If you want to invest in a publicly traded company, you simply purchase securities in the company. But if you want to invest in the organic farm down the road, or a new renewable energy startup in your town, it’s not that easy.
Small businesses and entrepreneurs face a costly permitting process or can only pursue private investments from wealthy investors—not small investments from a larger number of people. And would-be investors find few opportunities to invest locally, in part, because of the lengthy and costly securities regulation process and a lack of awareness about local companies seeking investment.
The new California Local Economies Securities Act (AB2751), authored by the Sustainable Economies Law Center (SELC), aims to make it possible for small farms, agricultural land trusts, cooperatives, nonprofit organizations with business income, and renewable energy systems in California to raise capital without going through a costly permitting process.
The bill, which recently passed through the State Assembly Banking and Finance Committee, exempts certain securities offerings from California permit requirements, which opens the doors to raising capital for a variety of enterprises focused on the economic and ecological health of the state.
The bill proposes allowing enterprises to conduct small public offerings through the following exemptions from permitting requirements, as detailed by SELC:
Small Investments: This bill would exempt from permitting requirements any offer or sale of a security if the business provides basic offering and business information to the public, and the total amount raised during the offering period (one year) does not exceed $500,000. Additionally, each individual investor would be limited as follows:
- Non-accredited investors would be limited to investing no more than $1000 each in one offering.
- Accredited investors would be limited to 5% of their net worth in an offering.
Farms and Agricultural Land Trusts: This bill would allow a farm enterprise or agricultural land trust to raise up to $2,000,000 per year for the purchase, long-term leasing, purchase of an easement, construction, or improvement of real property to be used for agriculture purposes. The issuers using this exemption must be farmers who will actively farm the land or issuers must be an agricultural land trust or other nonprofit organization. For land purchases, 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. Under this exemption, the limits on each individual's investment amount would be as follows:
- Each individual investor could invest up to $2,000 at least.
- An investor could invest up to $5,000 IF the investor has an annual gross income of at least $100,000 or a total net worth of at least $200,000.
- Accredited investors would be limited to investing no more than 5% of their net worth.
Renewable Energy Projects: Similar to the farm and land trust exemption in the previous paragraph, the bill would allow nonprofits, cooperatives, and groups of tenants to raise up to $2,000,000 to purchase solar panels or wind turbines, and equipment necessary for the storage or transmission of the energy produced by the panels or turbines. The same limits per investor as in the farmland exemption above would apply to these renewable energy projects.
Nonprofit Organizations: This bill would expand an existing exemption for nonprofit organizations in California Corporations Code Section 25100(j) to include debt securities, not just equity securities, which would make this exemption mirror similar exemptions in federal law and the laws of many other states. The existing California statute is not suitable for nonprofit organizations organized for charitable or educational purposes and exempt from income tax under Internal Revenue Code Section 501(c)(3) because such organizations cannot have equity shareholders. When such nonprofit organizations accept investments the investments must be in the form of debt securities in order to comply with state corporate law and the terms of their tax-exempt status. Therefore, this bill would open up new capital raising opportunities for nonprofit organizations such as Community Development Financial Institutions and other similar organizations that provide investment and technical assistance to small businesses.
Investor Protections: The proposed bill and existing law provide numerous investor protections in addition to the limits on investment amounts described in each exemption above, including:
- The exemptions could not be used to fund enterprises whose success depends on any unproven technology or enterprises which are developing new products that have not yet been prototyped (small investments and energy exemptions).
- The enterprise's directors, officers, other individuals holding similar positions, and major shareholders are subject to a "bad actor disqualification" meaning that someone with a history of securities fraud is prohibited from using the proposed exemptions (small investments, farmland and energy exemptions).
- The offering documents must contain financial statements, tax returns, and a list of risk factors, among other information typically found in a business plan (small investments, farmland and energy exemptions).
- The offering documents would include a cover page with a stern warning to prospective investors cautioning that they are taking a risk and advising that they only invest if they can afford to lose their entire investment (small investments, farmland and energy exemptions).
- Existing securities laws that prohibit the use of false or misleading information or the intentional omission of material facts in offering documents would still apply to all offerings under this bill.
- Escrow accounts would be required to hold investment funds until a sufficient amount was raised to proceed with the land purchase or project implementation (farm and energy exemptions).
- Investors are limited to investing no more than $1,000, $5,000, or 5% of net worth depending on the exemption and the investor's wealth (small investments, farmland, and energy exemptions).
AB2751 is currently being considered in the 2016 legislative session. For more information and to get involved, visit theselc.org/lesa.