Bill Text: CA AB2096 | 2013-2014 | Regular Session | Amended
Bill Title: Securities transactions: qualification: notification: small company.
Spectrum: Partisan Bill (Democrat 1-0)
Status: (Engrossed - Dead) 2014-08-14 - In committee: Held under submission. [AB2096 Detail]
Download: California-2013-AB2096-Amended.html
BILL NUMBER: AB 2096 AMENDED
BILL TEXT
AMENDED IN SENATE AUGUST 7, 2014
AMENDED IN SENATE AUGUST 4, 2014
AMENDED IN SENATE JUNE 9, 2014
AMENDED IN ASSEMBLY APRIL 24, 2014
AMENDED IN ASSEMBLY APRIL 9, 2014
AMENDED IN ASSEMBLY MARCH 26, 2014
INTRODUCED BY Assembly Member Muratsuchi
FEBRUARY 20, 2014
An act to amend Sections 25102 25112
and 25503 of the Corporations Code, relating to securities
transactions.
LEGISLATIVE COUNSEL'S DIGEST
AB 2096, as amended, Muratsuchi. Securities transactions:
qualification: exemption: notification:
small company.
Existing law, the Corporate Securities Law of 1968, requires
securities offered or sold in this state to be qualified through
application filed with the Commissioner of Business Oversight, unless
exempt from the qualification requirements. Under existing law, a
security issued either by the issuer of a security registered under a
designated provision of the federal law or issued by an investment
company registered under other specified federal law, and which is
not eligible for qualification by coordination under existing law,
may be qualified by notification by making a specified application
and providing certain documents and additional information.
Existing law, the Corporate Securities Law of 1968, requires
certain securities offered or sold in this state to be qualified
through application filed with the Commissioner of Business
Oversight, or to be exempt from the qualification requirements.
Existing law exempts from qualification, offers and sales of
securities in specified transactions.
Existing law imposes liability for specified damages on a person
who offers or sells a security if the sale is not qualified, violates
a condition of qualification under the act, or violates an order
suspending trading issued by the commissioner.
This bill would exempt from qualification any offer or sale of a
security, if, among other requirements, the offering meets the
requirements for a federal exemption for limited offerings and sales
of securities not exceeding $1,000,000, and the aggregate amount of
securities sold to any investor by the issuer does not exceed certain
amounts within a 12-month time period.
This bill, in addition, would authorize qualification by
notification for any offer or sale of a security if, among other
requirements, the offering meets the requirements for a federal
exemption for limited offerings and sales of securities not exceeding
$1,000,000, and the aggregate amount of securities sold to any
investor by the issuer does not exceed certain amounts within a
12-month time period, except as specified.
This bill would require a court to award attorney's fees and costs
to a prevailing purchaser in an action brought against a person who
makes a sale in violation of the qualification provisions prescribed
in the bill, and would authorize the court to award treble or
punitive damages.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 25112 of the
Corporations Code is amended to read:
25112. (a) (1) Any security issued by a
person which is the issuer of any security registered under Section
12 of the Securities Exchange Act of 1934 or issued,
issued by an investment company registered under
the Investment Company Act of 1940, and which is not eligible for
qualification under Section 25111, may be qualified by notification
under this section.
(2) Any offer or sale of any security that meets all of the
following criteria may be qualified by notification under this
section:
(A) The aggregate amount of securities sold to all investors by
the issuer within any 12-month period is not more than one million
dollars ($1,000,000).
(B) The aggregate amount of securities sold to any investor by the
issuer, including any amount sold during the 12-month period
preceding the date of the transaction, does not exceed five thousand
dollars ($5,000), or a greater amount as the commissioner may provide
by rule or order, unless the investor is an accredited investor as
defined in Section 230.501 of Title 17 of the Code of Federal
Regulations.
(C) The offering meets the requirements of the federal exemption
for limited offerings and sales of securities not exceeding one
million dollars ($1,000,000) in Section 230.504 of Title 17 of the
Code of Federal Regulations.
(D) The issuer files with the commissioner, provides to investors,
and makes available to potential investors the following:
(i) A Small Company Offering Registration disclosure document on
Form U-7, as adopted by the North American Securities Administrators
Association, prior to the commencement of the offering of securities.
The issuer shall ensure that the cover page of Form U-7 includes all
of the following statements, in bold typeface no smaller than
12-point type:
(I) The Commissioner of Business Oversight has in no way passed
upon the merits or qualifications of, or recommended or given
approval to, any person, security, or transaction associated with
this offering.
(II) The company described in this disclosure form is seeking to
raise a minimum offering of insert minimum offering amount].
(III) If the sum of the investment commitments received by the
company does not equal or exceed the minimum offering amount by
insert date] your investment in the company will be returned to you.
(ii) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of one hundred thousand dollars ($100,000) or less,
the following:
(I) The income tax returns filed by the issuer for the most
recently completed year, if any.
(II) The financial statements of the issuer certified by the
principal executive officer of the issuer to be true and complete in
all material respects.
(iii) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of more than one hundred thousand dollars
($100,000), but not more than five hundred thousand dollars
($500,000), all financial statements reviewed by a public accountant
who is independent of the issuer, using professional standards and
procedures for the review or standards and procedures established by
the commissioner by rule.
(iv) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of more than five hundred thousand dollars
($500,000), audited financial statements.
(E) The issuer 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 issuer shall return all funds to investors.
(F) The issuer, a predecessor of the issuer, an affiliated issuer,
a director, executive officer, or other officer participating in the
offering, a general partner or managing member of the issuer, a
beneficial owner of 20 percent or more of the issuer's 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 issuer 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 would not be disqualified as
a "bad actor" under subdivision (d) of Section 230.506 of Title 17 of
the Code of Federal Regulations.
(G) Any other requirement set forth by rule adopted by the
commissioner.
(b) An application for qualification under this section shall
contain such all information and be
accompanied by such all 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.
(c) If no stop order or order under subdivision (a) of Section
25143 is in effect under this law, qualification of the sale of the
securities under this section automatically becomes effective (and
the securities may be offered and sold in accordance with the terms
of the application as amended) at 12 o'clock noon
12 p.m. California time of the 10th business day after the
filing of the application or the last amendment thereto or at
such an earlier time as the
commissioner determines.
SECTION 1. Section 25102 of the Corporations
Code is amended to read:
25102. 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 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 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 purchaser's 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 issuer's 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 plaintiff's 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 purchaser's 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 1995-96 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 1995-96 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 issuer's 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 person's 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 purchaser's 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
commissioner's 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
commissioner's 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
person's 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 purchaser's 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 issuer's 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 issuer's financial position, the results of the issuer's
operations, and the issuer's 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 purchaser's 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 purchaser's 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.
(r) (1) (A) An offer or sale of a security by an issuer using any
form of general solicitation or general advertising, as specified in
Rule 502(c) of Regulation D under the Securities Act of 1933 (17
C.F.R. 230.502(c)), except as provided in subparagraph (B).
(B) An offer of a security made by means of an unsolicited
telephone call to a person's residence or cellular telephone.
(2) In order for the exemption under this subdivision to apply,
all of the following shall be satisfied:
(A) The aggregate amount of securities sold to all investors by
the issuer within any 12-month period is not more than one million
dollars ($1,000,000).
(B) The aggregate amount of securities sold to any investor in
reliance on this subdivision, 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 any 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.
(C) The issuer has taken reasonable steps to ensure that each
investor who is a natural person who is not an accredited investor,
as defined in Section 230.501 of Title 17 of the Code of Federal
Regulations, either alone or with the investor's purchaser
representative or representatives, has sufficient knowledge and
experience in financial and business matters that the investor is
capable of evaluating the merits and risks of the prospective
investment.
(D) The offering meets the requirements of the federal exemption
for limited offerings and sales of securities not exceeding one
million dollars ($1,000,000) in Section 230.504 of Title 17 of the
Code of Federal Regulations.
(E) The issuer provides to investors, and makes available to
potential investors the following:
(i) A Small Company Offering Registration disclosure document on
Form U-7, as adopted by the North American Securities Administrators
Association, prior to the commencement of the offering of securities.
The issuer shall ensure that the cover page of Form U-7 includes all
of the following statements, in bold typeface no smaller than
12-point type:
(I) The Commissioner of Business Oversight has in no way passed
upon the merits or qualifications of, or recommended or given
approval to, any person, security, or transaction associated with
this offering.
(II) The company described in this disclosure form is seeking to
raise a minimum offering of insert minimum offering amount].
(III) If the sum of the investment commitments received by the
company does not equal or exceed the minimum offering amount by
insert date] your investment in the company will be returned to you.
(ii) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of one hundred thousand dollars ($100,000) or less,
the following:
(I) The income tax returns filed by the issuer for the most
recently completed year, if any.
(II) The financial statements of the issuer certified by the
principal executive officer of the issuer to be true and complete in
all material respects.
(iii) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of more than one hundred thousand dollars
($100,000), but not more than five hundred thousand dollars
($500,000), all financial statements reviewed by a public accountant
who is independent of the issuer, using professional standards and
procedures for the review or standards and procedures established by
the commissioner by rule.
(iv) For offerings that, together with all other offerings of the
issuer within the preceding 12-month period, have, in the aggregate,
offering amounts of more than five hundred thousand dollars
($500,000), audited financial statements.
(F) The issuer sets aside in a separate bank 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 issuer shall return all funds to
investors.
(G) Securities issued in reliance on this subdivision may not be
transferred by the purchaser of those securities during the 1-year
period beginning on the date of purchase, unless the securities are
transferred (i) to the issuer of the securities; (ii) to an
accredited investor; (iii) as part of an offering qualified with the
commissioner or registered with the United States Securities and
Exchange Commission; or (iv) to a member of the family of the
purchaser or the equivalent, or in connection with the death or
divorce of the purchaser or other similar circumstance, in the
discretion of the commissioner. Securities issued in reliance on this
subdivision shall be subject to any other limitations as the
commissioner shall, by rule, establish.
(H) The issuer, a predecessor of the issuer, an affiliated issuer,
a director, executive officer, or other officer participating in the
offering, a general partner or managing member of the issuer, a
beneficial owner of 20 percent or more of the issuer's 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 issuer 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 would not be disqualified as
a "bad actor" under subdivision (d) of Section 230.506 of Title 17 of
the Code of Federal Regulations.
(I) Any other requirement set forth by rule that is adopted by the
commissioner.
SEC. 2. Section 25503 of the Corporations Code is amended to read:
25503. (a) 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 the security sold in
violation of that section, who may sue to recover the consideration
he paid for such security with interest thereon at the legal rate,
less the amount of any income received therefrom, upon the tender of
the security, or for damages, if he 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 the plaintiff's purchase
price plus interest at the legal rate from the date of purchase and
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.
(b) If the consideration given for the security is not capable of
being returned, damages 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 the value of the consideration given for the
security plus interest at the legal rate from the date of purchase
and 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. A 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 the security sold in violation of that
section who may sue to recover the difference between the value of
the consideration received by the seller and
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. A 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. However, in no event shall an underwriter be liable,
unless the 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, in any suit or suits
authorized under this section, for damages in excess of the total
price at which the securities underwritten by the underwriter and
distributed to the public were offered to the public. A tender
specified in this section may be made at any time before entry of
judgment. A person shall not 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.
(c) The court shall award attorney's fees and costs to a
prevailing purchaser in an action brought against any person who
violates Section 25110 for failure to comply with
subdivision (r) of Section 25102 paragraph (2) of
subdivision (a) of Section 25112 and may award treble or
punitive damages.
