Current through Register 2024 Notice Reg. No. 52, December 27, 2024
Deferred payments or similar arrangements on account of
the purchase price of program interests shall not be allowed except as set
forth below:
(a) Mandatory Deferred
Payments may be allowed in the case of specified property programs to the
extent such payments bear a reasonable and demonstrable relationship to the
capital needs and objectives of the program as described in the presentation of
the business development plan in the prospectus, but in any event such
arrangements shall be subject to the following conditions:
(1) A minimum of 50% of the purchase price of
the program interests must be paid by the investor at the time of sale, with
the remainder to be paid within three years of the earlier of the completion of
the offering or one year following the effective date of the offering or such
shorter period as the Commissioner, under the circumstances, deems
appropriate.
(2) Mandatory Deferred
Payments shall be evidenced by a promissory note of the investor. Such notes
shall be with recourse, shall not be negotiable and shall be assignable only
subject to defenses of the maker. Such notes shall not contain a provision
authorizing a confession of judgment. In any event, the notes shall provide for
venue in the jurisdiction of the investor.
(3) The program shall not sell or assign the
mandatory deferred payment notes at a discount.
(4) Selling commissions for program interests
sold on a mandatory deferred payment basis are payable pro rata only as cash
payments are made by the participant.
(5) In the event of default in the payment of
Mandatory deferred payments by a participant, the participant's interest may be
subject to a reasonable reduction as set forth in the prospectus and acceptable
to the Commissioner. Responses to defaults should be designed to protect the
capital requirements of the program and the best interests of the
non-defaulting participants while being fair to the defaulting
participant.
(6) The program may
take a security interest in the participant's program interests in the amount
of the unpaid portion of the note provided that proceedings to enforce the
security interest may not be commenced earlier than 30 days after default and
notice for intent to foreclose on the security interest. Security interests on
program interests that have been fully paid shall be dissolved
promptly.
(7) Unless mandatory
deferred payments are guaranteed by the sponsor or by a surety bond or other
arrangement satisfactory to the Commissioner, prior to the time the
qualification becomes effective, the sponsor shall not be allowed to purchase
program interests recovered as a result of defaults in mandatory deferred
payments unless, after recovery, such program interests have first been offered
to the non-defaulting participants.
(8) Any certificates evidencing program
interests purchased or a mandatory deferred payment basis shall so
indicate.
(9) Upon receipt of any
request to assign or transfer program interests purchased on a mandatory
deferred payment basis and having an unpaid balance, the sponsor, before the
assignment or transfer, at its own cost, shall notify the proposed
assignee/transferee of the material terms of the mandatory deferred payment
obligation, including: the schedule of payments, the status of payments, the
status of any encumbrance held by the program or the program interests; the
terms of default, the consequences thereof, and the procedure for curing the
default. In lieu of such notification the sponsor may accept a written
statement containing such information and signed by the
assignee/transferee.
(10) A default
shall include the failure to make a scheduled payment on the mandatory deferred
payment obligation within 30 days after its due date. A participant shall be
allowed to cure a default and avoid any reduction in the participant's interest
in the program if within a minimum of 30 days from default and notice thereof
the participant makes the delinquent payment with interest at the rate set
forth in the prospectus for curing defaults.
(11) Default provisions shall have the
integrity of the program's capital as a priority. Depending on the
circumstances, arrangements which may be appropriate include:
(A) a reduction in the participant's
percentage interest in program revenues based on the ratio of the cost to the
program of the unpaid mandatory deferred payment obligation to all capital
contribution;
(B) a reallocation of
the defaulting participant's revenues and application for such revenues to make
up the cost to the program of the unpaid mandatory deferred payment
obligations;
(C) a reallocation of
the defaulting participant's right to receive revenues from the program to
those non-defaulting participants who have voluntarily paid the defaulting
participant's obligation until such time as such non-defaulting participants
have recovered from this reallocation 200% of the proportionate amount of the
defaulted payment which they forwarded;
(D) a forced sale of the program interest
complying with applicable procedures for notice and sale;
(E) a delayed buy-out of the defaulting
participant's interest; or
(F) a
foreclosure of the security interest held by the program. "Cost to the program"
shall be defined in the prospectus and may include the reasonable costs to the
program of collecting unpaid installments, reselling the interests, and/or
additional financing costs caused by the default.
(b) Mandatory Deferred Payments shall not be
allowed in the case on non-specified property programs except where the sponsor
is able to satisfy the Commissioner that the mandatory deferred payments bear a
reasonable and demonstrable relationship to the capital needs and objectives of
the program as described in the business development plan in the investor
disclosure document. A plan that merely states that money will be invested as
installments are received, or at specified intervals, will not be considered a
sufficient business development plan. In any event, such arrangements shall be
subject to the following conditions:
(1) A
minimum of 50% of the purchase price of the program interests must be paid by
the investor at the time of sale, with the remainder to be paid within three
years of the earlier of the completion of the offering or one year following
the effective date of the offering or such shorter period as the Commissioner,
under the circumstances, deems appropriate.
(2) The program shall otherwise comply with
the provisions (2) through (11) of paragraph (a) hereof.
(c) Warrants or options (or their
equivalents) to purchase program interests will be allowed only at the
discretion of the Commissioner but, in any event, must be identified as such
and be accompanied by a clear statement of their nature and effect. Program
interests acquired by their exercise may not differ from the stated terms of
program interests otherwise acquired. Any penalty for non-exercise will
ordinarily be viewed with disfavor.
1.
Renumbering and amendment of former Section 260.140.118.1 to Section
260.114.111.5; and renumbering and amendment of former Section
260.140.118.2 to Section
260.114.118.1 filed 1-27-84; effective thirtieth day thereafter (Register 84,
No. 4).
2. Repealer and new section filed 5-18-92; operative 6-17-92
(Register 92, No. 22).
Note: Authority cited: Section
25610,
Corporations Code. Reference: Section
25140,
Corporations Code.
