Setting up a “fund” is a great way to raise capital for businesses that need it. A fund can go through all the securities law hoops, raise enough money to become an accredited investor ($5 million), and then invest in other companies with minimal regulatory hurdles.
The only problem is that a company that is set up for the purpose of investing in other companies is regulated under the federal Investment Company Act of 1940.
The expense of complying with the Investment Company Act is huge and probably not worth it for any but the largest funds like publicly traded mutual funds.
There is an exemption from the coverage of the Act for funds that have 100 or fewer shareholders. But what if you want to raise money from more investors?
There are some other exemptions under the Act. One of those (Section 6(a)(5)) exempts from coverage of the 1940 Act funds that are regulated by a state and are set up to promote economic development in that state.
Apparently, no state has passed legislation to take advantage of this exemption except one: California.
California adopted the Capital Access Company law (Corporations Code Section 28000 et seq.) more than ten years ago to take advantage of the exemption from the federal Investment Company Act. To date, not a single CAC has been formed! Earlier this year, the state adopted amendments to the law to encourage its use. Hopefully we will start to see some CACs blooming all over California!
Here are some basics about the CAC:
Applying to be a CAC
To become a CAC a company must file a license application with the California Department of Corporations.
The applicant must have a tangible net worth of at least $250,000.
The applicant must have investable funds of at least $5,000,000.
The applicant must have financial resources adequate to cover its expenses for three years.
Activities of the CAC
At least 80% of the CAC’s securities must be held by California residents or persons who have a “substantial business presence” in California.
The activities of the CAC are limited to the promotion of economic, business, or industrial development in the state of California through the provision of financial or managerial assistance, primarily to small business firms.
The CAC must invest all of its funds in California “small business concerns ” (companies with less than $18 million tangible net worth and less than $6 million of average net income in last two years), and must invest at least 20% of its funds in “smaller business concerns” (companies with less than $6 million of tangible net worth and less than $2 million of after tax net income in the last two years).
Public Offerings of Stock in CACs
A CAC can do a public offering of stock if it successfully files for a California permit.
The CAC’s securities can only be sold to accredited investors.
The California Dept of Corporations has indicated its willingness to allow a coordinated filing for a CAC permit and a public offering permit.
CACs as SBICs
A CAC can file with the federal Small Business Administration to become a Small Business Investment Company (SBIC) and obtain 2:1 leverage up to $150 million – this means that in addition to its equity capital, the CAC will have low interest debt securities to invest in local business.
AUG. 25, 2011 – IMPORTANT CORRECTION! ONLY ACCREDITED INVESTORS CAN INVEST IN CALIFORNIA CAPITAL ACCESS COMPANIES.