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2015 Commissioner's Report - On the Offer or Sale of Securities by Permit under Corporations Code Section 25113

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1) Commissioner’s Report On the Offer or Sale of Securities by Permit under Corporations Code Section 25113 December 2015 California Department of Business Oversight

2) Introduction Corporations Code section 25113(d) requires the Department of Business Oversight (DBO) to prepare an annual report summarizing data collected from small corporations granted permits to offer and sell securities pursuant to section 25113’s other provisions. The report must include the following information: ï‚· ï‚· ï‚· ï‚· ï‚· ï‚· ï‚· A summary of the general categories of investments for which permits were approved The minimum, maximum and average net worth required of permit holders The least stringent and most stringent suitability standards imposed on persons issued permits for each category The experience requirements imposed The total dollar amount of money sought to be raised per category The number and nature of enforcement actions taken against permit holders Any other information deemed relevant by the Commissioner of Business Oversight (Commissioner). Data and Summary from 2014 Generally, under the Corporate Securities Law of 1968 (Corporations Code section 25000 et seq.), the offer and sale of a security requires either a permit from the DBO or an exemption from the permit requirement. A total of 139 permits were issued under Corporations Code section 25113 in 2014. General Categories of Investment In 2014, the DBO issued securities permits in the following categories of investment: agriculture, church debt, church extension fund, cooperative, employee compensation, food and drink, manufacturing, membership, microlender, mobile home park, mortgage, mutual water company, oil and gas, real estate, technology and other. Department of Business Oversight | Corporate Securities Law of 1968 Page 2

3) The table below breaks down the number of permits issued by category of investment: Category of Investment Number of Permits Issued Agriculture 1 Church Debt 13 Church Extension 33 Cooperative* 7 Employee Compensation 1 Food and Drink 2 Manufacturing 3 Membership** 12 Microlender 14 Mobile home park 13 Mortgage 10 Mutual Water Company 7 Oil and Gas 2 Real Estate 9 Real Estate Investment Trust 0 Technology 7 Other*** 5 Total 139 *The category “cooperative” includes home improvement stores, grocers and professional services providers. **The category “membership” includes social and sports club memberships. ***The category “other” includes charity, community development, mortuary, project and stock management, schools and wholesaler. Investor Suitability Standards The Commissioner has broad discretion under the Corporate Securities Law of 1968 to set standards for the offer and sale of securities. The Commissioner may require investors to meet specific qualifications related to experience, level of financial responsibility, tax status or any other criteria the Commissioner deems necessary.1 These “investor suitability” standards are imposed as needed and depend on the securities issued. As reflected in the table below, both the least stringent and most stringent standards varied by category of investment. For some investment categories, no investor suitability standard was imposed. In other words, the issuer was permitted to offer and sell the securities in an “open qualification” to the public generally.2 When investor suitability standards were imposed, the Commissioner in most cases restricted the offer and sale of the securities to persons 1 2 Cal. Code Regs., tit. 10, § 260.140.01. Cal. Code Regs., tit. 10, § 260.001, subd. (f). Department of Business Oversight | Corporate Securities Law of 1968 Page 3

4) having a minimum gross income and minimum net worth, or limited the percentage of net worth a person could invest. The table below sets out by category of investment the least and most stringent suitability standards imposed by the Commissioner in 2014. Category of Investment Least Stringent Standard Most Stringent Standard Agriculture* Cooperative Cooperative Church Debt Must be affiliated with the church Church Extension No suitability standard imposed Cooperative No suitability standard imposed Must be affiliated with the church $70,000 net worth + $70,000 gross income, or $250,000 net worth plus 10% net worth cap on investment $75,000 net worth + $50,000 gross income, or $150,000 new worth Employee Compensation Must be an employee of the company Must be an employee of the company Food and Drink No suitability standard imposed $75,000 net worth + $50,000 gross income, or $150,000 net worth plus 10% net worth cap on investment Manufacturing* No suitability standard imposed $250,000 net worth + $65,000 gross income, or $500,000 net worth Membership** No suitability standard imposed $500,000 net worth + $100,000 gross income, or $1,000,000 net worth Microlender No suitability standard imposed $250,000 net worth + $65,000 gross income, or $500,000 net worth Mobile home park No suitability standard imposed Mortgage Must be a California resident plus 10 % net worth cap Mutual Water Company Member or resident who receives water from the mutual water company Oil and Gas Must be an existing shareholder Must be a current resident of the mobile home park $250,000 net worth + $65,000 gross income, or $500,000 net worth plus 10% net worth cap on investment Member or resident who receives water from the mutual water company Must be a member of the company and a crude oil producer $250,000 net worth + $65,000 gross income, or $500,000 net worth $250,000 net worth + $65,000 gross Technology No suitability standard imposed income, or $500,000 net worth plus 10% net worth cap on investment $75,000 net worth + $50,000 gross Other*** No suitability standard imposed income, or $150,000 net worth plus 10% net worth cap on investment *The category “cooperative” includes home improvement stores, grocers and professional services providers. **The category “membership” includes social and sports club memberships. ***The category “other” includes charity, community development, mortuary, project and stock management, schools and wholesaler. Real Estate Must be an accredited investor Department of Business Oversight | Corporate Securities Law of 1968 Page 4

5) Standards for Issuers or Sponsors ï‚· Experience Requirements for Persons Issued Permits The securities permit application requires the issuer to explain the applicant’s business experience. The DBO evaluates that explanation along with other information provided in the application. The Corporate Securities Law of 1968 imposes no experience requirement that applies to all issuers. However, regulations promulgated by DBO set experience standards for issues or sponsors in the Real Estate Program3 and in oil and gas offerings.4 In a real estate program, the general partner of the sponsor must have at least two years of relevant real estate experience or other experience relevant to acquiring and managing the types of properties sought by the program.5 Additionally, any affiliate providing service to the program must have no less than four years of relevant experience in the kind of service being rendered, or otherwise demonstrate knowledge and experience to render the proposed services.6 In an oil and gas offering, the general partner or its chief operating officers must have at least three years relevant oil and gas experience demonstrating the knowledge and experience to manage the operations.7 Additionally, the general partner or any affiliate providing services to the program must have at least four years relevant experience in the services being rendered or otherwise demonstrate sufficient knowledge and experience to perform the services proposed.8 ï‚· Net Worth Requirements for Persons Issued Permits Although Corporations Code section 25113(d) requires the report to include the “…minimum, maximum, and average net worth required of those persons to whom permits are issued for each category,” the Commissioner generally does not require specific net worth or minimum capital requirements of the issuer or sponsor unless required to do so by specific rule. In that regard, regulations governing REITs (Real Estate Investment Trusts), 9 Real Estate Programs, 10 and Oil and Gas Interests 11 specify net worth requirements. Cal. Code Regs., tit. 10, § 260.140.111.1. Cal. Code Regs., tit. 10, § 260.140.122.1. 5 Cal. Code Regs., tit. 10, § 260.140.111.1. 6 Id. Where good cause is shown, and the individual characteristics of specific programs warrant it, certain guidelines may be modified or waived by the Commissioner. Cal. Code Regs., tit. 10 § 260.140.110.1 subd. (a) and (b). 7 Cal. Code Regs., tit. 10, § 260.140.122.1. 8 Id. 9 Cal. Code Regs., tit. 10, § 260.140.91. 10 Cal. Code Regs., tit. 10, § 260.111.2. 11 Cal. Code Regs., tit. 10, § 260.140.122.2. 3 4 Department of Business Oversight | Corporate Securities Law of 1968 Page 5

6) Below is a summary of the minimum, maximum and average net worth of persons to whom permits were issued in 2014: Agriculture* Church Debt Minimum Net Worth (in dollars) 22,227,547 190,816 Maximum Net Worth (in dollars) 22,227,547 54,473,557 Average Net Worth (in dollars) 22,227,547 16,108,453 Church Extension 1,022.93 190,195,008 28,434,214 Cooperative** 996,501 168,555,000 54,625,236 Employee Compensation* 11,089,509 11,089,509 11,089,509 Food and Drink 1,000 1,000 1,000 Manufacturing 3,066,962 11,286,666,667 3,766,941,046 Membership*** -28,687,430 3,332,987,000 314,646,874 Microlender 321,587 92,542,471 22,8701,858 Mobile home park Mortgage -641,590 130,555 22,684,063 8,532,423 3,051,889 2,271,987 Mutual Water Company 293,217 21,113,398 5,897,392 Oil and Gas 10,160,889 10,160,889 10,160,889 Real Estate -31,716 7,210,182 1,852,407 Technology -10,027,000 26,807,000 2,394,861 Category of Investment Other**** -1,767,844 230,846,000 64,049,618 *There was only one permit issued under this category **The category “cooperative” includes home improvement stores, grocers and professional services providers. ***The category “membership” includes social and sports club memberships. ****The category “other” includes charity, community development, mortuary, project and stock management, schools and wholesaler. Department of Business Oversight | Corporate Securities Law of 1968 Page 6

7) Total Dollar Amount Sought to be Raised Below is a summary of the minimum, maximum and total dollar amount issuers requested to raise applications filed in 2014, by category: Agriculture* Minimum Dollar Amount Raised (in dollars) 200,000 Maximum Dollar Amount Raised (in dollars) 200,000 Total Dollar Amount Raising in CA (in dollars) 200,000 Church Debt 125,000 100,000,000 227,230,000 Church Extension 2,000,000 750,000,000.00 2,988,115,000 Cooperative** 18,792 3,750,000 10,252,792 Employee Compensation* 2,000,000 2,000,000 2,000,000 Food and Drink 600,000 650,000 1,250,000 Manufacturing 500,000 4,990,000 8,290,000 Membership*** 550,000 318,200,000 698,180,000 Microlender 300,000 100,000,000 579,268,000 Mobile home park 60 21,000,000 25,590,360 Mortgage 1,700,000 200,000,000 620,700,000 Mutual Water Company 2,500 162,200 290,333 Oil and Gas 20,000 5,118,000 5,138,000 Real Estate 100,000 100,000,000 350,100,000 Technology 3,000,000 194,210,205 505,466,205 Category of Investment Other**** 375,000 21,684,000 27,009,000 *There was only one permit issued under this category **The category “cooperative” includes home improvement stores, grocers, and professional services providers. ***The category “membership” includes social and sports club memberships. ****The category “other” includes charity, community development, mortuary, project and stock management, schools, and wholesaler. Enforcement Actions There were no new enforcement actions taken against any of the issuers who received a permit in 2014 under section 25113. Department of Business Oversight | Corporate Securities Law of 1968 Page 7