California Introduces the Local Economies Securities Act Crowdfunding Exemption

The state of California nearly enacted their own intrastate exemption late last year but politics got in the way of things and the bill ended up withering in a committee. One local crowdfunding advocate shared an update on AB 722;

“I hear the forces are gathering to try again getting Crowdfunding passed in Sacramento. This new bill is AB 722 introduced by Assembly member Henry T. Perea (D-Fresno). It has labor’s support so maybe AARP won’t derail it like they did AB 2096 last year.”

While this new bill may be pushed forward this year – there is another piece of legislation that is rising up now.

The California Local Economies Securities Act (LESA) will exempt certain securities offerings from California permit requirements.  This new legislation is expected to help raise capital for a variety of enterprises.  Specifically small farms, agricultural land trusts, cooperatives, renewable energy enterprises and other small businesses. The Sustainable Economies Law Senator Ben HuesCenter (SELC) is working with state Senator Ben Hues to pass SB 577 and they are asking California residents to pitch in with a letter writing campaign so the bill moves forward to become law.  The proposed legislation recognizes the sizable challenges (and costs) for small companies to issue securities.

The Law Center outlines the parameters of the bill as follows:

Micro Investments: This bill would exempt securities offerings if the total amount raised by the business in the offering does not exceed $100,000, and no individual, non-accredited investor invests more than $100.

Small Investments: This bill would exempt securities offerings if the business provides basic offering and business information to the public, the total amount raised during the offering does not exceed $500,000, and no individual, non-accredited investor invests more than $1,000.

Sustainable Economies Law CenterSmall Farms and Agricultural Land Trusts: This bill would allow a small farm enterprise or agricultural land trust to raise up to $2,000,000 for the purchase, long-term leasing, purchase of an easement, construction, or improvement of real property to be used for agriculture purposes. This bill would exempt the securities offering from permit requirements so long as the issuer receives no more than $5,000 per non-accredited investor, provided that the investor signs a statement verifying an annual gross income of at least $50,000 or a total net worth of $100,000 or more. Any investor that does not verify such levels of income or net worth may contribute no more than $1,000. All funds raised for the purpose must be held in an escrow account until the issuer has entered into a contract to purchase the land.

Renewable Energy Projects: Similar to the farm and land trust exemption in the previous paragraph, the bill would allow nonprofits and cooperatives to raise up to $2,000,000 to finance the purchase of solar panels or wind turbines. Similarly, this exemption could be used only as long as the issuer receives no more than $5,000 per non-accredited investor, provided that the purchaser signs a statement verifying an annual gross income of at least $50,000 or a total net worth of $100,000 or more. Any investor that does not verify such levels of income or net worth may contribute no more than $1,000.

Cooperatives: Cooperatives are enterprises that are owned and democratically controlled by members. Members might be the consumers of the business, its workers, or the producers of products that the business sells. One of the defining characteristics of a cooperative is that each member has one vote, unlike a typical corporation where voting power is proportionate to the number of shares one owns. Existing law exempts from permit requirements any offer or sale of a membership in a California consumer cooperative corporation, provided that the offering does not exceed $300 per purchaser. This bill would raise the cap to $1,000, thereby facilitating the creation of more consumer cooperatives that operate for the benefit of Californians.

State of California SealThe SELC tackles the question of the federal exemption which may make all intrastate exemptions a moot point.  They state that it is,

“unclear when the regulations will actually be finalized. Furthermore, the bill passed by Congress became tailored towards businesses hoping to grow very quickly. The federal law entails many requirements that are not very practical for very small businesses…Additionally, in order to raise more than $100,000, a business must have professionally reviewed financials, and to raise over $500,000 one must have audited financials, which would be a significant out-of-pocket expense for many small businesses which would otherwise not have their financial statements reviewed or audited”.

California has a state economy the size of most nations so any viable intrastate investment crowdfunding exemption has potential – if it is crafted correctly.

H/T Paul Spinrad

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