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Bill Threatens To Yank Qualification Upon Any Change In Management

Sometimes, I run across bills that seem to defy rational explanation.  AB 2610 (Holden) appeared to be one such bill.

Under the California Corporate Securities Law of 1968, the offer and sale of securities must be qualified unless the transaction or security is exempt or not subject to qualification due to federal preemption.  Qualification, however, does not last forever.  In the case of issuer transactions, the effective period of qualification is 12 months, unless the Commissioner of Business Oversight extends provides by rule or order for a different period.  Cal. Corp. Code § 25114.  In addition, the Commissioner may suspend a qualification pursuant to Corporations Code Section 25143.

AB 2610 would extend this period of qualification by 24 months to 36 months.  However it would provide that an issuer qualification “immediately becomes ineffective upon any change in board members, directors, officers, partners, members, or trustees of the issuer”.  Of course, this is a entirely impracticable curtailment.  What if a director or officer dies?  Is that really grounds for cutting short the period of qualification and requiring the issuer to reapply?  Worse yet, it puts the issuer at the mercy of all of its directors, officers, partners, members or trustees.  Any one of them can threaten to derail an offering simply by threatening to leave.

Being at a loss to explain such a bizarre limitation, I contacted the author’s office.  According to the fact sheet provided to me, the author’s intent was actually to facilitate Small Corporate Offering Registration (aka SCOR) offerings (“AB 2610 improves the SCOR program and adopts a flexible, three-year timetable so that small business are able to plan and execute their innovative ideas in a way that will enable them to expand and create jobs for hard working Californians.”).  These have never been popular and there is certainly nothing wrong in attempting to facilitate capital formation by small businesses.  However, the bill as introduced is more poison than panacea.

Webcast Tomorrow

On Wednesday, March 2, 2016, I will be participating in a webcast devoted to “Hot Issues for Your Annual Meeting”.  Joining me will be Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, Roxanne Houtman, Partner, Potter Anderson Corroon LLP, and  Jill Whitney, VP – Client Services, Broadridge.

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