AB 2178. This bill is very similar to last year’s AB 2178 (Chiu), which was passed by this Committee, but held on the Assembly Appropriations Committee’s suspense file. However, this year’s AB 1517 differs from last year’s AB 2178 in a few key ways, most of which offer additional protections to the state’s potential investors.
- This bill provides significant new consumer protections and remedies to consumers.
This bill specifically prohibits an issuer of a crowdfunding investment pursuant to its provisions from requiring or imposing an obligation on any investor or potential investor to do any of the following: (1) Arbitrate any claim or dispute; (2) Waive his or her right to file or participate in a class action involving any claim or dispute; (3) Waive his or her right to a jury trial; (4) Be bound by or subject to any law other than California law; (5) File or resolve any claim or dispute in any forum other than California.
This bill prohibits provisions that often are used to strip investors, consumers and workers of important rights: including forced arbitration clauses, class action waivers, choice-of-law clauses, and choice-of-forum clauses.
AB 1517 also introduces better investor remedies. It contains a one-way attorney’s fee shift that should make it possible for an investor with smaller losses to get an attorney. A $10,000 loss may be too small to interest an attorney to litigate a case on a contingency basis, but may represent a devastating and life-altering loss to a retiree with a fixed income. It is only fair that that retiree should have a chance of finding a lawyer who can afford to take the case.
Further, the treble and punitive damages provisions are additional deterrents to those who would cheat investors. All of these improved investor protections – and the costs that they will impose on misconduct – will add up to an environment that is far less attractive to those who are motivated to make a quick profit from unsophisticated investors.
- This bill doubles the maximum amount of the security that can be issued during a 12-month period from $1 million to $2 million.
The bill limits the total offering of securities within 12 months by the applicant to be two million dollars ($2,000,000), which is double the maximum amount in any prior bill heard and approved by this Committee. However, given the additional consumer protections and remedies, described above, and the alternatives available via the JOBS Act, which may create much greater risk of loss to consumers, this appears to be an appropriate trade-off, allowing issuers to raise a more significant amount of start-up funds.
Would Small Businesses Use This New Type of “Crowdfunding” and, if so, Why? The permitting process imagined by this bill seems to involve greater regulation, not less. In that case, why would a business utilize this method of raising funds when it could do so under the federal JOBS Act with less regulatory oversight? The author and sponsors argue that they would do so under a theory that visible regulation gives investors a legitimate reason to believe they’re making a legitimate investment, giving them a reasonable chance of at least recouping their investments. It doesn’t mean that they are guaranteed to make money. Far from it. What it means is that they’re less likely to be out-and-out cheated—as they very well could be under the JOBS Act, at least according to Taibbi, above, because the greater regulation will tend to drive the cheaters away.
The greater level of regulation takes several forms. One is that, instead of being exempt offerings, AB 1517 offerings will be qualified by permit (or, under language used in California and a few other states, “qualified” rather than “registered”). The bill’s requirement that offerings must be qualified and receive a permit from the Department of Business Oversight means that small businesses seeking capital will have to go the extra mile in terms of disclosure and fairness of the offering and thereby to distinguish themselves from other businesses that are seeking capital by other means, including via “crowdfunding” via the JOBS Act. Over time, according to the author and sponsor, that difference will be written about and should come to be more widely known and recognized among investors for the value it confers. They say it is fitting that California should buck the deregulatory trend and lead the way on its own version of “crowdfunding.”
ARGUMENTS IN SUPPORT: The sponsor, Small Business California, writes the following on behalf of the coalition of 23 small business organizations that support this bill:
While the JOBS Act was designed to address this capital gap, it could potentially open the floodgates to fraud. AB 1517 offers both entrepreneurs and investors a safer means of filling the “capital gap” that exists for smaller early-stage seed capital offerings and “jumpstarting” these companies so that they can become candidates for larger rounds of financing.
OTHER PRIOR SIMILAR LEGISLATION: AB 722 (Perea, 2015) created a new qualification by permit under California's Corporate Securities Law of 1968 to allow equity-crowdfunding. This bill died in the Assembly Appropriations Committee.
AB 2096 (Muratsuchi, 2014) created a new way in which a person seeking to offer or sell securities could qualify their offering, by authorizing the “qualification by notification” of offers or sales of securities advertised by means of general solicitation and general advertising, as specified. This bill died in the Senate Appropriations Committee.
AB 783 (Daly, 2013) provided that an issuer can offer or sell securities using any form of general solicitation or general advertising. This bill died in the Assembly Banking and Finance Committee.
AB 2081 (Allen, 2012) provided that an issuer can offer or sell securities using any form of general solicitation or general advertising. This bill died on the Senate Floor.
SB 875 (Price, 2010) exempted from qualification offerings or sales of securities using a general solicitation or general advertisement, provided the transaction meets specified requirements, including a requirement that the sales are made to accredited investors. This bill died in Senate Banking and Financial Institutions Committee.
AB 1644 (Campbell & Briggs, 2001) exempted from qualification offerings or sales of securities using a general solicitation or general advertising, provided the transaction meets specified requirements, including a requirement that the sales are made to accredited investors. This bill failed passage in Assembly Banking and Finance Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
California Asian Pacific Chamber of Commerce
California Association of Competitive Telecommunications Companies
California Association of Micro-economic Opportunity
California Black Chamber of Commerce
California Metals Coalition
Flasher Barricade Association
Golden Gate Restaurant Association
Greater Geary Boulevard Merchants & Property Owners Association
National Association of Women Business Owners – Sacramento Valley
National Federation of Independent Business
Northern California Independent Booksellers Association
North East Mission Business Association
Opportunity Fund
Plumbing Heating Cooling Contractors of California
Public Investors Arbitration Bar Association
San Francisco Builders Exchange
San Francisco Chamber of Commerce
San Francisco Council of District Merchants Association
San Francisco Locally Owned Merchants Alliance
San Francisco Small Business Network
Sierra Business Council
Small Business California (SB-Cal)
Small Business Majority
Small Manufacturers Association of California Opposition
Oppose
None on file
Analysis Prepared by: Alison Merrilees / JUD. / (916) 319-2334
Date of Hearing: April 17, 2017
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
ABPCA Bill Id:AB 1517 (
Author:Muratsuchi and Chui) – As Amended Ver:April 5, 2017
SUBJECT: Securities transactions: qualifications by permit: liability
SUMMARY: Creates a new qualification by permit under California’s Corporate Securities Law of 1968 to allow equity-crowdfunding. Specifically, this bill:
- Provides that any offer or sale of any security that meets the following criteria may be qualified by permit:
- An applicant may file an application for a "crowdfunding" permit if the applicant meets the following conditions:
- Is a California corporation or a foreign corporation, as specified; is not issuing fractional undivided interests in oil and gas rights, or a similar interest in other mineral rights; is not an investment company subject to the Investment Company Act of 1940; and is not subject to the reporting requirements, as specified, in the Securities Exchange Act of 1934.
- Provides that the total offering of securities by the applicant to be sold in a 12-month period, within or outside this state, is limited to $2 million, less the aggregate offering price for all securities sold within the 12 months before the start, and during the offering of the securities.
- Current offers and sales cannot be integrated with prior offers or sales of securities or subsequent offers or sales of securities, as specified.
- Prohibits the securities sold during a 12-month period to any investor from exceeding the lesser of $5,000 or 10% of the net worth of that natural person or such amount as the Commissioner of the Department of Business Oversight (DBO) may provide by rule or order.
- Requires the applicant to take reasonable steps to ensure that each investor who is a natural person who is not an accredited investor has knowledge and experience in financial business matters that he or she is capable of evaluating the merits and risks of the prospective investment.
- Requires the applicant to file with the Commissioner and provide to investors a disclosure document, as defined, and a Small Company Offering Registration (SCOR) disclosure document on Form U-7, or any other disclosures and documents deemed necessary or desirable by the Commissioner.
- Provides a three day right of rescission.
- Prohibits an applicant from direct solicitation.
- Defines "direct solicitation" as any in person face to face conversation between the applicant or any of its founders, promoters, officers, directors, controlling persons, agents, or other persons acting directly or indirectly on behalf of the applicant and any investor or prospective investor or any person acting directly or indirectly on behalf of, or in regular communication with, the investor.
- Requires the applicant to set aside in a separate third-party escrow account all funds raised as part of the offering to be held in escrow until that time of minimum offering amount is reached. The issuer shall return all funds if the minimum offering amount is not reached within one year.
- Prohibits an applicant from conducting unsolicited telephone calls.
- Requires the transaction be conducted through an intermediary that complies with the requirements in the Federal Securities Act, as specified.
- Requires the applicant to comply with state law regarding advertisements, as specified.
- Places a fiduciary obligation on the applicant to any investor or prospective investor.
- Prohibits an applicant and others, as specified, from being disqualified as a "bad actor" under federal regulations.
- Prohibits stock splits, stock dividends, spinoffs, or mergers for a period of two years from the close of the offering.
- Prohibits the applicant from requiring or imposing an obligation on any investor with respect to the arbitration of any claim or dispute, or the waiving of rights, as specified.
- An applicant may file an application for a "crowdfunding" permit if the applicant meets the following conditions:
- Requires DBO to either issue or deny the permit within 60 days of receipt of the application otherwise the applicant can demand a hearing with DBO to explain why the permit has not been granted.
- Imposes a filing fee of $200 plus one-fifth of 2% of the aggregate value of the securities sought to be sold in California for qualification of the sale of securities by permit.
- Requires the court to award reasonable attorney's fees and costs, and authorizes the award of treble and punitive damages, to a prevailing purchaser in an action brought against any person who violates conditions of qualification by permit.
- Provides that a plaintiff is not required to plead or prove that the defendant acted with scienter.
EXISTING FEDERAL LAW:
- Authorizes, pursuant to the Jumpstart Our Business Startups (JOBS) Act (Public Law 112-106), the use of general solicitation and general advertising in certain circumstances not previously authorized. Title II of the JOBS Act, operative September 23, 2013, lifted the restriction against use of general solicitation and general advertising, when sales are made only to accredited investors and other requirements are met. Title III of the JOBS Act, otherwise known as the CROWDFUND Act, lifted the restriction against use of general solicitation and general advertising to both accredited and non-accredited investors.
- Provides for the Securities Act of 1933, which establishes a framework for regulating the offer and sale of securities and ensuring the protection of investors that purchase those securities. Generally speaking, the Securities Act of 1933 requires the offer or sale of all securities to be registered with the Securities and Exchange Commission (SEC) and to be structured as prescribed in federal law and regulation, unless the offer or sale is covered by an exemption. This federal act also requires those who offer (i.e., market) and sell securities to be licensed as investment advisers or broker-dealers, unless either the transaction or the activity being undertaken is exempt.
- Provides for Regulation D, one of the regulations promulgated by the SEC to implement the Securities Act of 1933. Regulation D authorizes a series of exemptions from the registration requirements of the Securities Act of 1933.
EXISTING STATE LAW:
- Provides that it is unlawful for any person to offer or sell any security in this state, unless such offering or sale has been qualified by the commissioner, as specified, or unless the offering or sale is covered by an express exemption. [Corporations Code (CC) Section 25110]
- Authorizes the qualification by notification of any security issued by a person that is the issuer of a security registered under Section 12 of the Securities Exchange Act of 1934 or issued by an investment company registered under the Investment Company Act of 1940. [CC Section 25112]
- Establishes "qualification by permit" which states all securities, whether or not eligible for qualification by coordination under CC Section 25111 or qualification by notification under CC Section 25112, may be qualified by permit under this section. An application for a permit under this section shall contain any information and be accompanied by any documents as shall be required by rule of the commissioner, in addition to the information specified in CC Section 25160 and the consent to service of process required by CC Section 25165. For this purpose, the commissioner may classify issuers and types of securities. [CC Section 25113]
- Contains several exemptions from the requirement immediately above. Two of the most relevant exemptions for purposes of this bill include CC Sections 25102(f) and 25102(n).
FISCAL EFFECT: Unknown
COMMENTS: This bill is sponsored by Small Business California, to allow small businesses and start-ups to more readily access capital. According to the Author’s office:
Small businesses, accounting for over two-thirds of new jobs nationally, often lack access to capital and rely heavily on credit card debt, home equity and limited personal assets for financing. Crowdfunding enables entrepreneurs to prove a concept, build infrastructure necessary to support a business model and take other steps necessary to attract capital investment. For small businesses and start-ups, however, raising capital frequently can be an overwhelming challenge.
[This bill] would allow start-up and emerging small businesses to find investors who can provide capital to help them grow and create jobs, while providing greater protections to California investors participating in crowdfunding. This bill would add to the California Corporate Securities Laws specific conditions under which [DBO] will review and issue a permit for a crowdfunding offering in California. This bill offers both entrepreneurs and investors a safer means of filling the “capital gap” that exists for smaller early-stage seed capital offerings while helping to jumpstart companies so that they can become candidates for larger rounds of financing.
This measure allows applicants to "qualify by permit" under which applicants also known as issuers can use general solicitation and general advertising with the exception of direct solicitation and unsolicited telephone calls to attract both accredited and non-accredited investors. The bill also creates a process where an applicant turns in a permit application to offer securities. The DBO has 60 days to approve or deny a permit; otherwise, the applicant can ask for a hearing from the DBO.
Crowdfunding: Crowdfunding is a collective cooperation of people who network and pool their money and resources together, via the internet, to support efforts initiated by other organizations. Crowdfunding literally attracts a “crowd” of people, each of whom takes a small stake in a business idea by contributing towards an online funding target. Crowdfunding has become a popular and alternative method of raising finance for businesses, real estate investments, projects or ideas and has become popularized online by sites such as Kickstarter, Wefunder, Crowdfunder and RockthePost.
Background: On April 5, 2012, President Barack Obama signed landmark legislation, House Resolution 3606, the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act makes it easier for startups and small businesses to raise funds. This legislation passed Congress through a 73-26 Senate vote and a 380-41 House vote. Title III of the JOBS Act required the SEC to develop new rules permitting capital raising by “crowdfunding.”
In October of 2013, the SEC issued the proposed crowdfunding rules in a 585 page document. The SEC struggled to create the final rules that respected the flexible and democratic nature of crowdfunding (which makes it so appealing to very small and early stage start-up companies) while also implementing sufficient regulation to satisfy consumer and investor protection critics who fear that investment crowdfunding is far too open to abuse and fraud.
On October 30, 2015, the SEC adopted final rules under Title III of the JOBS Act. The JOBS Act provided for a new exemption under the Securities Act of 1933 that will permit securities-based crowdfunding by private companies without registering the offering with the SEC. The final rules become effective in May 2016 except that the forms enabling funding portals to register with the SEC became effective on January 29, 2016. Additionally, the SEC staff must submit a report to the SEC no later than three years following the effective date of crowdfunding on the impact of the regulation on capital formation and investor protection.
Questions and Concerns:
- The federal Crowdfunding rules became final in October, 2015. We now have a process set in place nationwide to conduct equity crowdfunding. Why does California need its own crowdfunding process? Considering that these final rules are so new, isn't it too early to cast a shadow on federal Crowdfunding? The SEC is required to issue a report in three years. Should California wait to reevaluate the success, or lack of success, of federal Crowdfunding after the first report is released?
- This bill, if enacted, would allow and promote "regulation shopping." Issuers/Applicants can determine whether to register to adhere to federal regulations or state securities regulations. Even if California's crowdfunding has better investor protections, why would this point matter, since issuers would have the ability to choose the weaker regulations?
- Although the Federal program is fairly new, what data is available to show that small, early stage start-up companies are taking advantage of the program?
- This bill provides that the securities sold could be "within or outside California." Wouldn't anything outside California conflict with federal rules? Other states who have enacted state crowdfunding proposals only apply intrastate. How will DBO be able to enforce?
Previous Legislation:
AB 2178 (Chiu) of 2016 would have authorized a new form of securities offering in California to facilitate crowdfunding as an alternative to a similar authorization in federal law under the JOBS Act. Died in the Assembly Appropriations Committee.
AB 722 (Perea) of 2015 would have authorized a new form of securities offering in California to facilitate crowdfunding as an alternative to a similar authorization in federal law under the JOBS Act. Died in the Assembly Appropriations Committee.
AB 2096 (Muratsuchi) of 2014 would have created a new way in which a person seeking to offer or sell securities could qualify their offering, by authorizing the “qualification by notification” of offers or sales of securities advertised by means of general solicitation and general advertising, as specified. Died in the Senate Appropriations Committee.
AB 783 (Daly) of 2013 would have provided that an issuer can offer or sell securities using any form of general solicitation or general advertising. Died in the Assembly Banking and Finance Committee.
AB 2081 (Allen) of 2012 would have provided that an issuer can offer or sell securities using any form of general solicitation or general advertising. Died on the Senate Floor.
SB 875 (Price) of 2010 would have exempted from qualification offerings or sales of securities using a general solicitation or general advertising, provided the transaction meets specified requirements, including a requirement that the sales are made to accredited investors. Died in Senate Banking and Financial Institutions Committee.
AB 1644 (Campbell and Briggs) of 2001 would have exempted from qualification offerings or sales of securities using a general solicitation or general advertising, provided the transaction meets specified requirements, including a requirement that the sales are made to accredited investors. Failed passage in Assembly Banking and Finance Committee.
Double Referral: This measure is double referred to the Assembly Judiciary Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
California Asian Pacific Chamber Of Commerce
California Association Of Competitive Telecommunications Companies
California Association Of Micro-economic Opportunity
California Black Chamber Of Commerce
California Metals Coalition
Flasher Barricade Association
Golden Gate Restaurant Association
Greater Geary Boulevard Merchants & Property Owners Association
National Association Of Women Business Owners California - Sacramento Valley Chapter
National Federation Of Independent Business
North East Mission Business Association
Northern California Independent Booksellers Association
Opportunity Fund
Pacific Coast Regional Small Business Development Corporation
Plumbing-heating-cooling Contractors Association Of California
San Francisco Chamber Of Commerce
San Francisco Council Of District Merchants Association
San Francisco Locally Owned Merchants Alliance
San Francisco Small Business Network
Sierra Business Council
Small Business California
Small Business Majority
Small Manufacturers Association Of California
Opposition
None on file.
Analysis Prepared by: William Herms / B. & F. / (916) 319-3081
Discussed in Hearing
1H
Assembly Standing Committee on Appropriations
15MIN
Assembly Standing Committee on Judiciary
9MIN
Assembly Standing Committee on Banking and Finance
19SEC
Assembly Standing Committee on Banking and Finance
10SEC
Assembly Standing Committee on Banking and Finance
Bill Co-Author(s):
