About Capital Access Company Law
Senate Bill 2189 (Chapter 668, Statutes 1998) enacted the Capital Access Company Law (the “CACL”), which, among other things, provides for the licensure and regulation of capital access companies by the Commissioner of the Department of Financial Protection and Innovation. This law, which is found at Corporations Code Section 28000 et seq., became operative on July 1, 1999, and is intended to facilitate California small businesses obtaining financing by enabling certain investment companies to rely on an exemption from registration under the federal Investment Company Act of 1940 (the “Investment Company Act”).
Under the Investment Company Act, investment companies are subject to registration and oversight by the Securities and Exchange Commission. At the federal level, investment companies must comply with various requirements (e.g., periodic reporting, disclosure of information, examination and audit) that are designed to protect the investing public. The National Securities Markets Improvement Act of 1996 (“NSMIA”) amended the Investment Company Act to exempt any investment company not engaged in the business of issuing redeemable securities if its operations are regulated by the state where it is formed pursuant to a statute regulating companies that provide financial or managerial assistance to businesses in the state, and if certain additional conditions are met. Section 6(a)(5) of the Investment Company Act. The CACL provides for the licensure and regulation of capital access companies that are exempt from the Investment Company Act by virtue of Section 6(a)(5). Capital access companies are defined under the CACL as providing financing or managerial assistance to small business firms in California. Corporations Code Sections 28047, 28200 and 28400-28404.
Also, under the existing California securities law, the Department of Financial Protection and Innovation and the Commissioner of the Department of Financial Protection and Innovation regulate the offer and sale of securities in this state, as well as License and regulate broker-dealers and investment advisers, under the Corporate Securities Law of 1968 (the “CSL”). The offer or sale of non-redeemable securities to accredited investors by a capital access company Licensed under the CACL is exempt from the qualification requirements of the CSL. Corporations Code Section 25102(p). A capital access company Licensed under the CACL is also exempt from the broker-dealer licensure requirements of the CSL. Corporations Code Section 25208.
The CACL provides that a capital access company is limited primarily to providing financial or managerial assistance to small businesses that meet specified requirements, including that the small businesses receiving the financial assistance have a significant connection to California. Corporations Code Section 28047. Although the CACL imposes obligations on the board of directors, executive committee, or other policy body of the capital access company in regard to the approval of the investment contract between the company and the person who will make recommendations with respect to the investment of funds, neither the CACL nor the rules adopted by the Commissioner under the CACL limit in any way what the organizers or fund managers can earn from their investment efforts on behalf of the capital access company. Corporations Code Sections 28152, 28153 and 28212.