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California Legislative Counsel Bureau California. Secretary of State.

Amendments to the Constitution and proposed statutes : with arguments ... online

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repeals all laws on subject adopted heretofore or concurrentiy herewith.

either for an investment company or for an
investment broker.

(e) The term sale, when used in this act,
means the original transfer of title of its own
securities from an investment company for a
valuable consideration.

Sec. 3. This act shall not apply to corpora-
tions, associations, co-partnerships, companies,
firms or Individuals when they are subject to
the jurisdiction or authority of the railroad
commission, nor to corporations, associations,
co-partnerships, companies, firms or individuals
after they have sec.ured from the state banking
department, the insurance commissioner or the
bureau of building and loan supervision a cer-
tificate of authority or license to do business
within this state, nor to corporations, associa-
tions, co-partnerships or companies, subject to
federal regulation, nor to those not organized
for profit, nor to mutual water companies, nor
to irrigation districts, nor to municipal corpora-
tions, nor to the stocks, stock certificates, bonds
or other evidences .of indebtedness of such cor-
porations, associations, co-partnerships, com-
panies, firms or individuals, nor to the securities
described or referred to in section 635-a of the
Political Code.

Sec. 4. (a) Before selling, offering for saled
negotiating for the sale of, or taking subscript
tions for any security defined in this act, each
investment company shall file in the ofiSce of
the auditor of investments of this state, together
with a filing fee, as hereinafter provided, an
itemized statement setting forth the name of
the investment company; its principal place of
business; the amount and character of its
assets; the amount and character of its obliga^
tions; and the names of its officers and of it^
directors or trustees, or the names of Its part-
ners, if it be a co-partnership. The above de-
scribed statements shall be verified by the oatl^
of a member of the co-partnership or company^
If It be a co-partnership or company, or by the
oath of a duly authorized officer thereof, if it be
an incorporated or an unincorporated association.
Also, there shall be filed, together with said
statement, a copy of all forms of securitiefl
which such Investment company proposes to
sell to the public, a certified copy of Its char-
ter, articles of Incorporation or articles oi
association and all amendments thereto, and
a certified copy of its by-laws and all amenAi
ments thereto. Said filing fee shall be fivi
dollars. If the par or face value of said securlJ
ties amount to twenty- five thousand dollar^
or less; ten dollars If the par or face valul
of said securities amount to over twenty-fiv<
thousand dollars and not over fifty thousand
dollars; fifteen dollars if the par or face valul
of said securities amount to over fifty thott
sand dollars and not over seventy-five thousaul
dollars; twenty dollars If the par or face vaim
of said securities amount to over seventy-fivj
thousand dollars and not over one hundred



The electors of the State of California hereby
present this petition to the secretary of state
of said state, and hereby propose for submis-
sion to, and for approval of or rejection by, the
qualified voters of said state, the following pro-
posed law for said state, which proposed law Is
hereby and herein set forth in full In this
petition, and the following is the full title and
text of the said proposed measure:

An act to define Investment companies, Invest-
ment brokers, and agents; to provide for
the regrulation and supervision thereof; to
provide penalties for the violation thereof;
to create the office of auditor of invest-
ments, and to make an appropriation there-
for; and to provide that the provisions of
this act shall constitute the entire and only
law of this state upon or relating to the
subject matter or matters dealt with In or
by this act, and that it shall operate as a
complete substitute for, and shall be deemed
to be amendatory of all other provisions of
or In any and ail other laws of this state
relating to such subject matter or matters,
whether heretofore existing, or approved or
adopted prior to or concurrently with the
adoption or approval of this act, and that
the office of commissioner of corporations
shall not exist in this state.

The people of the State of California do enact
as follows:

Section 1. This act shall be known as the
Investors* Protective Act of California.

Sec. 2. (a) The term Investment company,
when used in this act, includes every corpora-
tion, association, co-partnership and company,
which shall, within this state, sell, offer for
sale, negotiate for the sale of, or take subscrip-
tions for any stock, stock certificate, bond or
other evidence of Indebtedness of any kind or
character. Issued or to be Issued by itself, other
than promissory notes not offered to the public
by the maker thereof.

(b) The term security, when used In this act,
includes the stock, stock certificates, bonds, and
other evidences of indebtedness, other than
promissory notes not offered to the public by
the maker thereof, of an investment company.

(c) The term investment broker, when used
in this act, includes every corporation, associa-
tion, co-partnership, company and person who
shall, within this state, engage In the business
of selling, offering for sale or negotiating for
the sale of, the securities of investment com-
panies.

(d) The term agent, when used in this act,
includes every corporation, association, co-part-
nership, company and person who shall, within
this state, sell, offer for sale, negotiate for the
sale of, or take subscriptions for any security
of an Investment company, as an employee on
a salaried basis or for a commission. If acting



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thousand dollars; and twenty-five dollars if the
par or face value of said securities amount to
over one hundred thousand dollars.

(b) If an investment company desire not to
sell its securities to the public the auditor of In-
vestments shall file a written finding to that
effect. Upon the filing of said finding the invest-
ment company and its securities shall be exempt
from the provisions of this act unless said invest-
ment company shall sell its securities to the pub-
lic, whereupon the auditor of investments shall
make and file an order setting aside said finding.
I (c) Also, if such investment company be organ-
ized or created under or by virtue of the laws of
any other state, territory or government, It shall
file In the oflfice of the auditor of investments, a
certified copy of the statute or statutes or legls-
i lative or executive or governmental act or acts
i creating it, in cases where it has been created
by statute or legislative or executive or govern-
I mental act, said copy to be duly certified by the
' official authorized by the law of the jurisdiction
under which said corporation is formed to certify
I such copy ; also such Investment company shall
file In the oflace of the auditor of Investments Its
written instrument, irrevocable, appointing the
I auditor of investments its true and lawful at-
, torney, upon whom all process in any action or
proceeding against it may be served with the
' same effect as If said company were organized
I or created under the laws of this state and had
been lawfully served with process therein. Serv-
■ ice upon said attorney shall be deemed personal
service upon such company. The auditor of In-
vestments shall forthwith forward by mail, post-
age prepaid, to the person designated by such
company by written instrument filed with tlie
auditor of investments, to the address given in
I said instrument, or, in case no such instrument
lias been filed, to the secretary of such company
at its latest known post oflfice address, a copy of
j every process served upon him under the pro-
I visions of this section. For each copy of process,
the auditor of Investments shall collect the sum
of two dollars, which shall be paid by the plain-
tiff or moving party at the time of such service,
to be recovered by him as part of his costs. If
he succeed in the suit or proceeding. Service
shall be deemed not complete until said fee has
been paid, and said copy of process mailed as
hereinbefore directed.

Sec. 5. It shall be the duty of the auditor of
Investments to examine the statement and other
information so filed, and, if it appear to said
auditor of investments from said statements that
said company be in an unsafe or in an insolvent
condition, to make, or to have made, at the cost
of said company as hereinafter provided, a de-
tailed examination, audit and investigation of
the Investment company's affairs. Such invest-
ment company shall pay to the auditor of invest-
ments, for each examination, traveling expenses,
and a fee of ten dollars for each day or fraction
thereof that he or his deputy shall necessarily be
absent from his office for the purpose of making
such examination, and failure or refusal of any
investment company to pay such fee upon de-
mand of the auditor of investments shall work a
forfeiture of Its rights to sell any further secur-
ities In this state until such fee shall have been
paid to the auditor of Investments, with Interest
at the rate of seven per cent, per annum from
the time of the demand of the auditor of Invest-
ments and an additional twenty-five per cent, of
such fee by way of penalty. If the auditor of
Investments, upon such examination, find said
Investment company to be violating the provisions
of Its charter or of the laws of this state pro-



vided for Its government, or to be conducting its
business in an unsafe or In an unauthorized man-
ner, he may, by an order addressed to tlie said
Investment company 30 offending, direct a dis-
continuance of such violations or unsafe practices
and a conformity with all the requirements of
law ; and If such investment company refuse or
neglect to comply with such order within the
time specified therein ; or if It appear to the
auditor of investments, at any time, that any
such investment company Is in an unsafe con-
dition, or is conducting its business In an unsafe
manner, so as to render its further proceeding
hazardous to the public or to those having funds
in its custody, he shall notify the attorney gen-
eral of the State of California of such facts and
shall furnish to him a statement showing the
condition of such Investment company, as the
same may have been found by him to exist ; at
the same time he shall notify the officers of such
investment company of the fact of such notifica-
tion having been given and of such statement
having been furnished and direct them to cease
the transaction of new business, and to hold all
moneys, securities and property intact, pending
the action of the attorney general on such report.
The attorney general shall thereupon apply to
the superior court of the county in which said
Investment company has its principal place of
business to issue a mandamus pending such
action on his part requiring compliance with said
instructions of said auditor or to issue an in-
junction restraining it, in whole or in part, from
further proceeding with its business until a hear-
ing shall be had. Such court may, upon such
application. Issue such mandamus or injunction
In whole or In part, and after a full hearing, it
may dissolve It or it may modify it, or It may
make it perpetual, and it may make such orders
and such decrees according to the course of pro-
ceedings in equity to restrain or to prohibit the
further prosecution of business by such invest-
ment company as may be needful in the premises ;
and It may appoint one or more receivers to take
possession of the property and of the effects of
such Investment company, subject to such direc-
tions as may from time to time be prescribed by
the court ; or it may, by its decree, order and
direct that, In lieu of the appointment of a re-
ceiver, the business and affairs of such Invest-
ment company be liquidated by a board of trus-
tees equal in number to its board of directors,
or partners, if It be a co-partnership, said board
of trustees to be elected by the stockholders, or
partners, If it be a co-partnership, at a meeting
thereof, to be called for such purpose and to be
held within two weeks after the first Monday
succeeding the date of such order and decree ;
such meeting to be called and to be held on the
order of the auditor of Investments, who shall
be present and who shall preside thereat until
such election shall be had ; whereupon he shall
report the result to the proper court, and there-
upon the term of office of the existing board of
directors and of all the officers, or partners, If
It be a co-partnership, of such investment com-
pany shall cease and shall determine.

Sec. 6. The provisions of sections four and
five of this act. In so far as applicable, shall
apply to Investment brokers.

Sec. 7. It shall be unlawful for any invest-
ment company. Investment broker or agent to
Issue, to circulate or to deliver any advertise-
ment, pamphlet, prospectus, circular or state-
ment or other similar document In regard to se-
curities which are to be sold In this state unless
the same shall be signed with the name of the
investment company or of the Investment broker



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and shall bear a serial number, and a copy thereof first shall
have been filed with the auditor of investments. Hie auditor
of investments may for cause object to any such advertisement,
pamphlet, prospectus, circular, statement or other similar
document, whereupon it shall be unlawful for any such invest-
ment company, investment broker or agent further to circulate
or to deliver such advertisement, pamphlet, prospectus, circu-
lar, statement or other similar document.

Sec. 8. (a) Every investment company shall file in the
office of the auditor of investments, under date of December
31st and of June 30th of each year, and within fifteen days
after said dates, respectively, a report setting forth the name
of the company; its principal place of business; the amount
and character of its assets; the amount and character of its
obligations; and the names of its officers and of its directors
or trustees or partners, if it be a co-partnership, together with
a copy of all amendments to its charter, articles of inconxn'a-
tion, or articles of association, or by-laws which may have
been made subsequent to the filing of its latest prior state-
ment. The above described statements shall be verified by the
oath of a member of the co-partnership or company, if it be
a co-partnership or company, or by the oath of a didy author-
ized officer thereof, if it be an Incorporated or an unincorpora-
ted association.

(b) Also, at the time (A filing sudi statement every invest-
ment company shall publish a condensed statement of its
financial condition, at least once, in a newspaper of general
circulation, published in the city or town where the principal
place of business of such investment company is located, and
if no newspaper be published in the place designated as the
principal place of business of sudi investment company then
the publication may be made in some other newspaper pub-
lished in the county, if there be one, and if there be none,
then in a newspaper published in an adjoining county of this
state. Said statement shall contain such items as shall show
the actual financial condition of such investment company, and
shall be verified.

Sec. 9. All papers, documents, reports and other instru-
ments in writing filed with the auditor of investments under
this act shall be open to public inspection; provided that, if
in his judgment the public welfare or the welfare of any invest-
ment company demand that any portion of such information
be not made public the auditor of investments may withhold
such information from public inspection for such time as in
his juc^ent be wise.

Sec. 10. Any person who knowingly or wilfully shall sub-
scribe to or shall make or shall cause to be made any false
statement or false entry in any book of any investment com-
pany or of any investment broker, or ^o shall exhibit any
false pi^)^ with the intention of deceiving any person authw-
ized to examine into such affairs, or who knowingly or wilfully
shall make or publish any false or any misleading statement
of financial conditions or concerning securities offered for sale,
shall be guilty of a misdemeanor and shall be punishable by
a fine not to exceed one thousand dollars or by imprisonment
in a county jail not to exceed one year or by both such fine
and by sudi imprisonment.

Sec 11. Any person, corpwation, association, co-partner-
ship or company which shall violate or which shall fail to
comply with any of the provisions of this act shall be subject
to a penalty of not less than five hundred dollars ncH* more
than two thousand dollars tor each and every offense, which
penalty if unpaid after demand by the auditor of Investments
shall be recovered in an action brought in the name of the
people of the State of California by the attcuney general of
said state.

Sec. 12. There is hereby created the office of auditor of
investments. The auditor of investments shall be appointed
by the governor and he shall hold office at the pleasure of
the governor. He shall receive a monthly salary at the rate
of six thousand dollars a year to be paid from the state treas-
ury upon a warrant of the controller. He shall within fifteen
days from the time of notice of his appointment take and
subscribe to the constitutional oath of office and file the same
in the office of the secretary of state and he shall execute to
the people of the state a bond in the penal sum of twelve
thousand dollars with corporate security or two or more
sureties, to be approved by the governor of the state, for the
faithful discharge of the duties of his office.

Eighty



Sec. 13. Hie auditor of investments diall employ sudi
clerks and such deputies as he may need to discharge in proper
manner the duties imposed upon him by law. Neither the
auditor of investments nor any of his clerics nor deputies diaU
be interested in any Investment c(»npany, or investment broker,
as director, stockholder, officer, member, agent or employee.
Such clerks and deputies shall perform such duties as the
auditor of investments shall assign to them. The auditor of in-
vestments shall fix the compensation of such clerks and depu-
ties; which compensation shall be paid monthly from the
treasury of the state upon the certificates of the auditor of
investments and upon the warrants of the controller; provided,
however, that the total expenditure provided for in this act
shall not exceed the sum (tf thirty thousand dollars a year.
Each deputy within fifteen days after his appointment shal^
take and shall subscribe to the constitutional oath of office and
shall file the same In the office of the secretary of state, i
Sec. 14. The auditor of investments shall have his officd
in the city of Sacramento and he shall from time to timj
obtain the necessary furniture, stationery, fuel, light and otber
proper conveniences for the transaction of his business, tb^
expenses of which shall be paid out of the state treasury on
the certificate of the auditor of investments and the warrant
of the controller.

Sec. 15. A fund is hereby created to be known as the
investment auditor's fund and out of said fund shall be paid
all the expenses incurred in and about the conduct of th^
business of the auditor of investments. Including the salary
of the auditor of investments and of his clerks and of bis
deputies, traveling expenses, furniture and rent All moneys
collected or received by the auditor of investments under and;
by virtue of the provisions of this act shall be delivered by
him to the treasurer of the state, who shall deposit the same
to the credit of said investment auditor's fund. All such fund
so deposited or such part thereof as may be necessary for the
purposes of this act hweby are appropriated to tl^ use of!
the auditor of investments for the purposes of this act It
shall be the duty of the auditor of investments semi-annoally
to certify under oath to the state treasurer and to the secre-
tary of state th^ total amount of receipts and of expenditures
of the auditor's investment fund for the six months preceding.
All fees and payments of every description required by this act
to be paid to the auditor of investments shall be paid by him
to the state treasurer on the first day of each mcmth following
their receipt by the auditor of investments.

Sec 16. The auditor of investments shall adopt a seal
bearing the words Auditor of Investments, State of Calif omii,
and such other device as the auditor of investments may desire,
by which he shaU authenticate the proceedings of bis office.
Certified copies of all records and papers in the office of the
auditor of Investments shall be received as evidence in all cases |
equally and with like effect as originals.

The auditor of investments shall charge customary fees for!
certifying to copies of papers filed in his office.

Sec. 17. Any investment company, investment broker or
agent complying with the requirements of this act may sell
securities or perform any other act permitted under the pro-
visions hereof.

Sec. 18. llie office of commissioner of corporations shall
not exist in this state.

Sec. 19. If any section, sub-section, sentence, clause or
phrase of this act be, for any reason, held unconstitutional,
such decision shall not affect the validity of the remaining
parts of this act.

Sec. 20. All acts and parts of acts inconsistent with the
provisions of this act are hereby repealed.

Sec 21. The sum of ten thousand dollars is hereby
appropriated from any moneys in the state treasury not other-
wise appropriated tor the purpose of putting this act into
■ effect.

Sec. 22. The provisions of this act shall constitute the
entire and only law of this state upon or relating to the subject
matter or matters dealt with in or by this act, and they shall
opiate as a complete substitute for, and shall be deemed to
be amendatory of all other provisions of (h* in any and all other
laws of this state relating to such subject matter or matters,
\i1iether heretofwe existing, or approved or adopted iMrior to or
concurrently with the adoption or approval of this act.



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ARGUMENT IN FAVOR OF INVESTORS'
PROTECTIVE ACT.

This act, initiated by the electors of this state,
will eompletely safeguard the interests of in-
vestors in securities, without virtually prohibit-
ing corporate or co-operative enterprises.

This state must have its resources developed,
either by encouraging corporate or co-operative
enterprises financed by our general public, as
"small investors," or by letting them fall into
tlie hands of great individual capitalists, or "close
corporations" formed abroad, which will absorb
the profits due our own people.

This act has been prepared by experts of long
I experience in fiduciary capacities with respon-
! Bible and successful concerns,, who know and
appreciate the value of that public confidence
I which rests on honesty in financial affairs.

The definition of "investment companies," as
j adopted by our legislature, includes all corporate
'or co-operative concerns and partnerships, what-
\tver their line of business, and no matter how
I far from "investment" enterprises in the ordl-
Inary sense. Every concern for profit which is
I incorporated, or which raises money in any way
i except on its promissory notes to banks, is an
I "investment company" and comes under these
stringent rules.

Is it not desirable, therefore, that these rules
shall be fixed and bear evenly on all, and that
their administration shall be conducted according
to established, orderly procedures, rather than
that they be subject to the caprices and prej-
udices of a single individual, who may alter or
amend his requirements at will, or make fiesh
of one and fowl of another, without effective
check and with no appeal adequate to protect
the personal and property rights of even in-
nocent parties?

This act includes everything controlled by the
most comprehensive "blue sky" law, but it avoids
tlie vicious methods of administration which
make many such acts more dangerous and harm-
ful to the public than beneficial.

It involves no unnecessary expense or delay
to legitimate business, and the healthful public-
ity it provides will enable the public to judge



Online LibraryCalifornia Legislative Counsel Bureau California. Secretary of StateAmendments to the Constitution and proposed statutes : with arguments ... → online text (page 26 of 36)