The California Local Economies Securities Act will exempt certain securities offerings (advertising of investment opportunities in an enterprise) from California permit requirements, and therefore open doors to raising capital for a variety of enterprises necessary to the economic and ecological health of California, including small farms, agricultural land trusts, cooperatives, renewable energy enterprises, and other small businesses.

As many people seek to move their savings from Wall Street to "Main Street," they often find that there are very few opportunities to move their money, even for investors willing to make lower returns on their investment. This is in part due to the lengthy and costly securities registration process required in order to publicly advertise investment opportunities. Because the barriers to conducting public advertising of investment opportunities are so onerous for small businesses, many small businesses simply have no way of connecting with potential investors and receiving even small amounts of capital. This bill proposes to allow enterprises to conduct small public offerings through the following exemptions from permitting requirements:

Micro Investments: This bill would exempt securities offerings if the total amount raised by the business in the offering does not exceed $100,000, and no individual, non-accredited investor invests more than $100.

Small Investments: This bill would exempt securities offerings if the business provides basic offering and business information to the public, the total amount raised during the offering does not exceed $500,000, and no individual non-accredited investor invests more than $1,000.

Small Farms and Agricultural Land Trusts: This bill would allow a small farm enterprise or agricultural land trust to raise up to $2,000,000 for the purchase, long-term leasing, purchase of an easement, construction, or improvement of real property to be used for agriculture purposes. This bill would exempt the securities offering from permit requirements so long as the issuer receives no more than $5,000 per non-accredited investor, provided that the investor signs a statement verifying an annual gross income of at least $50,000 or a total net worth of $100,000 or more. Any investor that does not verify such levels of income or net worth may contribute no more than $1,000. All funds raised for the purpose must be held in an escrow account until the issuer has entered into a contract to purchase the land.

Renewable Energy Projects: Similar to the farm and land trust exemption in the section above, the bill would allow nonprofits and cooperatives to raise up to $2,000,000 to finance the purchase of solar panels or wind turbines. Similarly, this exemption could be used only as long as the issuer receives no more than $5,000 per non-accredited investor, provided that the purchaser signs a statement verifying an annual gross income of at least $50,000 or a total net worth of $100,000 or more. Any investor that does not verify such levels of income or net worth may contribute no more than $1,000.

Cooperatives: Cooperatives are enterprises that are owned and democratically controlled by members. Members might be the consumers of the business, its workers, or the producers of products that the business sells. One of the defining characteristics of a cooperative is that each member has one vote, unlike a typical corporation where voting power is proportionate to the number of shares one owns. Existing law exempts from permit requirements any offer or sale of a membership in a California consumer cooperative corporation, provided that the offering does not exceed $300 per purchaser. This bill would raise the cap to $1,000, thereby facilitating the creation of more consumer cooperatives that operate for the benefit of Californians.

Frequently Asked Questions

So what is securities law exactly, and how is the current law such a barrier to financing small businesses?

Securities law--the law governing investments--in the United States entails a maze of federal and state laws, many of which were written several decades ago. The federal Securities Act of 1933 defines a security as “any note, stock, transferable share, bond, evidence of indebtedness, certificate of interest or participation in any profit-sharing," and many other forms of investment. California courts have included other forms of capital investments in the meaning of the term 'securities,' such as pre-purchasing memberships in enterprises that are still in development.

When an investment offering meets the definition of a security, it must generally either be approved by a government agency or it must fall under an exemption from permitting from the government agency. Many small-scale public securities offerings can be exempt from permitting requirements at the federal level but still need to be permitted by a state regulatory agency, which, in California is the Department of Business Oversight (DBO).

Permitting requirements can be a very time consuming and costly endeavor for small businesses. To qualify for a permit from the Department of Business Oversight requires a fee of $500 to $2,500, depending on the amount of money the business hopes to raise.

Additionally, most businesses seeking to do an investment offering that entails public advertising hire an attorney to ensure their application to the DBO will be approved, which typically costs $10,000 to $30,000. These costs make it difficult for many very small enterprises and start-ups to raise money, especially if they do not have many wealthy individuals among their close friends and family.

What is an accredited investor?

An accredited investor is an individual person with at least $200,000 in annual income, or a married couple with at least $300,000 in annual income, or a person with at least $1 million in net worth, not including their home and furnishings. An entity, like a corporation or nonprofit organization, is an accredited investor if it has $5 million or more in assets. One does not need to obtain any kind of certification, training or undergo any process to be an accredited investor; anyone who meets those wealth requirements is an accredited investor.

What benefits does the reviewing and permitting of securities offerings by the Department of Business Oversight provide?

California's Department of Business Oversight reviews applications for permits to ensure that the offering documents disclose adequate information to potential investors and do not make any misleading statements so that potential investors can make an informed decision about whether to invest. The regulators also sometimes impose additional restrictions and requirements on the business making the securities offering. For example, the regulators may limit the amount of money that the business can take from any individual who earns less than some annual income threshold, in an attempt to prohibit less affluent investors from putting large amounts of money at risk. The DBO can also require a business to get audited or reviewed financial statements, and it can require the business to deposit funds raised into special bank accounts called impound accounts.

Why is it a good idea to forgo those registration requirements? Don't we need those for investor protection?

There are certain protections provided to investors through the registration process that will be compromised in this bill to limited extents, however, this proposed bill still provides helpful protections to investors in a few key ways. 1) Regardless of whether a security is permitted or exempt from permit requirements, securities, corporate, and contract laws prohibit a business from misleading investors, lying to investors, and omitting material information from securities offering documents. These laws still would apply to offerings made under the proposed exemptions and regulators at the state and federal government still have the authority to intervene in securities offerings where there are reports of potential violations of those laws. 2) This bill limits the amounts of money that non-wealthy investors can put at risk in any one enterprise and the total amount that the enterprise can raise. Businesses that wish to raise larger amounts of money would still need to get permits from the state and/or federal government. 3) The bill requires offering documents to begin with a clear and simple warning that the investment may be risky and that the investor should not invest if he/she cannot afford to lose the entire investment.

But we already have some exemptions for small businesses in California's securities law. Why do we need more?

Many small businesses in California raise money using small offering exemptions where they can solicit money from friends, family, and accredited investors only through private offerings, where the entrepreneur must have a preexisting personal or business relationship with anyone solicited for investment. Entrepreneurs need to be weary using these types of exemptions, however, because the law is not precise about what counts as a sufficient preexisting relationship, leaving much room for debate and potential disputes. It is extremely difficult for the law to define and categorize human relationships. The proposed bill would greatly simplify the question of who can invest by allowing all California residents to make investments. As increasing numbers of California residents join local investing clubs and networks where they seek to invest in local enterprises, untested questions come up about how the law would the relationships among all these individuals. A small offering exemption which allows any California resident to learn about local investing opportunities is greatly needed.

What about the federal JOBS Act? Didn't that make this legal already? Why do we need state-level crowdfunding laws?

In 2012, President Obama signed the JOBS Act, which was a bundle of legislation passed by Congress intended to boost the economy. A portion of the JOBS Act is designed to enable investment "crowdfunding" throughout the United States and contains some similar provisions as the proposed California Local Economies Securities Act. However, the SEC is years behind schedule in its rule making process so we still don't have final regulations required by the legislation, so no one has actually been able to take advantage of the new federal law yet. It's unclear when the regulations will actually be finalized. Furthermore, the bill passed by congress became tailored towards businesses hoping to grow very quickly. The federal law entails many requirements that are not very practical for very small businesses, including one requirement that most information about the offering be communicated through a regulated internet intermediary, thus limiting an entrepreneur's ability to communicate directly about the investment opportunity, making it more costly, and making the process impersonal. This is impractical because many entrepreneurs and investors alike find that person-to-person communication is vital because it enables an entrepreneur and a potential investor to get to know one another, which helps an entrepreneur promote the investment and helps potential investors gauge the character of the entrepreneur. So the requirement in the JOBS Act to use an online portal to communicate about a securities offering is an unrealistic requirement that does little to protect investors. Additionally, in order to raise more than $100,000, a business must have professionally reviewed financials, and to raise over $500,000 one must have audited financials, which would be a significant out-of-pocket expense for many small businesses which would otherwise not have their financial statements reviewed or audited.

Someday the SEC will finalize the regulations under the federal crowdfunding law, so businesses will have the option to use the new federal law, or use already existing federal exemptions combined with either state permits or state exemptions. Once the federal rulemaking process is completed, it will not override any state-level exemptions, such as those proposed in this bill. We suspect that some very small businesses would prefer the proposed California exemptions in this bill even when the federal crowdfunding process is finalized.

How is this different from what is already happening on Kickstarter, Indiegogo and other online crowdfunding platforms?

Many crowdfunding campaigns hosted on popular websites, such as Kickstarter, offer rewards to people who contribute money towards some project. Typically, these campaigns are asking people to donate and receive some kind of reward as a thank you gift, where the reward is of relatively small value compared to the donation made, or sometimes, the campaign is asking someone to purchase a product and there is little to no risk that the person contributing money will lose money because the campaign involves a simple purchase of a product, rather than a true investment. However, some crowdfunding campaigns ask people to contribute money in order to later receive a product or service that is still in development at the time of the payment, such that the person contributing money is taking some risk because the development of the product or service may not go as planned and the person contributing money may not receive the product they paid for. Some of these situations are arguably securities offerings under California law, and they should arguably be regulated by the DBO. Typically, however, online crowdfunding campaigns are simply donation-based, so they do not fall under the scope of securities regulation. This proposed bill seeks to make it easier for businesses and organizations to organize true investment crowdfunding campaigns, enabling small businesses to raise more money through local investors where the investor purchases stock or makes a loan.