California requires persons who are engaged in the business of making loans to be licensed under the Finance Lenders Law. Cal. Fin. Code § 22000 et seq. This had been an issue for venture capital funds that extended bridge loans to see portfolio companies through to the next round of financing. In 2003, the legislature provided some relief by enacting AB 169 (Chavez). That bill exempts commercial bridge loans made by venture capital companies. Cal. Fin. Code § 22062. The relief, however, was limited. Notably absent from the exemption were venture capital investments in the form of longer-term convertible debt.
Senator Correa now proposes to exempt a venture capital investment made by a venture capital company in an equity security issued by an operating company. An “equity security” would have the same definition as Section 3(a)(11) of the Securities Exchange Act of 1934.
The bill will have its first hearing in the Senate Banking and Financial Institutions Committee tomorrow.