WHAT DOES CALIFORNIA’s CROWD FUNDING STATUTE PROPOSE?
AB2178 requires that all sales are made through a licensed broker or intermediary. No direct sales are allowed. Under AB2178, the investor has a three day right of recission. Purchasers can buy up to the lesser of 10% of their net worth or $5,000. So, AB decreases the amount that can be sold as compared to the existing process. It also adds the requirement that the company take “reasonable steps” to ensure that non-accredited investors (those with $1 million in net worth and $200,000 in income) have “such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.” For such small amounts of an investment, it is not worthwhile for the company to devote resources to that inquiry.
This is a huge additional requirement over existing law, because, let’s be honest here. Few people with income under $50,000 or net worth under $75,000 have this level of financial sophistication.
AB 2178 also adds a provision that the company and its officers, directors, founders, promoters, any broker dealer or the funding portal has a fiduciary obligation to any investor or prospective investor. A fiduciary obligation is the highest obligation one can have under the law. A fiduciary has to look solely out for the interests of the beneficiary. This means that the company has to determine if the crowdfunding investment is in the investor’s best interest. This standard is impossible to satisfy. Only fools will file applications under the new law.
AB 2178 does require that the DBO approve or deny the crowdfunding application within 60 days, or the company can request a hearing. But the DBO should be held to those standards anyway. The DBO can simple deny every application and avoid the impact of the 60-day requirement.
One has to bear in mind that California’s securities laws and the DBO’s Rules are over a half century old. They are poorly adapted to the pace of modern life.
What the California legislature should do, if it really wishes to help California businesses obtain the capital they need, is provide a blanket exemption from qualification of offerings that comply with the Federal rules. Companies should file copies of the offering documents and advertising with the DBO in advance of use, and the DBO should continue to have the same power to cut short those offerings that do not comply with law. Otherwise, crowdfunding will be unavailable to California companies seeking to raise money locally.
