Sunshine May Be Free But It May Take A Security To Harvest It

Harvesting the sunlight as a source of “clean” energy is the dream of many. Although the energy provided by the sun is free, converting that energy into electricity continues to require significant financial resources. One model for local solar energy development is “community shared solar”. Under this model, local consumers invest in the development of a solar energy system. The investment may take the form of a n up-front payment or ongoing an ongoing subscription to the output. When the system begins to generate electricity, the participants receive a credit on their electricity bill.

Because these are shared projects with numerous participants, they begin to look much like an investment contract as defined by the U.S. Supreme Court – “an investment of money in a common enterprise with profits to come solely from the efforts of others”. Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293 (1946).

The possible application of the securities laws to shared energy projects hasn’t gone unnoticed. In February, Assembly Member Das Williams introduced a bill, AB 1014, which would create the Shared Renewable Energy Self-Generation Program. That program would authorize a retail customer of an electrical corporation to acquire an interest, as defined, in a shared renewable energy facility, as defined, for the purpose of receiving a bill credit, as defined, to offset all or a portion of the participant’s electricity usage, consistent with specified requirements. The bill would also amend the definition of a “security” in Corporations Code Section 25019 to exclude any right to a bill credit or interest of a participant in a community renewable energy.

While I’m not opposed to eliminating barriers to capital formation, I question whether it makes sense to give a type of investment contract a complete pass simply because it is “green”. Excluding “bill credits” for community renewable energy not only relieves promoters of the obligation to qualify the offer and sale of those investments, it immunizes them from potential liability for securities fraud under the Corporate Securities Law of 1968.

There is no reason to believe that securities fraud won’t occur simply because the issuer plans to develop solar or other clean energy. For example, the Commissioner in 2010 issued a desist and refrain order against a group of companies that claimed to be ”committed to acquire or build 100 new green energy power plants, focusing on co-generation and solar technologies”. 808 Investments, LLC et al. (Jan. 19, 2010). When a similar exception for bill credits was proposed last year, the analysis prepared for the Assembly Committee on Utilities and Commerce noted:

Since there is potentially no limit to the number of developers who can enter into this market, there is potential for opportunists to prey on consumers or potential facility investors.

Analysis of SB 843 (W0lk), Assembly Comm. on Util. & Commerce (Aug. 23, 2012).

Even should AB 1014 be enacted, the exemption will not affect the application of the federal securities laws.