WHY CALIFORNIA AB 2178 IS — USELESS AND A SHAM

We have reviewed AB 2178 and although it appears on its surface to assist California companies to use the SEC’s new crowdfunding rules, it will be of little utility and only serves to advance the State of California’s mission statement to be a finely-honed job and business killing machine.

The bill is obviously written in coordination with the Department of Business Oversight and California attorneys that want to continue making money.

For background, earlier in 2016 the Securities and Exchange Commission issued rules on raising money via crowdfunding. The SEC’s rules (known as Regulation CF) permits start up and other companies which do not already file reports with the SEC to raise money from the public, provided certain conditions are met. The offering must be made through a registered broker or funding portal. This requirement is to ensure a level of screening from fraudulent deals. Investors with net worth or annual income over $100,00 can only purchase an amount up to 10% of their net worth or annual income; those with lesser income or net worth are limited to the higher of $2,000 or 5% of their annual income. Net worth excludes the value of one’s home.

The problem with using crowdfunding in California is that Regulation CF does not provide an exemption from compliance with California law and  the Department of Business Oversight’s offering rules.  AB 2178 ostensibly seeks to provide relief from those rules, but it does not.

Under current law, before a company could use crowdfunding to solicit from California investors, it must file an application for qualification by permit. Unless the company is currently profitable or can prove it will likely be profitable within 2 years, the DBO will not give an “open” qualification. That is, investors must meet minimum requirements. The DBO will require that purchasers either have minimum net worth of $75,000 and income of $50,000, or net worth of $150,000, and do not purchase any amount over 10% of their net worth. In the alternative, any person may purchase regardless of financial condition up to $2,500. Sometimes these requirements can be negotiated up by one’s attorney, however, so they are not as strict as it seems.

The company can sell its shares directly to purchasers.

What does AB2178 add to the mix? (to be continued)