Requirements for Capital Access Companies

The Capital Access Company Law (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.

Below are additional requirements of the CACL:

  • The capital access company’s securities can be sold only to accredited investors. Corporations Code Sections 28031 and 28200(d).
  • The capital access company may not issue redeemable securities. Corporations Code Section 28200(b).
  • Not less than 80% of the capital access company’s securities must be held by California residents or investors with a substantial business presence California. Corporations Code Section 28200(c).
  • The investment of funds by a capital access company will be limited by and subject to provisions of the Investment Company Act, the CSL, and the CACL. Corporations Code Section 28200(e).
  • The CACL also requires that capital access companies have:
  • A tangible net worth of at least $250,000, exclusive of the funds to invest in small businesses. Corporations Code Section 28152(a).
  • At least $5 million in funds to invest before a License is issued. (This requirement will be satisfied by the Commissioner’s issuance of the License to the capital access company, subject to an escrow or impound of funds until the company raises the minimum amount during a specified period of the offering.) Corporations Code Section 28152(b).
  • Financial resources to cover expenses for three years. Corporations Code Section 28152(c).
  • The directors, officers, and controlling persons of the company must be of good character and sound financial standing, competent to perform their functions, and be collectively adequate to manage the business of the company. Corporations Code Section 28152(d).
  • A person who makes investment recommendations to the management of the capital access company be an investment adviser. Corporations Code Section 28152(e). This person need not be registered or Licensed under federal or California law. However to protect investors, the law does require the investment adviser to have a clean disciplinary record in the investment business. Moreover, and importantly, upon a showing by the capital access company that it is not in the public interest, the requirement that management must rely on an investment adviser may be waived. Corporations Code Section 28951(b).
  • The capital access company must comply with the provisions of the CACL, Section 6(a)(5) of the Investment Company Act, applicable provisions of the CSL, and any regulation or order adopted or issued under the CACL. Corporations Code Section 28152(f).