Investor Alert on State of California IOUs
The staff of the Securities and Exchange Commission has expressed its belief that the State of California’s recently issued IOUs are “securities” and therefore those holding the IOUs are entitled to protections provided under federal securities laws.
California began issuing the IOUs, or “registered warrants,” on July 2 to certain individuals and entities, including citizens who were entitled to a tax refund or vendors who were entitled to payments. These IOUs bear interest and are negotiable, which means they can be sold to third parties.
The staff’s view that the IOUs are securities does not affect California’s right to issue or repay the IOUs.
As securities, the IOUs are subject to the antifraud provisions of the securities laws. As a result, buyers and sellers will have certain rights and remedies for fraud, and the Commission will be able to take action against any person committing fraud in connection with the purchase or sale of an IOU.
While the IOUs are “securities” for purposes of the federal securities laws, as obligations of the State of California they are “municipal securities.” This means that sales of the IOUs are not required to be registered with the Commission. Also, as municipal securities, the IOUs are subject to the rules issued by the Municipal Securities Rulemaking Board, which include a requirement that the securities sold are suitable for the purchaser.
In addition, persons engaged in the business of buying and selling the IOUs may need to be registered as market intermediaries, such as brokers, dealers, or municipal securities dealers, alternative trading systems, or national securities exchanges.
Although the IOUs are called “registered warrants,” they are not registered with the Commission. Investors should be aware that the Commission has not approved or disapproved of these securities.
If you hold an IOU and wish to sell it prior to maturity you should consider whether you think you are getting a fair price. If you sell your IOU at less than face value, you will forfeit the difference in price and any interest that would have accumulated. As with any new instrument, the extent to which a robust trading market will develop cannot be predicted with certainty.
Investors who wish to buy IOUs should also understand who the seller is. If you are buying from a third party, ask if the person is registered to do this business. You can check out registered broker-dealers and their personnel using the BrokerCheck database at www.finra.org.
Furthermore, investors who buy IOUs should be sure to understand the terms of the IOU, including state law documentation requirements for transferring and presenting IOUs for payment. Information is available from the California Comptroller at http://www.sco.ca.gov/5935.html and the California Treasurer at http://www.treasurer.ca.gov/warrants/index.asp.