Puzzling CSL Exemption Proposed

Allen Matkins
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Allen Matkins

California Assembly Member Al Muratsuchi introduced a bill, AB 511, which would add a new transactional exemption to the qualification requirement of the California Corporate Securities Law of 1968.  As introduced, the exemption would be available only to California corporations and foreign corporations that are subject to California's pseudo-foreign corporation statute (Cal. Corp. Code § 2115).  However, a corporation would not be eligible for the exemption if it is:

  •  a “blind pool” company, as that term is defined by the Commissioner;
  •  issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights;
  • is an investment company subject to the Investment Company Act of 1940; or
  •  Is subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.

There are also several requirements as to the type of transaction.  For example, the transaction must be conducted as an intrastate offering pursuant to Section 3(a)(11) of the Securities Act of 1933 and Rule 147 or Rule 147A.   What I find puzzling is the bill's requirement that the offering be "conducted in accordance with the requirements of Section 4(a)(7) of the Securities Act of 1933 and Regulation CF (17 C.F.R. 227 et seq.)."  Section 4(a)(7), of course, is a resale exemption that is not available to issuers.    Regulation CF, is the SEC's crowdfunding regulation.  

Another unique feature of the exemption would be a statutory right of a purchaser to change its mind and rescind.

It is still very early in the session (the deadline for bill introductions ends next week) and AB 511 is likely to be amended.  However, the numerous conditions and restrictions in the current version of the bill make it unlikely that many issuers will rely upon it.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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