FEBRUARY 2017— PART 1 OF 2 / $5

THE MAGAZINE OF THE LOS ANGELES COUNTY BAR ASSOCIATION

Ballot Blues

EQUITYCROWD-FUNDINGpage 21

Death withDignitypage 11

On Direct:Laura A. Wasserpage 8

EARN MCLE CREDIT PLUS

SECALJspage 30

Los Angeles lawyers Edward Caseyand Andrea Warren examine ballotinitiatives affecting land use in Los Angelespage 16

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http://www.walzermelcher.com

http://www.girardikeese.com

16 Ballot BluesBY EDWARD CASEY AND ANDREA WARREN

Potential legal conflicts inherent in recent land development initiatives raiseconcern over the value of the initiative process to resolve complex policy issues

21 Ready Capital, Part 2BY MARK HIRAIDE

Regulation CF of the JOBS Act exempts those seeking equity crowdfunding fromSEC registrationPlus: Earn MCLE credit. MCLE Test No. 265 appears on page 25.

30 Questionable ProceedingsBY SARAH A. GOOD AND LAURA C. HURTADO

Under Dodd-Frank, the SEC has increased the use of administrative proceedingsas opposed to actions filed in federal court

F EATU RE S

Los Angeles Lawyer

the magazine of

the Los Angeles County

Bar Association

February 2017

Volume 39, No. 11

COVER PHOTO: TOM KELLER

02.17

8 On DirectLaura A. WasserINTERVIEW BY DEBORAH KELLY

10 Barristers TipsPersonal perspectives on practicing law in other countriesBY VICTORIA M. MCLAUGHLIN

11 Practice TipsGuidance on California's End of LifeOption ActBY JOHN M. GORALKA AND KIRAN K. DHILLON

36 Closing ArgumentReflections on the plight of an alternate jurorBY MARSHA C. BRILLIANT

DE PARTM E NTS

LOS ANGELES LAWYER (ISSN 0162-2900) is publishedmonthly, except for a combined issue in July/August, by theLos Angeles County Bar Association, 1055 West 7th Street,Suite 2700, Los Angeles, CA 90017 (213) 896-6503. Period -icals postage paid at Los Angeles, CA and additional mailingoffices. Annual subscription price of $14 included in theAssociation membership dues. Nonmember subscriptions:$38 annually; single copy price: $5 plus handling. Addresschanges must be submitted six weeks in advance of nextissue date. POSTMASTER: Address Service Requested. Sendaddress changes to Los Angeles Lawyer, P. O. Box 55020,Los Angeles CA 90055.

4 Los Angeles Lawyer February 2017

VISIT US ON THE INTERNET AT WWW.LACBA.ORG/LALAWYERE-MAIL CAN BE SENT TO LALAWYER@LACBA.ORG

EDITORIAL BOARD

Chair

TED M. HANDEL

Articles Coordinator

JOHN C. KEITH

Assistant Articles Coordinator

SANDRA MENDELL

Secretary

TYNA ORREN

Immediate Past Chair

DONNA FORD

JERROLD ABELES (PAST CHAIR)

ETHEL W. BENNETT

SCOTT BOYER

CHAD C. COOMBS (PAST CHAIR)

THOMAS J. DALY

GORDON K. ENG

STUART R. FRAENKEL

MICHAEL A. GEIBELSON (PAST CHAIR)

CHRISTINE D. GILLE

SHARON GLANCZ

STEVEN HECHT (PAST CHAIR)

DENNIS F. HERNANDEZ

JUSTIN KARCZAGMARY E. KELLY (PAST CHAIR)

ERIC KINGSLEY

KATHERINE KINSEY

RENA KREITENBERG

JENNIFER W. LELAND

PAUL S. MARKS (PAST CHAIR)

MICHAEL MAUGE

COMM’R ELIZABETH MUNISOGLU

CARMELA PAGAY

GREGG A. RAPOPORT

GARY RASKIN (PAST CHAIR)

JACQUELINE M. REAL-SALAS (PAST CHAIR)

LACEY STRACHAN

THOMAS H. VIDAL

STAFF

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Senior Editor

JOHN LOWE

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LES SECHLER

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MATTY JALLOW BABY

Copyright © 2016 by the Los Angeles County Bar Association. All rightsreserved. Reproduction in whole or in part without permission is pro -hibited. Printed by R. R. Donnelley, Liberty, MO. Member BusinessPublications Audit of Circulation (BPA).

The opinions and positions stated in signed material are those ofthe authors and not by the fact of publication necessarily those of theAssociation or its members. All manuscripts are carefully considered bythe Editorial Board. Letters to the editor are subject to editing.

For More Information Call 213-617-7775Or visit us on the web at www.hmlinc.com

Business litigation is increasingly complex. That is why we believe valuationissues must be addressed with the same meticulous careas legal issues. Analysis must be clear. Opinions must bedefensible. Expert testimony must be thorough andarticulate. HML has extensive trial experience and canprovide legal counsel with a powerful resource for experttestimony and litigation support.

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BUSINESS VALUATION • LOSS OF GOODWILL • ECONOMIC DAMAGES • LOST PROFITS

Los Angeles Lawyer February 2017 5

LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATIONOF THE LOS ANGELES COUNTY BAR ASSOCIATION

1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2553Telephone 213.627.2727 / www.lacba.org

LACBA EXECUTIVE COMMITTEE

PresidentMARGARET P. STEVENS

President-ElectMICHAEL E. MEYER

Senior Vice PresidentPHILIP H. LAM

Vice PresidentTAMILA C. JENSEN

TreasurerDUNCAN W. CRABTREE-IRELAND

Assistant Vice PresidentHON. SHERI A. BLUEBOND

Assistant Vice PresidentANNALUISA PADILLA

Assistant Vice PresidentROXANNE M. WILSON

Immediate Past PresidentPAUL R. KIESEL

Barristers PresidentDAMON A. THAYER

Barristers President-ElectMARIANA ARODITIS

Chief Financial & Administrative OfficerBRUCE BERRA

General Counsel & Chief Administrative OfficerW. CLARK BROWN

BOARD OF TRUSTEES

RONALD F. BROT

HARRY W.R. CHAMBERLAIN

NATASHA R. CHESLER

REBECCA A. DELFINO

KENNETH C. FELDMAN

JO-ANN W. GRACE

JOHN F. HARTIGAN

MARY E. KELLY

LAVONNE D. LAWSON

F. FAYE NIA

BRADLEY S. PAULEY

ANGELA REDDOCK

DIANA K. RODGERS

MARC L. SALLUS

EDWIN C. SUMMERS III

DAVID W. SWIFT

WILLIAM L. WINSLOW

AFFILIATED BAR ASSOCIATIONS

BEVERLY HILLS BAR ASSOCIATION

CENTURY CITY BAR ASSOCIATION

CONSUMER ATTORNEYS ASSOCIATION OF LOS ANGELES

CULVER MARINA BAR ASSOCIATION

GLENDALE BAR ASSOCIATION

IRANIAN AMERICAN LAWYERS ASSOCIATION

ITALIAN AMERICAN LAWYERS ASSOCIATION

JAPANESE AMERICAN BAR ASSOCIATION

JOHN M. LANGSTON BAR ASSOCIATION

THE LGBT BAR ASSOCIATION OF LOS ANGELES

MEXICAN AMERICAN BAR ASSOCIATION

PASADENA BAR ASSOCIATION

SAN FERNANDO VALLEY BAR ASSOCIATION

SANTA MONICA BAR ASSOCIATION

SOUTH BAY BAR ASSOCIATION

SOUTHEAST DISTRICT BAR ASSOCIATION

SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION

WOMEN LAWYERS ASSOCIATION OF LOS ANGELES

6 Los Angeles Lawyer February 2017

During World War II, the U.S. Office of War Infor -mation coined the phrase “loose lips sink ships” forpropaganda posters reminding the public that careless

conversation could provide useful information to enemyspies. Seventy-five years later, the phrase could be “loose

Ted M. Handel is the 2016-17 chair of the Los Angeles Lawyer Editorial Board and ChiefExecutive Officer of Decro Corporation, a nonprofit housing developer, which develops andmanages affordable multifamily projects for low-income families and seniors.

e-mails sink campaigns.” Setting aside whether the Russians or WikiLeaks or bothhacked Hillary Clinton’s State Department e-mails or those of her presidential cam-paign or the Democratic National Committee, an unequivocal question begs asking:Why send, much less write, messages containing insulting comments or disclosingkey strategic decisions in the first place?

Some e-mails, Clinton told Jimmy Kimmel, were “so boring.” In one titled “Gefiltefish,” she asked, “Where are we on this?” In a second, she wanted to know the showtimes for “Parks and Recreation” and “The Good Wife.”

The same, however, hardly applies to those sent by campaign staff or supporters.John Podesta, Clinton’s campaign chairman, wrote a message describing SenatorBernie Sanders as a “doofus.” Neera Tanden, a Clinton supporter, said in a messagetitled “Hillary,” “Her instincts are suboptimal.”

Clinton and the Democrats are not alone in exercising questionable judgment.After Sony Pictures computers were hacked several years ago, messages from studioco-chair Amy Pascal were released disclosing her unflattering comments on, amongothers, former President Barack Obama, Aaron Sorkin, and Cameron Crowe.

Attorneys would be well advised to heed the following tips from the March 2015issue of the New York Legal Ethics Reporter on best practices in using e-mails:

1. Never respond to any message without thinking of the consequences ofthat communication becoming public.2. Remove excessive “strings” of messages . . . and include only what’s neces-sary.3. Remove attachments unless necessary. Never send an email message withoutknowing exactly what’s on every page of an attachment. Consider strippingmetadata . . . or sending a PDF or facsimile version of the document.4. Rename messages when appropriate. 5. Turn off the “Suggest Names” option to avoid automatically filling in thewrong name. . . .6. Consider drafting email messages without the “To,” “Cc,” and “Bcc” fieldsbeing completed until after your message is drafted, and you are sure it’scomplete. This will avoid the transmission of messages to anyone unless youare absolutely sure that they are the intended recipients.7. Hitting “Reply to All” is always a disfavored practice . . . .8. If you are a recipient of a “Bcc” message, do not hit “Reply to All”. . . youmay be disclosing something that the sender intended to keep confidential.9. Clean out your Inbox by filing or printing relevant messages and deletingextraneous messages. . . .10. Take a deep breath . . . [w]atch your language and grammar. Remember:Nothing is funny when it’s used as an exhibit in a lawsuit, or as an exampleof poor judgment or violation of policy. (Emphasis in original.) When all else fails, consider the Yiddish word sechel (common sense) and remember

that today any reasonable expectation of privacy no longer exists. n

http://www.lmic.com

8 Los Angeles Lawyer February 2017

on direct

LAURA A. WASSER | Laura A. Wasser is a cele-brated family law attorney in Los Angeles. Namedone of the Daily Journal’s Top 100 Lawyers andSouthern California’s Top 50 Women Attorneysfrom 2012 to 2016, she serves on many boardsand committees from which she has receivedvarious awards for her civic service. In 2013, St.Martin’s Press published her book It Doesn’tHave to Be That Way: How to Divorce WithoutDestroying Your Family or Bankrupting Yourself.

Laura A. Wasser Attorney

you? I don’t know why I’m called thedisso queen. I can’t seem to shake it.

Are prenuptial agreements the first stageof a celebrity marital cycle? A prenuptialmakes sense for a high earner, especially ifthe earning continues as a result of whathe or she did before marriage. They don’twant the State of California controllingwhat they do with their wealth.

Have you seen couples break up over theprenuptial agreements? Not often, but I’vehad some very uncomfortable and un-pleasant negotiations. Once they are at theend of it, though, the relationships arehealthier because they have a much betterunderstanding of each other.

Many prenuptial agreements also containa confidentiality agreement. How do youprotect privacy? Put teeth in the contract—something like $100,000 for every breach.

What can be done to promote privacy?Change California law to make divorce fil-ings private or anonymous. That’s how it isin New York. I am a big proponent of theFirst Amendment but I don’t understandhow the benefit to the public outweighs thedetriment to private individuals.

Paparazzi are all over celebrity divorces.Can you avoid them? People who are fa-mous sign up for this, but they usuallythink of the red carpet. When you’re goinginto the courthouse for a custody hearing,it totally sucks. We try to do as much aswe can out of the public forum.

TMZ splashes the news of a divorce filingwithin the hour. How? If you’re at thecourthouse, you can immediately get alook at that file. If you grease the rightperson, you get the file sooner.

Are celebrity filings timed for minimum ex-posure? Before a weekend, before a holi-day.

What is the biggest difference betweencelebrity divorces and those of everydayfolks? Someone telling you no.

What are the qualities that are the samebetween most divorcing couples? They aresad, scared, and angry.

Are there differences within specific cate-gories of celebrities? I notice that musi-cians are emotional, athletes like a gameplan, and actors do well with a script.

What motivated you to write your book, ItDoesn’t Have to Be That Way? It’s a guideto making it nicer, particularly if you havekids. Divorce is unlike other litigation, be-cause this person is someone you’re goingto be dealing with for a very long time. Heor she is your family member.

Are you writing a second book? No. I amlaunching an app in 2017, which will en-able people to go online for help and livechat. The app is called itsovereasy.com.Right now, it’s a blog.

Your initials spell LAW. Coincidence?When my parents learned that my fatherpassed the California bar, they celebratedby having sex. When they found out mymother was pregnant, they did the mathand decided to name me Laura AllisonWasser.

Who do you turn to for advice? My par-ents.

Are they still married? No, but they had agood divorce.

What is the one characteristic you mostadmire in your mother? Her positivity.

You went to UC Berkeley for undergradu-ate school. What did you study? Rhetoric.

You graduated from Loyola Law School in1994. Why did you want to become alawyer? I am a problem solver who enjoyslooking at two sides of a conflict to find aresolution.

Were you frightened when you first ap-peared in front of a Judge? Of course.

You were a consultant on Liar, Liar, a

INTERVIEW BY DEBORAH KELLY

What is the perfect day? I go for a run, makebreakfast for my kids, work with clients,and leave work in time to have dinnerwith my kids.

You are a family law lawyer. What is themost important part of that job? Problemsolving in a way that fits legally and emo-tionally into the clients’ expectations.

How do you accomplish that? Having real-istic expectations at the outset; if someoneis very litigious, we will refer them tosomeone else. We are settlement-oriented.

What if the other side is not cooperative?That’s when I love going to court, becauseour family law judges are really smart andrecognize a reasonable position.

You have been called the Disso Queen. Are

Los Angeles Lawyer February 2017 9

movie starring Jim Carrey as an attorneywho had to tell the truth. Is that hard forlawyers to do? I don’t think it is. All youhave is your word.

You are currently unmarried. It is said youprefer to be unmarried. Has your work im-pacted your view of marriage? Probably.

Marriages rates have been declining fordecades. Do you think marriage is on itsway out? Certainly not in Los Angeles—welove a romance.

California is among nine other communityproperty states. Do you think communityproperty laws are fair? Fair is a very sub-jective term. I feel if both parties are awareof the law in the state where they resideand opt to enter into a marriage contractbased on those laws, community propertyis fair. Obviously, in certain circumstances,a community property structure doesn’tseem to make sense. That’s where prenup-tial agreements can be most helpful.

Equitable distribution states claim theirsystem is fair. Do you agree? Equitable dis-tribution states must rely on their judicialofficers to apply the law fairly based on thecircumstances involved.

Studies say 30 to 60 percent of spousescheat. How often is it a factor in divorce? Itcan be a factor but not the determinatecause.

Are you involved in a charitable organiza-tion? The Harriet Buhai Center for FamilyLaw and A Place Called Home. I am rais-ing two Los Angelenos in an environmentin which they can learn and thrive. I find ittotally unacceptable that there are childrenin our city who have so much less.

What is your hidden talent? How hiddendoes it have to be?

What was your last vacation? I took thekids to Italy for three weeks.

What is your greatest vanity? High heels.

What are three deplorable world condi-tions? The water situation, the judgmentalnature of people, and the bipartisan natureof our country.

Who are your two favorite world heroes? Ihope you will indulge me if I include myfather, Dennis Wasser; he is heroic. Also,Eleanor Roosevelt, who said, “The futurebelongs to those who believe in the beautyof their dreams.” What a badass!

What do you want written on your tomb-stone? She had a nice smile.

MANY NEW AND YOUNG U.S. LAWYERS aspire to practice in othercountries but have no roadmap for how to realize that dream andno personal role models to follow. Insight from attorneys currentlypracticing internationally offers guidance on how to get started.

Language competence will inevitably play a role in which oppor-tunities are available to an attorney. Similarly, an evaluation ofacceptable cultural differences—e.g., an attorney’s willingness to livein a third-world country—may narrow the field of opportunities.However, with a grasp of those parameters, a new or young attorneycan begin tackling the dream.

Aspiring international attorneys should decide whether they wantto practice in a traditional setting, for example at a U.S. law firmthat has offices in other countries, or with a government agencyoverseas or an international nonprofit. The decision will dictatemany of the preparatory steps. Attorneys interested in public inter-national law have a broad selection of locale given that many UNagencies and NGOs have offices around the world, including locationsin Africa, Latin America, and Asia. On the other hand, for thoselooking to practice at a U.S. firm, international offices generally arelocated in big cities in Europe, the Middle East, and Asia.

Traditional Path

An attorney wishing to practice in a traditional law firm setting willlikely be able to follow a traditional path—which is not to say thepath will be easy. For example, Bora Rawcliffe, an attorney currentlypracticing at Skadden, Arps, Slate, Meagher & Flom LLP in London,recently transitioned from the Los Angeles office of Sheppard, Mullin,Richter & Hampton LLP.1 Her transition to London came to fruitionafter years of intense work focused on achieving that precise goal.

When Rawcliffe began practicing, she focused on obtaining asolid foundation in commercial litigation and white collar work,including internal investigations and the Foreign Corrupt PracticesAct (FCPA).

“During my fourth year, and as a result of my focus on cross-border investigations work, I was offered the opportunity to moveto London2 to advise European clients on a variety of mattersinvolving U.S. laws including anti-corruption, sanctions, tax fraud,and anti-money laundering, and to represent them in enforcementactions brought by U.S. authorities such as the DOJ and SEC,”Rawcliffe said.

An attorney wishing to practice in a nontraditional setting willface hurdles unique to the nontraditional international law prac-tice—not only in obtaining the first international position, but alsoin those that follow. Stephanie Montaño spent more than five yearsbuilding her litigation skills in the United States before transitioningfrom her role as an attorney in the Los Angeles office of VenableLLP to a short-term role as a visiting attorney at the Institute forHuman Rights and Business in Nairobi, Kenya.3

Looking back after eight months of working in Nairobi, Montañosaid, “There tends to be a good deal of professional maneuvering

that must be conducted during the transition process. This is becausethe vast majority of international legal positions are term-basedroles, i.e., three months, six months, one year, etc. So the transitionprocess requires a certain amount of stamina to think outside thebox and not be deterred by the many unknowns and factors thatare out of your control, while continuing to shape your career.”

The temporary nature of such positions affects certain logisticalconsiderations, such as whether to keep a U.S. residence during theanticipated time away. Montaño kept her apartment.

Attorneys interested in practicing internationally, especially thosewhose U.S. practices do not readily transfer overseas, should beginworking on international matters in settings outside their firms. Forboth Rawcliffe and Montaño, bar associations played a key role inthe process. Joining international law committees and pursuing probono opportunities on international law matters allow aspiring inter-national attorneys to work with senior attorneys who have practicedinternationally—connections that can prove imperative to makingthe jump beyond the States.

Many nuanced factors affect the transition to international prac -tice. Rawcliffe noted that for her transitioning took great patience,focus, and persistence. She encourages lawyers who wish to follow asimilar path to learn as much as possible about the history andculture of the country of their destination, and to become familiarwith the non-U.S. laws that will impact his or her practice in thenew country.

A Foot in the Door

On moving to a less traditional practice of law, Montaño noted itcan be difficult to get a foot in the door of the first non-law firmrole. Thus, she recommends prioritizing paying off law school loansto enable flexibility in stepping away from the security of law firmlife and accepting opportunities that continue to build a career inthe desired direction, even if it means accepting short-term rolesabroad.

Those aspiring to practice overseas should engage in the samepractices recommended to most attorneys: sharpen legal skills, buildstrategic relationships,4 and stabilize their financial situations. Aftera few years of building a solid foundation, a new or young attorneyshould be poised for a successful practice internationally. n

1 E-mail interview with attorney Bora Rawcliffe in London (Sept. 20, 2016).2 Skadden covered Rawcliffe’s moving costs and residency and work permits—considerations an attorney otherwise would have to address on his or her own.3 E-mail interviews with attorney Stephanie Montaño in Nairobi, Kenya (Oct. 13,2016 and Oct. 31, 2016).4 A good place to start might be joining LACBA’s International Law Section.

Personal Perspectives on Practicing Law in Other Countries

Victoria M. McLaughlin is an attorney with the Law Offices of William E.Crockett in Encino, California, where she practices business litigation. Sheis a member of the LACBA Barristers Executive Committee and has served asa volunteer attorney for Child Hope International in Port-au-Prince, Haiti.

10 Los Angeles Lawyer February 2017

barristers tips BY VICTORIA M. MCLAUGHLIN

AFTER A NUMBER OF DELAYS, California’s End of Life Option Act(the Act) became effective in June 2016.1 Only a few states haveeither legislatively or judicially approved an end of life or death withdignity option: Oregon, Washington, Vermont, Montana,2 andCalifornia. The Act is not without controversy. Some doctors believeit is a violation of the Hippocratic Oath, and many individuals andreligious organizations oppose it. On the other hand, others believein a right to choose to die in the event of terminal illness. Regardlessof the views one may have on the morality of the Act, attorneysneed to know how to advise clients on how it may be applied.

The Act provides a mechanism for a physician to prescribe alethal dose of a drug to a qualified individual. The drug must beself-administered by the qualified individual; a physician may notassist. The Act uses the term “aid in dying drug,” defined as a drugthat may be self-administered to bring about death.3 To qualify toreceive the prescription the individual must be mentally competentor have the capacity to make medical decisions, defined as havingthe ability to “understand the nature and consequences of a healthcare decision, the ability to understand its significant benefits, risks,and alternatives, and the ability to make and communicate aninformed decision to health care providers.”4

The Act is based upon the individual’s ability to make and com-municate an informed decision to health care providers. In thiscontext, an “informed decision” is defined as one made by an indi-vidual with a terminal disease to request and obtain a prescriptionfor a drug that may be self-administered to end the individual’s life.5

The decision can only be made after being informed of the relevantfacts by the individual’s attending physician—the physician with pri-mary responsibility for healthcare and treatment.6 The individualalso must be diagnosed with a terminal disease and must voluntarilyexpress his or her wish to receive the aid-in-dying prescription.7

California Residency

The Act only applies to California residents.8 Residency in Californiafor purposes of the Act can only be established through one of thefollowing: 1) possession of a California driver’s license or other iden-tification issued by the State of California, 2) registration to vote inCalifornia, 3) evidence that the person owns or leases property inCalifornia, or 4) filing of a California tax return for the most recenttax year. The California law is modeled after Oregon’s Death withDignity Act (the Oregon Act), which recites the same four factorsfor establishing residency.9 However, California identifies the fourfactors as an exclusive list while Oregon permits other factors to beused as well.

A person who becomes a California resident must obtain aCalifornia driver’s license within 10 days.10 Residency is establishedfor this purpose by voting in a California election, paying residenttuition, filing for a homeowner’s property tax exemption, or “anyother privilege or benefit not normally extended to nonresidents.”As of July 1, 2016, and pursuant to AB 1465, an original (first-

time) applicant for a driver’s license or identification card mustpresent two acceptable documents as proof of California residencyin addition to meeting all other existing driver license and identifi-cation card requirements.11 (See accompanying sidebar “DocumentsAccept able as Proof of California Residency” on page 12 for a listof documents the state has approved to provide proof of Californiaresidency.) All residency documents must list the applicant’s firstand last name, and the California residence address must match theresidence address listed on the driver’s license application, with theexception of the last three items on the list.

The question of residency is most often raised when determiningwhether an individual is subject to California income tax.12 TheCalifornia Revenue and Taxation Code defines a California “resident”as either an individual domiciled in California who is “outside thestate for a temporary or transitory purpose” or every individual inthe state for other than a temporary or transitory purpose.13 Residencyand domicile have different legal meanings. In Estate of Glassford,a California court defined “domicile” as “the concurrence of physicalpresence in a particular place with the intention to make that placeone’s home.”14 To change one’s domicile, a person must actuallymove to a new state with the intent to remain there permanently orindefinitely.15 Domicile is essentially the place in which one voluntarilyestablishes oneself and family, not for a limited or special purposebut with a present intention of making that place a time-fixed per-

BY AUTHOR

Guidance on California's End of Life Option Act

practice tips BY JOHN M. GORALKA AND KIRAN K. DHILLON

Los Angeles Lawyer February 2017 11

John M. Goralka, of the Goralka Law Firm in Sacramento, is a certified spe-cialist in taxation and in estate planning, trust, and probate law. Kiran K.Dhillon is an attorney with the Goralka Law Firm specializing in estate andincome tax planning, business and corporate law, and trust and probate.RI

CHA

RD E

WIN

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manent home. Domicile is the place where,whenever absent, one intends to return.16

The concept of domicile is relevant be -cause lawyers often operate in the marginsand gray areas seeking to push the boundariesfor a client’s benefit. Domicile is a traditionalconcept in the definition of a California res-ident that lawyers consider or utilize in orderto maximize a client’s benefit.

The question of residency may be impor-tant because people who have been diagnosedwith a terminal illness may desire to moveto California and establish domicile so thatthey may end their lives. Brittany Maynard’sstory is illustrative. In 2014, Maynard wasa terminally ill California resident unable tocarry out her wish to die with dignity underCalifornia law. She was 29 years old, married,and suffering from brain cancer. Upon beingadvised that she might have to endure mor-phine-resistant pain, personality changes,

and potential loss of verbal and cognitiveabilities, Maynard, along with her husbandand family, researched the treatment andprognosis.17 Eventually, she chose to die onher own terms, but California law did notpermit her to carry out her decision. Maynardmoved to Oregon, which did have a deathwith dignity law permitting her to die on herterms when the suffering became too great.18

She ended her life on November 1, 2014.California Governor Jerry Brown spoke toMaynard three days before her death andconsidered her family’s wishes and circum-stances when deciding to sign the Act.19

However, future court decisions may bringnew twists to long-standing concepts ofCalifornia residency and domicile.

The Act seeks to simplify the complex def-inition of a California resident for the par-ticular purpose of seeking relief under theAct. Time will tell as to how this will interact

with California’s long-standing notions, laws,and precedents defining a California resident.The Act already interacts with existing law—for example, the requirement that a personbecoming a California resident obtain a dri-ver’s license within 10 days. This requirementwould be based upon the traditional notionsof when a person is a California resident.Obtaining a driver’s license is one of the meansused to establish residency under the Act.

The Act requires that a qualified individualbe a California resident. An understandingof the traditional notions of residency anddomicile must be considered while viewingthe four factors for establishing residency.For example, evidence that a person ownsor leases property in California should beviewed in light of the concepts of domicileand residency. A person renting a hotel roomfor a night or two is not as persuasive as aperson under a long-term lease.

If California courts are obliged to considerwhether a person is domiciled in Californiaand therefore meets the residency qualifica-tion, they may consider Oregon’s law, whichhas been in effect since 1997. In Oregon, apatient must be able to establish that he orshe is currently a resident of Oregon, andhere is no minimum requirement of previousresidency. Similar to Oregon, California doesnot have a minimum requirement of previousresidency.20

A patient demonstrates residency by pro-viding adequate documentation to the attend-ing physician to verify that he or she is acurrent resident of Oregon. Factors demon-strating residency in Oregon include, but arenot limited to: 1) possessing an Oregon driver’slicense, 2) a lease agreement or property own-ership document showing that the patientrents or owns property in Oregon, 3) possess-ing an Oregon voter registration, or 4) filinga recent Oregon tax return. The Cali forniaAct and that of Oregon provide that owningor leasing property is a factor in establishingresidency.21 There is no meaningful guidanceon what constitutes leasing property withinthe meaning of the Act. The definition of alease includes a rental.22 At first blush, rentinga hotel room might satisfy the requirementfor a lease. However, again, a short-term rental,such as a hotel room, would not appear toevidence establishing a domicile or residency.For residency, a stronger connection is required.

Under the Oregon statute, the attendingphysician is charged with the responsibilityfor determining whether the patient adequatelyestablished residency.23 The Act is silent asto who makes the residency determination.If California follows in Oregon’s footsteps,the attending physician would appear to havethe authority to determine if the patient is aCalifornia resident for purposes of the Act.This may be problematic as a physician is

12 Los Angeles Lawyer February 2017

• Rental or lease agreement with the signature of the owner/landlord and the tenant/resident.

• Deed or title to residential real property.

• Mortgage bill.

• Home utility bills (including cellular phone).

• School documents including any document issued by a public or private primary, or secondary, orpost-secondary institution, college, or university that either includes the applicant’s date of birth,or if a foreign school document, is sealed by the school and includes a photograph of the applicantat the age the record was issued.

• Medical documents.

• Employment documents.

• Faith based documents that include the name and address of the issuing organization.

• Insurance documents, including medical, dental, vision, life, home, rental, and vehicle.

• Internal Revenue Service or California Franchise Tax Board tax return.

• California Certificate of Title or Registration Card for a vehicle or Certificate of Ownership or Certificateof Number for a vessel.

• Change of Address Confirmation by the U.S. Postal Service (Form CNL 107).

• Documents issued by a U.S. government agency.

• Property tax bill or statement.

• Records from a financial institution.

• Voter registration confirmation letter or postcard issued by the California Secretary of State or alocal California county elections officer.

• Proof of payment of resident tuition at a public institution of higher education located in California.

• An original copy of an approved Claim For Homeowners’ Property Tax Exemption (BOE-266) formfiled with a local California County Assessor.

• Court documents that list the applicant as a resident of California.

• A letter on letterhead from a homeless shelter, shelter for abused women, nonprofit entity, faithbased organization, employer, or government agency within the U.S. attesting that the applicantresides in California.

• A parent, legal guardian, or child may use a birth certificate and a spouse or domestic partner mayuse a marriage license or domestic partner registration certificate to trace his or her relationship tothe individual to whom the two acceptable resident documents have been addressed.

Source: California Residency Requirement for New Driver License and Identification Card Applicants, State of CaliforniaDep’t of Motor Vehicles, available at https://www.dmv.ca.gov/portal/dmv/detail/dl/residency-requirement.

Documents Acceptable as Proof of California Residency

not customarily the best professional to eval-uate the subtleties of California’s residencylaw. An attorney should consider all four fac-tors involved in establishing residency whenconsidering whether the patient is a Californiaresident.

Making Formal Requests

In addition to the residency requirement, anattorney should consider several other impor-tant issues when providing advice to a client.In particular, for example, California requiresthat the individual seeking to qualify for anend-of-life prescription must follow a pro-cedure of formal request. The request cannotbe made through a power of attorney, ad -vance health care directive, conservator,health care agent, or any other legally recog-nized health care decision maker. An indi-vidual seeking assistance must make threepersonal requests directly to his or her attend-ing physician. Two of the requests must beverbal and made at least 15 days apart. Aseparate written request must also be madeto the attending physician. The physicianmust personally receive the requests and maynot use a designee.24 Section 443.11 of theHealth and Safety Code provides the formfor the request. The request must be signedand dated in the presence of two witnesses.Only one of the witnesses may be related tothe individual or own, operate, or be employed

by the health care facility in which the indi-vidual resides or provides treatment, or beentitled to a portion of the person’s estateupon death.25 The attending physician, con-sulting physician, or mental health specialistfor the individual may not be a witness.

Each witness must indicate to the best ofhis or her knowledge and belief that 1) theindividual is personally known or has pro-vided proof of identity to the witness, 2) therequest was voluntarily signed, and 3) theindividual was under sound mind and notsigning under duress, fraud, or under theinfluence.26 While the individual must bementally competent to make the request, therequest may be withdrawn at any time with-out regard to the individual’s mental state.27

Mental capacity or competency is determinedby the attending physician under the Act.28

The written language of the request mustbe written in the same translated languageas any conversations, consultations, or inter-preted conversations or consultations betweena patient and his or her attending or con-sulting physicians.29 The written request maybe prepared in English even when the con-versations or consultations or interpretedcon versations or consultations were conduct -ed in a language other than English if theEnglish language form includes an attachedinterpreter’s declaration that is signed underpenalty of perjury.

If an interpreter is needed, he or she cannotbe related to the qualified individual by blood,marriage, registered domestic partnership,adoption, or be entitled to a portion of theindividual’s estate upon death. In addition,the interpreter must meet the standards pro-mulgated by the California Healthcare In -terpreting Association or the National Councilon Interpreting in Health Care or other stan-dards deemed acceptable by the departmentfor health care providers in California.30

Assessing Legal Capacity

The attending physician must determinewhether the individual has the legal capacityto make medical decisions. Before prescribingthe patient, the attending physician mustmake a determination regarding whether therequesting adult has the capacity to makemedical decisions. If there are indications ofa mental disorder, the physician must referthe individual for a mental health specialistassessment. If a mental health specialist assess-ment referral is made, no aid-in-dying drugsmay be prescribed until the mental healthspecialist determines that the individual hasthe capacity to make medical decisions andis not suffering from impaired judgment dueto a mental disorder.31 The physician mustalso determine whether the requesting adulthas a terminal disease and whether the re -questing adult voluntarily made the request

Los Angeles Lawyer February 2017 13

for an aid-in-dying drug.32

The attending physician must also confirmwith the individual that he or she is makingan informed decision by discussing whetherthe requesting adult is a qualified individualpursuant to subdivision o of Section 443.1and confirming that the individual is makingan informed decision by discussing with himor her all of the following: 1) the individual’smedical diagnosis and prognosis, 2) the poten-tial risks associated with taking the drug tobe prescribed, 3) the probable result of takingthe drug to be prescribed, 4) the possibilitythat the individual may choose not to obtainthe drug or may obtain the drug but maydecide not to ingest it, and 5) the feasiblealternatives or additional treatment oppor-tunities, including, but not limited to, comfortcare, hospice care, palliative care, and paincontrol.

The attending physician is also requiredto refer the individual to a consulting physi-cian for medical confirmation of the diagnosisand prognosis, and for a determination thatthe individual has the capacity to make med-ical decisions and has complied with the Act’sother provisions.33 The attending physicianmust also confirm that the qualified individ-ual’s request does not arise from coercion orundue influence by another person by dis-cussing with the qualified individual, outside

of the presence of any other persons, exceptfor an interpreter as required pursuant tothis part, whether or not the qualified indi-vidual is feeling coerced or unduly influencedby another person.34

The individual also should understandand be advised by the attending physicianof the importance of 1) having another per-son present when he or she ingests the aid-in-dying drug prescribed, 2) not ingestingthe aid-in-dying drug in a public place, 3)notifying the next of kin of his or her requestfor an aid-in-dying drug (a qualified indi-vidual who declines or is unable to notifynext of kin shall not have his or her requestdenied for that reason), 4) participating ina hospice program, and (5) maintaining theaid-in-dying drug in a safe and secure loca-tion until the time the qualified individualwill ingest it.35

The attending physician must also informthe individual that he or she may withdrawor rescind the request for an aid-in-dyingdrug at any time and in any manner. In addi-tion, the physician must verify, immediatelybefore writing the prescription for an aid-in-dying drug, that the qualified individualis making an informed decision. Once thephysician has confirmed that all requirementsare met and all appropriate steps are carriedout in accordance with the Act, he or she

must write a prescription for an aid-in-dyingdrug. The attending physician must refer theindividual to a mental health specialist foran assessment if there are indications or symp-toms of a mental disorder. The attendingphysician must confirm that the individualis making an informed decision and mustdiscuss with him or her the medical conditionrisks associated with ingesting the aid-in-dying drug and the possibility of not usingthe drug after it is requested.

A second physician—the consulting physi-cian—independent from the attending physi-cian must confirm the diagnosis, prognosis,mental capacity of the individual, and allrequirements of the Act. The consulting physi-cian independently: 1) examines the individualand his or her relevant medical records; 2)confirms in writing the attending physician’sdiagnosis and prognosis; 3) determines andreaffirms that the individual has the capacityto make medical decisions, is acting volun-tarily, and has made an informed decision;(4) refers the individual for a mental healthspecialist assessment if there are indicationsof a mental disorder; 5) fulfills the recorddocumentation required under Section 443.7;and (6) submits the compliance form to theattending physician.36

Afterward, the attending physician mustprovide a final attestation form to the indi-

14 Los Angeles Lawyer February 2017

vidual. The individual must complete thisform within 48 hours prior to self-adminis-tering the aid-in-dying drug. The individualis not required to inform his or her family ofthe decision.

The Act and Estate Plans

When working with terminally ill clients, trustand estate law attorneys should discuss theAct with clients and help them prepare forthe process. The Act specifically precludesmaking a decision under the End of Life Op -tion Act by means of a power of attorney,health care directive, or similar document.Also, the specific requirements of the Act forcapacity and general compliance would seemto minimize the effectiveness of any such pro-vision. For out-of-state clients, attorneysshould consider including a provision in bothpowers of attorney and health care directivesto authorize a change in the client’s domicileto be made by the agent. This will allowclients to change their domiciles more easilyif necessary.

Changes in domicile may become increas-ingly important as the aging populationincreases. A change in domicile to a lower-cost and/or lower-tax state may reassure clientsthat they will not run out of money duringtheir lifetimes. At least one court has held thata change in domicile may not be made on apower of attorney.37 The court determinedthat the concept of domicile is too personalto be made on a power of attorney as it relatesto the individual’s subjective intent. Includingthe provision in the power of attorney forfinancial purposes, separate powers of attorneyfor personal care and the health care directivemay minimize this argument. n

1 HEALTH & SAFETY CODE §§443 et seq. See alsoGeorge Skelton, ‘Right-to-die’ Act Hangs in LimboAmid Special Sessions’ Inaction, L.A. TIMES (Oct. 19,2015), http://www.latimes.com.2 Montana does not have a death with dignity statute,but the end of life option is legal in that state pursuantto a ruling by the Montana Supreme Court. Baxter v.Montana, 224 P. 3d 1211 (2009).3 HEALTH & SAFETY CODE §443.1(b).4 HEALTH & SAFETY CODE §443.1(e).5 HEALTH & SAFETY CODE §443.1(i).6 Id.7 HEALTH & SAFETY CODE §443.2(a)(1), (2).8 HEALTH & SAFETY CODE §443.2(a)(3).9 OR. REV STAT. §§127.800-.897.10 How to apply for a driver license if you are over 18,State of California Dep’t of Motor Vehicles, availableat https://www.dmv.ca.gov/portal/dmv/detail/dl/dl_info(last visited Dec. 30, 2016).11 California Residency Requirement for New DriverLicense (DL) and Identification Card (ID) Applicants,State of California Dep’t of Motor Vehicles, availableat https://www.dmv.ca.gov (last visited Dec. 30, 2016).All documents acceptable as proof of California resi-dency—of which two are required—are listed at thiswebsite.12 REV. & TAX. CODE §17041(a).13 Id.

14 Estate of Glassford, 114 Cal. App. 2d 181, 186(1952).15 Id.16 Meaning of Domicile, FTB Publication 1031 Guide -lines for Determining Resident Status, State of Cali f -ornia Franchise Tax Bd. (2011), available at https://www.ftb.ca.gov (last visited Dec. 30, 2016).17 Brittany Maynard, My Right to Death with Dignityat 29, CNN (Nov. 2, 2014), http://www.cnn.com/2014/10/07/opinion/maynard-assisted-suicide-cancer-dignity.18 Id.19 Patrick McGreevy, After Struggling, Jerry BrownMakes Suicide Legal in California, L.A. TIMES (Oct.5, 2015), http://www.latimes.com.20 HEALTH & SAFETY CODE §443.2(a)(3).21 HEALTH & SAFETY CODE §443.2(a)(3)(C); OR. REV

STAT. §127.860.22 Civ. Code §1954.26(e).23 OR. REV STAT. §127.815.24 HEALTH & SAFETY CODE §443.3(a).25 HEALTH & SAFETY CODE §443.3(c).26 HEALTH & SAFETY CODE §443.3(b)(3).27 HEALTH & SAFETY CODE §443.4(a).28 HEALTH & SAFETY CODE §443.1(e)29 HEALTH & SAFETY CODE §443.11(b)(1).30 HEALTH & SAFETY CODE §433.11 (b)(3).31 HEALTH & SAFETY CODE §443.5(a).32 HEALTH & SAFETY CODE §§443.2-443.3.33 HEALTH & SAFETY CODE §443.5(a)(3).34 HEALTH & SAFETY CODE §443.5(a)(4).35 HEALTH & SAFETY CODE §443.5(a)(5).36 HEALTH & SAFETY CODE §443.6.37 Matter of Wilhelm, 134 Misc. 2d 448 (1987).

Los Angeles Lawyer February 2017 15

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KEN

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election year mayhave raised vari-ous contentious

issues, local ballot initiatives in Los Angeles left voters with littlechoice but to confront the future of development in the city. Votersapproved one development initiative in November and will vote onanother in March. Both measures1 are symptomatic of the increasingtensions among groups that seek to maintain the status quo, groupsfrustrated by the increasing cost of living, and groups realizing theeconomic need for more development.2 Proponents of the initiativesmay have felt compelled to intervene and change the current courseof development, but the contents of the initiatives and their potentialconsequences illustrate the precarious task of asking the voters tobalance complex policy choices through a single yes-no vote.

In November, voters approved ballot measure JJJ, the Build BetterLA Initiative (BB-LA), which generally requires all projects with 10or more residential units that need a general plan amendment orzone or height district change to include a certain percentage ofaffordable housing units.3 BB-LA also requires those projects to be

constructed by contractors who meet certain labor requirements,which may increase wages and a project’s labor costs. In addition toBB-LA, Los Angeles voters will cast ballots in March4 on yet anotherdevelopment initiative aimed at constraining development in the city.The Neighborhood Integrity Initiative (NII), if approved, generallywill impose a two-year building moratorium on projects that need toobtain an amendment to the general plan,5 zone change, or heightdistrict change to develop a more intensive use.6 The NII also wouldprohibit the city from approving amendments to its general plansolely for specific projects. Given the outdated nature of many elementsin the city’s general plan and the community plans, NII could affectdevelopment in Los Angeles for decades.7

Backdrop

Different planning and public policy dynamics in the city promptedsupporters of the two initiatives to ask voters to confront these

Edward Casey is a land use partner, and Andrea Warren a land use associate,in the Los Angeles office of Alston & Bird.

by Edward Casey and Andrea Warren

BLUESWHILE THE 2016

BALLO

T

Los Angeles voters confront ballot issues that may affect housing and land development for decadess

policy choices.8 Certain affordable housing advocates and unionschampioned the BB-LA initiative, citing the city’s lack of affordablehousing options and need for more jobs with livable wages.9 Asdescribed in Section 2 of the BB-LA initiative findings, proponentswere primarily concerned with the increasing homeless populationin Los Angeles, the shortage of affordable housing, and the needto promote fair wages for local construction workers—problemsthey sought to address on the back of development projects thatneed a general plan amendment or zone change. These problemswere summarized in an August 2015 study from the UCLA LuskinSchool of Public Affairs.10 The study reported that constraints onthe housing supply across the city have led to an increase in homeprices and rents while median income has not kept up with thoseincreases. Indeed, voters approved the initiative by approximately64 percent.11

In contrast to BB-LA, advocates of the NII12 reacted to a broadersystemic problem that has plagued planning in the city for years.According to city planners, Los Angeles has an outdated zoningcode, and some elements in its general plan have not been updatedin decades.13 The outdated planning regulations are inconsistentwith how uses have evolved or become concentrated across differentparts of the city. For example, many areas of the city, especiallyaround new public transit opportunities, are not zoned for the densitythe city requires to accommodate its ever growing population. Inaddition, at tempts to update the city’s zoning code or general planhave proven difficult since the updates require significant resourcesand rigorous review under the California Environ mental Quality Act(CEQA).14 The update to the Hollywood Community Plan, for exam-ple, was invalidated by a trial court in 2014 for failing to complywith CEQA.15

Against that backdrop, applicants have had few choices whenseeking to construct projects with higher densities or mixed uses toalign with the city’s evolution. Developers could seek a variancefrom existing zoning provisions, but variances may be hard toobtain and defend under the requirements of the Los AngelesMunicipal Code (LAMC) and applicable case law.16 Alternatively,developers have pursued amendments to the general plan or a zonechange to allow the desired density and use for a project. Thisoption has led the city’s planning commission and the city councilto approve general plan amendments or zone changes for individualprojects. This practice has not necessarily led to poor planning buthas nonetheless caused some communities to conclude that the cityapproves high density and new uses on a piecemeal basis withoutconsidering the concerns of the community at large.17 The NII’sfindings (Section 2) describe the state of development in the city asfollows: “As a result of the city council’s approval of greater densityand greater intensity of use through spot zoning and spot generalplan amendments, there is a current and immediate threat to publichealth, safety and welfare.”

Key Provisions of BB-LA and NII

The heart of the BB-LA initiative is found in Section 5, which amends“appropriate sections” of the LAMC to add requirements for projectswith 10 or more residential units that also require a general planamendment or zone or height district change that could result in anincrease in allowable floor area, density, height, or will allowresidential uses not previously allowed. Under the new requirements,these types of projects must include a certain percentage of affordableunits, provide for affordable units off-site, or pay an in-lieu devel-opment fee. Those projects must also be constructed by contractorswho: 1) are licensed and certified as required by the state and thecity; 2) will make a good-faith effort to ensure that at least 30 percentof the workforce hours are performed by permanent residents ofthe city, including at least 10 percent whose primary place of residence

is within a five-mile radius of the covered project; 3) pay their con-struction workers standard wages in the project area; and 4) employ60 percent of their workforce from an apprenticeship trainingprogram or from workers who have on-the-job experience. Inaddition, Section 4 of the initiative amends Section 11.5.8 of theLAMC to divide Los Angeles into 37 planning areas and preventsan amendment to the general plan unless the city’s planning departmentcompletes a comprehensive assessment to ensure that such changeswill not impact the availability of affordable housing or access tolocal jobs in the city.

The BB-LA initiative provides alternative compliance options forthe on-site affordable housing requirements. Developers can constructaffordable units off-site or acquire existing affordable units off-siteand convert those units to a nonprofit community land trust andtenant ownership or both. Develop ers also may comply with theaffordable housing requirements by paying an in-lieu developmentfee to the city. The city would establish the in-lieu fee by accountingfor an “affordability gap,” which the city will establish by evaluatingdifferent market prices and affordability levels for different unitsizes. Section 5 further states that projects receiving a density bonusunder the state’s affordable housing law18 or any other state or localprogram will not be eligible for a general plan amendment or zonechange.

To focus development near transit centers, Section 6 of the BB-LA initiative instructs the city to develop a transit-oriented communitiesaffordable housing incentive program (TOC) by amending Section12.22 of the LAMC. This program applies to housing developmentslocated within a one-half mile radius of a major transit stop, includingexisting transit stations and intersections with major bus routes.Within 90 days of enactment, Section 6 requires the director of plan-ning to prepare the TOC Affordable Housing Incentive ProgramGuidelines, which will establish standards, incentives, and other nec-essary components for housing developments near transit centers toreceive special incentives.

Section 4, the NII’s key provision, imposes a two-year moratoriumthat will prohibit the city’s approval of future entitlements and willbar the city from issuing building permits for certain entitlementsthat have already been approved. Specifically, the two-year moratoriumwill prohibit the city from approving a general plan amendment,zone change, or height district change, if any of those approvalswould 1) change existing zoning to permit a more intense land use;2) increase the floor area ratio, density, or height; or 3) lead to a netloss of land zoned open space, agricultural, or industrial. Duringthe two-year moratorium, the initiative also prohibits the city fromissuing a building or demolition permit for any project for whichthe city already granted a general plan amendment or a zone orheight district change that resulted in 1) changes to existing zoningor height district that permitted a more intense land use or an increasein floor area ratio, density, or height from what was permitted inthe current general plan; or 2) a change of zone from open space,agricultural, industrial, or any other type of zoning that is not openspace, agricultural, or industrial.

The moratorium provides exceptions for 1) projects with 100percent affordable units that seek a zone change or height districtchange (although the moratorium would apply to projects with 100percent affordable units that still request a general plan amendment);2) projects that require a building or demolition permit to repair,remove, or demolish unsafe or substandard conditions or to rebuildas a result of destruction by fire, earthquake, or other natural disaster;or 3) projects for which a vested right has accrued under state lawor under the LAMC or to certain residential zones that are subjectto an interim control ordinance.

Section 5 of the NII also changes the city’s authority to approvegeneral plan amendments moving forward. Amending Section 11.5.6

18 Los Angeles Lawyer February 2017

of the LAMC, the NII prohibits the city from adopting a generalplan amendment unless the amendment is for a geographic area thathas a significant “social, economic or physical” identity. To be ageographic area with a significant social, economic, or physicalidentity, the geographic area must meet one of the following charac-teristics: 1) comprise an entire community or district plan area; 2)comprise an entire area that has been included in a specific plan; 3)comprise an entire named neighborhood council area; or 4) consistof an area at least 15 acres in size. The initiative expressly prohibitsa general plan amendment for a single project or group of pendingor concurrently submitted development projects. Also, the city councilmust accompany any general plan amendment with a specific findingthat the amendment is not being approved solely to facilitate theapproval of a pending project or projects.

Moving forward, the initiative amends Section 11.5.8 of theLAMC to require the city to adopt a schedule for the systematicpublic review and possible amendment of all elements of the generalplan. The review and updating process is required to occur everyfive years, and the review program should include the review andpossible updating of the city’s 35 community plans and port and airdistrict plans. However, since voter initiatives cannot direct electedofficials to adopt certain legislation in the future, NII acknowledgesthat updating the community plans is only “possible.”19

In addition to changing the procedure for certain entitlements, theNII also restricts the city’s process for conducting environmental reviewof projects under CEQA. The initiative states an environmental impactreport (EIR) under CEQA may only be prepared by the city or by acontract between the city and another public entity, not by the applicantor a consultant or third party retained by the applicant.20 (Undercurrent practice, project applicants can hire consultants directly andsubmit CEQA documents for the city’s review.) The initiative alsoamends Section 12.21(y) of the LAMC to prohibit parking variancesthat would reduce the number of required on-site parking spaces bymore than one-third of what is already required under the code.

Conflicts and Possible Legal Challenges

The courts may have to wrestle with what happens if voters approvethe NII in addition to the BB-LA initiative, since the two measuresmay conflict. If faced with a potential conflict, courts must first tryto reconcile the two initiatives to the furthest extent possible.21

However, some provisions may be irreconcilable. Potentially incom-patible provisions include Section 5 of the NII, which prohibits thecity from approving general plan amendments solely for specificprojects, and Section 5 of BB-LA, which expressly allows the city toapprove a general plan amendment for a specific project if thatproject complies with the affordable housing and labor requirements.The BB-LA initiative and NII include provisions stating that eachrespective initiative will prevail over the other if that initiative receivesmore votes than the other initiative. Notably, BB-LA will remain infull force for 10 years,22 unless amended or repealed by a vote ofthe people. The city council can reenact all or some of the BB-LAprovisions without amendment following the expiration of the 10years for two successive five-year periods. In contrast, the NII doesnot have a sunset provision. Instead, its terms can be amended orrescinded only by a vote in a future election.23

Both initiatives may also contain defects that could be subject tolegal challenge. First, voter initiatives are invalid at the time theyare passed if they are inconsistent with the city’s general plan.24 TheNII is potentially inconsistent with several of the polices in the city’sgeneral plan, including policies related to growth, economic devel-opment, land use, housing, the reduction of air pollution emissions,and the promotion of mass transit.25 The NII may frustrate theachievement of those policies by preventing new projects from movingforward, and the NII makes no attempt to amend the general plan

itself to address these inconsistencies.The NII initiative may also be inconsistent with policies set forth

in California’s planning and zoning law26 relating to the provisionof housing throughout the state. This law requires each city or countyto account for an appropriate share of the regional need for housingin a general plan. The NII will effectively limit the number of housingunits that can be constructed throughout Los Angeles in the nexttwo years and potentially long into the future.

The NII may also be invalid to the extent that it imposes animproper building moratorium not contemplated under the state’splanning and zoning law. The law allows cities to impose temporarymoratoriums (not to exceed two years) on projects that may be “inconflict with a contemplated general plan, specific plan, or zoningproposal that the legislative body, planning commission, or the plan-ning department is considering or studying or intends to study withina reasonable time.”27 Thus, building moratoriums usually accompanya city’s concurrent consideration of, or imminent plan to study, apotential change to the general plan or other applicable land usepolicy.28 Yet, no specific update to the general plan or a communityplan has been proposed to the city that can be adopted within twoyears. Since the NII’s moratorium is not tied to any specific updateto those plans, the initiative’s moratorium may be vulnerable in alegal challenge.

The BB-LA initiative may be invalid as a land use ordinancebecause all land use restrictions or regulations must bear a reasonablerelationship to the public welfare, and absent that relationship, theinitiative would be deemed to be arbitrary and discriminatory andan invalid exercise of police power.29 Proponents of BB-LA may facea significant challenge to show that the initiative’s labor requirementsfor residential projects bear a comparable reasonable relationshipsince arguably there is no connection between the labor requirementsand the development of residential projects that require general planamendments or zone changes.

Finally, Los Angeles is a charter city and its charter can only beamended in the same manner in which the charter was adopted inthe first instance. By enacting an ordinance that affects the city’sauthority to approve general plan amendments, the NII may be dis-guised as an indirect and impermissible city charter amendment.30

Potential Policy Changes

Regardless of whether these legal challenges are pursued or are suc-cessful, the city has taken note of voters’ frustrations to addressneeded reforms in the planning process. Indeed, the city council isalready considering multiple reform measures.

For example, to address affordable housing in Los Angeles, theplanning department is evaluating a proposal to implement what isknown as a “value capture” program.31 Under this program, thecity will capture a public benefit in the form of affordable housingin exchange for granting entitlements that result in significant increasesin the number of units allowed on a particular site for new residentialand mixed-use projects. The city views the value capture programas something different from an incentive-based tool—for example,granting a density bonus for including affordable housing—sincethose tools are already priced into the value of land. In contrast, ageneral plan amendment or zone change that gives a benefit to adeveloper creates an increase in land value. Other cities have adoptedvalue capture programs, including Boston, Chicago, Honolulu, NewYork, and San Francisco.32 Also, the city is exploring alternativeoptions, including implementing a “linkage fee,” which would requirenew development to pay a fee toward affordable housing based onthe size of the project.33

To update its general plan, the city council is also considering aprogram to update the city’s 35 community plans over the next 10years. Under the proposed program, the city would update three or

Los Angeles Lawyer February 2017 19

four community plans at a time, organizedaround three geographic regions: San Fer -nan do Valley, Central/East and South/West/Harbor.34 The city’s planning department islooking to create teams and hire new per-sonnel across the three regions. The city isalso considering a recommendation to amendthe general plan in batches according to dif-ferent geographic boundaries and may changeits process to approve amendments for par-ticular development projects. For example,the city would evaluate all proposed generalplan amendments for the specified geographicareas during different months of the year.The city council is also considering recom-mendations to modify the process throughwhich it reviews CEQA documents, includinga recommendation that will require applicantsto hire CEQA consultants from a prequalifiedlist provided by the city to ensure qualityand independence.35

While the city and courts address theselegal and policy issues, project applicants inLos Angeles that have started or will soonstart the application process may be left inlimbo because of unclear language in theinitiatives. For example, the NII express lycarves out projects with vested rights asexempt from its provisions. Developmentrights become vested when a project has per-formed substantial work and incurred sub-stantial liability in good faith reliance on abuilding permit.36 A vested right may alsoaccrue if the city approves a vesting entitle-ment, such as a development agreement orvesting tentative tract map.37 Alternatively,under certain state laws, a “deemed com-plete” application may give rise to a vestedright.38 Yet, proponents of the initiativeswill surely challenge use of these vestingmechanisms aimed at avoiding compliancewith the initiatives.

Despite the reality that ballot initiativesmay lead to unwanted consequences or evenpoor policy, cities in Southern California mayface an increasing number of ballot initiativesconcerning land use development if the votermalaise embodied in the two initiatives is notaddressed through revised planning policies.Illustrating this potential trend, antidevelop-ment advocates in Santa Monica sponsoredMeasure LV on November’s ballot, otherwiseknown as the Land Use Voter EmpowermentInitiative or LUVE Initiative.39 The LUVEInitiative generally would have required votersin Santa Monica to approve projects morethan 32 feet in height, projects that havedevelopment agreements, or projects thatrequire major amendments to Santa Monica’splanning policy documents in a special orgeneral election. Santa Monica voters rejectedthe LUVE initiative by approximately 55 to45 percent.40 Santa Monica’s rejection of theLUVE initiative may indicate that voters are

not willing to adopt antidevelopment measuresthat might seriously hinder development. TheLUVE results may forecast a similar rejectionof the NII by Los Angeles voters in March.Yet voters’ approval of BB-LA in Novembershows that voters may be willing to approvedevelopment initiatives that seek to resolve aspecific problem, such as the availability ofaffordable housing.

Balancing the competing concerns inherentin these complex policy issues is a difficulttask for any legislative body. But trying tosolve them, as BB-LA and NII try to do,through the initiative process can be fraughtwith peril. Striking the right balance betweenplanning for future development and address-ing concerns about continued growth is acomplicated task that is difficult to addressby a yes-no ballot measure. The initiativesput a burden on voters to balance difficulttradeoffs in arriving at a legislative consensus.Voters may not have sufficient informationto weigh the important tradeoffs, and toofew voters may turn out to vote in a munici -pal election. For example, turnout for LosAngeles’s municipal election in March 2015was as low as 9 percent.41 Low turnout con-centrates power to influence important plan-ning decisions into the hands of a few. Thesetypes of ballot initiatives may lead to resultsthat are contrary to what policymakers viewas the best path forward for progress—forexample, the results of the Brexit in the UnitedKingdom or voters’ rejection of the FARCpeace deal in Colombia. Given the enormoustask for cities to address concerns from allsides of the development debate, however,development initiatives and planning uncer-tainty may become more commonplace forvoters and developers. n

1 See The Build Better LA Initiative, election resultsavailable at www.lavote.net [hereinafter BB-LA]; seealso The Neighborhood Integrity Initiative appearingon the city’s March 2017 ballot, L.A. City OrdinanceNo. 184534 (2016), available at http://clkrep.lacity.org/onlinedocs/2016/16-054_ORD_184534_10-18-16.pdf [hereinafter NII]. For further information onBB-LA and NII, see Voter Information Pamphlet, avail-able at http://clerk.cityofla.acsitefactory.com/sites/g /files /wph606/f/2016%20November%20County%20WEB_English.pdf and http://clkrep.lacity.org/onlinedocs/2016/16-1054_misc _09-21-2016.pdf,respectively (websites last visited Jan. 4, 2017).2 See Findings, BB-LA, supra note 1, §2; Findings,NII, supra note 1, §2.3 See BB-LA, supra note 1, §5.4 See NII, supra note 1.5 California law requires that every city and county inthe state adopt a comprehensive general plan to guideits future development. In the case of the City of LosAngeles there is a Citywide General Plan FrameworkElement that “establishes the broad overall policy anddirection for the entire General Plan.” See GeneralPlan, Dep’t of City Planning, City of Los Angeles, avail -able at http://planning.lacity.org (last visited Dec. 27,2016) [hereinafter General Plan]. 6 See NII, supra Note 1, §4.

7 See Staff Report, City of Los Angeles Dep’t of Planning(May 26, 2016), available at http://clkrep.lacity.org/onlinedocs/2016/16-0422_rpt_PLAN_05-26-2016.pdf(last visited Dec. 27, 2016) [hereinafter Staff ReportMay 26, 2016].8 See Findings, BB-LA, supra note 1, §2; Findings NII,supra note 1, §2.9 See Findings, BB-LA, supra note 1, §2.10 PAUL M. ONG, ET AL., IMPACTS OF THE WIDENING

DIVIDE: WHY IS LA’S HOMEOWNERSHIP RATE SO LOW?,UCLA Luskin Sch. of Pub. Affairs (Aug. 2015).11 City of Los Angeles election results (Nov. 8, 2016),available at www.lavote.net [hereinafter L.A. electionresults].12 See Findings, NII, supra note 1, §2.13 Staff Report May 26, 2016, supra note 7.14 PUB. RES. CODE §§ 21000 et seq.15 See three related cases brought against the City ofLos Angeles by Fix the City, Inc. (No. BS138580),SaveHollywood.Org (No. BS138370), and La MiradaAvenue Neighborhood Ass’n of Hollywood (No.BS138369)in L.A. County Super. Ct.). 16 See Stolman v. City of Los Angeles, 114 Cal. App.4th 916 (Cal. Ct. App. 2003).17 See Findings, NII, supra note 1, §2.18 The state’s affordable housing law is known as SB1818, found at GOV’T CODE §65915.19 See Marblehead v. City of San Clemente, 226 Cal.App. 3d 1504 (Cal. Ct. App. 1991); NII, supra note 1,§6.20 NII, supra note 1, §7.21 Santa Clarita Org. for Planning and the Env’t v.Abercrombie, 240 Cal. App. 4th 300, 318-19. (Cal.Ct. App. 2015).22 BB-LA, supra note 1, §10.23 NII, supra note 1, §14.24 GOV’T CODE §65860; Lesher Commc’ns, Inc. v. Cityof Walnut Creek, 52 Cal. 3d 531, 540 (Cal. 1990);Building Ind. Ass’n of San Diego, Inc. v. City ofOceanside, 27 Cal. App. 4th 744, 766-77 (Cal. Ct.App. 1994).25 See, e.g., General Plan, Policy 3.1.4 of the FrameworkElement-Land Use and Policy 4.1.1 of the FrameworkElement-Housing.26 GOV’T CODE §§65000 et seq.27 GOV’T CODE §65858(a).28 Associated Home Builders of the Greater Eastbay,Inc. v. City of Livermore, 18 Cal. 3d 582, 589 (Cal.1976); Building Ind. of S. Cal., Inc. v. City of Camarillo,41 Cal. 3d 810, 823-24 (Cal. 1986).29 California Bldg. Ind. Ass’n v. City of San Jose, 61Cal. 4th 435, 499 (Cal. 2015); Merritt v. City ofPleasanton, 89 Cal. App. 4th 1032, 1036 (Cal. Ct. App.2001). 30 Citizens for Responsible Behavior v. Superior Court,1 Cal. App. 4th 1013, 1033-34 (Cal. Ct. App. 1991).31 Staff Report, City of Los Angeles Department of Plan -ning (May 27, 2016), available at http://clkrep.lacity.org/onlinedocs/2014/14-1325-S1_rpt_plan_5-27-16.pdf.32 Id.33 Id.34 Staff Report, City of Los Angeles Department ofPlanning (Aug. 26, 2016), available at http://clkrep.lacity.org/onlinedocs/2016/16-0422_rpt_PLAN_08-26-2016.pdf.35 Id.36 Stewart Enters., Inc. v. City of Oakland, 248 Cal.App. 4th 410, 418 (Cal. Ct. App. 2016).37 GOV’T CODE §66474.2.38 See Davidson v. County of San Diego, 49 Cal. App.639, 647-48 (Cal. Ct. App. 1996).39 See Santa Monica Measure LV, available at http://www.smvote.org/ballotMeasures.40 L.A. election results, supra note 11.41 Alice Walton, L.A. dismal voter turnout: 8.6% asballot count continues, L.A. TIMES (Mar. 4, 2015).

20 Los Angeles Lawyer February 2017

Los Angeles Lawyer February 2017 21

READY

Our Business Startups(JOBS) Act of 2012

represents a sea change in the regulation of securities offerings.1 Forthe first time in U.S. history, companies may offer shares of stock tothe general public without registering with the Securities and ExchangeCommission (SEC). The most revolutionary aspect of the JOBS Actis Regulation CF, the new rule added to the Securities Act of 1933that legalized equity crowdfunding. The JOBS Act’s two other newforms of public securities offerings, discussed elsewhere,2 are foundin Rule 506(c) of Regulation D and in Regulation A.

Under Regulation CF, companies can sell up to $1 million-worthof shares of stock to anyone no matter the person’s net worth orincome subject to certain limits on individual investment amounts.There is no SEC qualification requirement for securities offeredthrough crowdfunding. This compares with offerings under Rule506(c), which can raise an unlimited amount of capital withoutobtaining SEC qualification but can only be sold to accredited investors,and offerings under Regulation A, which are available to all investorsbut are limited to $50 million and must be qualified by the SEC.

President Barack Obama noted the significance of Regulation CFin his remarks during the April 5, 2012, bill-signing ceremony.

[F]or start-ups and small businesses, this bill is a potentialgame changer. Right now, you can only turn to a limitedgroup of investors—including banks and wealthy individu-

als—to get funding.…[A] lot has changed in 80 years, andit’s time our laws did as well. Because of this bill, start-upsand small business will now have access to a big, new pool ofpotential in vestors—namely, the American people. For thefirst time, ordinary Americans will be able to go online andinvest in entrepreneurs that they believe in.3

Equity crowdfunding was born of Inter net-based fund-raisingcampaigns that gained popularity with the success of two of thelargest crowdfunding websites, Kickstarter and Indiegogo. Bothoffered a platform for crowdsourcing funding for projects thatincluded films and environmental programs in exchange for t-shirts,movie production credits, or other tokens of appreciation.4 Prior tothe JOBS Act, selling equity through crowdfunding—by definitiona public offering—required SEC registration and blue-sky law qual-ification in each state in which the securities were offered. RegulationCF under Title III of the JOBS Act creates an exemption from regis-tration specifically for equity crowdfunding and preempts state secu-rities qualification laws.

Companies have raised just over $14 million using RegulationCF since it became effective in May 2016. In November 2016, Indie -gogo announced its project backers would be able to make equityinvestments by using Regulation CF.5 Indiegogo is by far the largestcrowdfunding platform to enter the equity space, having raised morethan $1 billion from eight million backers of nonequity projects.

Mark Hiraide is a partner in the Los Angeles office of Mitchell Silberberg & Knupp LLP. He defends directors and officers in securities litigation and counselscompanies in corporate financing transactions. He is the author of Crowdfunding. He wishes to thank his paralegal, Kay Cooperman Jue, for her assistance.

CAPITALby Mark Hiraide

THE JUMPSTART

P A R T T W O O F T W O

MCLE ARTICLE AND SELF-ASSESSMENT TEST

By reading this article and answering the accompanying test questions, you can earn one MCLE credit.

To apply for credit, please follow the instructions on the test answer sheet on page 25.

Opening up unprecedented investment opportunities, the JOBS Act's lack of registration also engenders potential risks

Entrepreneurs now may offer Indiegogo’s 15million monthly visitors an opportunity toinvest in their company.6 This entry by amajor crowdsourcing platform may kick-start the equity crowdfunding industry.

As the public capital markets have becomeaccessible to all, general business lawyers,and not just securities law specialists, willneed to respond to client questions abouttaking advantage of this new pool of potentialinvestors. Thus, they require at least a work-ing knowledge of the new methods and rulesfor raising capital under Regulations D, CF,and A under Titles II, III, and IV, respectively,of the JOBS Act. In particular, lawyers mustbe clear about the liabilities associated withthese new offering methods, as the JOBS Actdid not change the statutory joint and severalcivil liability for persons who control thecompany selling securities.

Equity Crowdfunding

The SEC’s rules for the new Reg ulation CF7

exemption enable entrepreneurs to raise upto $1 million during any 12-month periodfrom anyone who wants to invest, subjectto certain dollar limits on the amount of theindividual investment. There is no require-ment that the investor be accredited orsophisticated. If the investor’s net worth orincome is below $100,000, the investor issubject to an investment cap of the greaterof $2,000 or five percent of the lesser of theinvestor’s annual income or net worth. Forthose individuals whose net worth andannual income are at least $100,000, theinvestment cap is 10 percent of the lesser ofthe investor’s annual income or net worth,not to exceed an investment of $100,000.8

These caps reflect the aggregate amount aninvestor may invest in all offerings underRegulation CF in a 12-month period acrossall companies.9

To qualify for the crowdfunding exemption,the company must prepare an offering state-ment on Form C, which must include generalinformation about the company and its officers,directors, and significant shareholders; theintended use of proceeds; the company’s own-ership and capital structure; and financialstatements for the two most recently completedfiscal years.10 If the offering amount is greaterthan $100,000 but less than $500,000, thefinancial statements must be reviewed by anindependent accountant. If the offering amountis greater than $500,000, the financial state-ments must be audited, unless the companyis conducting its first Regulation CF offering,in which case the financial statements needonly be re viewed. For offerings less than$100,000, the financial statements need onlybe certified by the company’s principal officer.11

The company must file the offering statementwith the SEC on Form C, but the filing is not

reviewed by the agency.12 Once Form C isfiled, the offering may commence immediately.The company is required to set forth a mini-mum or target offering amount, and investorproceeds must be deposited in a third-partyescrow account until the minimum is reached.

A significant limitation under RegulationCF is the requirement that all offerings beconducted through a single Internet portal,which must either be registered with the SECas a broker-dealer or as a new form of regu-lated entity—a funding portal. Funding por-tals are regulated by the self-regulatory orga-nization, Financial Industry RegulatoryAuthority (FINRA). There are currently 21funding portals registered with FINRA.13

Unlike broker-dealers, a funding portal maynot offer investment advice or recommenda-tions, solicit investments to buy the securitiesoffered on its website or portal, pay com-missions to its employees or agents, or takecustody of investor funds. Similarly, unlikepersons associated with a broker-dealer, per-sons associated with a funding portal are notsubject to any licensing, testing, or qualifi-cation requirements.

Funding portals play a limited gatekeeperfunction.14 Regulation CF requires a fundingportal to have a reasonable basis for believingthat a company selling securities on its plat-form complies with Regulation CF.15 It is upto the portal to assess whether there is reasonto question the reliability of a company’srepresentation of compliance.

As with any securities offering, rules relat-ing to permissible communications and adver-tising are critical to the success of the offering.Regulation CF strictly limits communicationsthat mention the terms of the offering pub-lished by a company and third parties com-pensated by the company to promote itsoffering.16 Restrictions on advertising underRegulation CF raise difficult interpretiveissues. How the SEC and courts resolve thesequestions will likely be informed by SEC staffpositions articulated in future releases, no-action letters, and speeches.

Advertising Offerings

The new statutory exemption for equitycrowdfunding provides that the companyshall “not advertise the terms of the offering,except for notices which direct investors tothe funding portal or broker.”17 The noticesmay not include anything other than: 1) astatement that the company is conductingan offering, the name of the intermediarythrough which the offering is being conductedand a link directing the investor to the inter-mediary’s platform; 2) the terms of the offer-ing; and 3) factual information about thelegal identity and business location of thecompany, limited to a brief description ofthe company.18 Historically, notices of this

type have been referred to as tombstone ad -vertisements, because the factual informationabout the company must be limited to a briefdescription of a few sentences. These restric-tions on the content of advertising apply alsoto any third parties—for example, consultantsand public relations firms—that the companycompensates to promote the offering outsideof the platform.19

The only other form of advertising ex -pressly sanctioned by Regulation CF are com-pany communications (identified as such)with investors and potential investors aboutthe terms of the offering through communi-cation channels provided by the intermediaryon the intermediary’s platform.20 In adoptingthe crowdfunding rules, the SEC recognizedthe wisdom of the crowd—a central tenet ofcrowdfunding—and provided means for thecompany to respond to questions about theterms of the offering.21 To accommodate theserules, crowdfunding portals now universallyinclude a comment section for each crowd-funding offering that allows the public andthe company to post comments and responses.

The limited forms of advertising expresslyauthorized by Title III have been widely crit-icized, leading many to conclude that TitleIII is unworkable.22 Thus, there are nowefforts to amend the JOBS Act.23 Advocatesof reform argue that allowing companies toadvertise “off portal” is essential to drivetraffic to the portals where investors mayview the terms of the offering and other req-uisite disclosures. If companies are notallowed to conduct their own campaigns togenerate interest in their business and todirect prospective investors to the portal,few, if any, may know of the offering—aresult surely not intended by lawmakers.Restricting off-portal communications fur-thermore would prevent companies from tak-ing advantage of modern communicationtechnology and social media to drive trafficto the portal.

In May 2016, the SEC staff issued a num-ber of compliance and disclosure interpre-tations that offer some relief from the strictstatutory language.24 As to communicationsoccurring outside the portal, the staff dis-tinguishes between communications occur-ring before and after filing Form C. Prior tofiling the offering statement on Form C, anyactivity that may constitute an offer is pro-hibited because Section 5 of the SecuritiesAct prohibits offers as well as sales, unlessregistered or exempt from registration. Theterm “offer” is defined broadly in Section2(a)(3) of the Securities Act as “every attemptor offer to dispose of, or solicitation of anoffer to buy…for value.” The SEC and thecourts interpret the term “offer” broadly.In adopting Reg ulation CF, the SEC staffex plained that “the publication of inform -

22 Los Angeles Lawyer February 2017

Los Angeles Lawyer February 2017 23

ation and publicity ef -forts, made in ad vanceof a proposed fi nancingwhich have the effect ofconditioning the publicmind or arousing inter-est in the company orin its se curities consti-tutes an of fer.”25 TheSEC has long caution -ed that pub licity priorto a proposed offeringmay be considered aneffort to condition themarket.26

As to communica-tions after Form C is fil -ed, the SEC staff in -terprets the statutorypro hibition on adver-tising the terms of theoffering literally, andconcludes that a com-pany is not restricted in communicating in -formation that mightoccur in the ordinarycourse of its operationas long as the commu-nication does not referto the terms of the offer-ing.27 The SEC defines“terms of the offering”as the amount of secu-rities offered, the natureof the securities, theprice of the securitiesand the closing date ofthe offering period.28

Expanding on its inter-pretation, the SEC staff states that if a com-pany’s advertisement does not include anyof the terms of the offering, its message canextend beyond the limited information in thetombstone-type notices that include no morethan the circumscribed company description.This suggests that the staff may allow com-panies and the third parties they hire to pro-mote an offering to disseminate unrestrictedinformation about the company in commu-nications that direct prospective investors tothe funding portal.29

Before the JOBS Act, public offerings tounsophisticated investors required SEC reg-istration or qualification. In registered publicofferings, communications by the companyand offering participants are strictly circum-scribed. Violations of these restrictions gen-erally are referred to as ‘’gun jumping’’ andgive rise to statutory rescission remedies toinvestors.

Although only effective since May 2016,Regulation CF has spawned new forms ofsecurities solicitations heretofore never seen

in the highly regulated public securitiesoffering market. Incorporating the creativityof Madison Avenue (or its cyber equivalent),companies and their crowdfunding mar-keting consultants are crafting campaignsdesigned to appeal to unsophisticated in -vestors. For example, two- or three-minutevideos that rival Hollywood movie trailersare de rigueur. Promotional giveaways oft-shirts and other gifts, common in non-equity crowdfunding campaigns, are nowfeatured in several crowdfunded securitiesofferings. For now, however, the SEC staffmay monitor these new offering techniquesand allow the new paradigm to unravel, atleast until the next Bernard Madoff or En -ron catalyst causes the regulatory pendulumto reverse course. It is likely, though, thatbefore the regulators take action the crowdwill lose money, as early-stage investmentsin startups are risky.

Prior to the JOBS Act, issuers engagedfinancial intermediaries—e.g., investmentbanking firms—to sell their securities to the

public. The JOBS Act’sdisintermediation of WallStreet has left it to thecompanies them selves tounderwrite their of feringsand has spawn ed a cot-tage industry of crowd-funding consultants andfinders who assist com-panies with selling theirsecurities. The emergenceof this new category ofconsultants is bringing to bear difficult securi-ties-law issues in equitycrowdfunding offerings,name ly, the permissiblescope of activity of con -sul tants and finders whoare not registered andlicensed as broker-deal -ers and the compensa -tion that is suers may paythem. The question iswhether these consul-tants and finders are re -quired to be registeredand licens ed, and, if theyare not, whether issuerswill be allowed to pay“transaction-based com-pensation,” i.e., com mis -sions or other compen-sation contingent on thesale of a security to con-sultants who assist is -suers in finding and solic-iting investors.

Federal securities lawsand state blue-sky laws

prohibit a person from “engaging in the busi-ness of effecting transactions in securities”without being first registered with the SECas a broker-dealer and licensed with FINRA.Section 15 of the Securities Exchange Act of1934 requires that brokers and dealers insecurities register with the SEC. Each statealso has its own requirements for broker/dealer registration. A “broker” is “any personengaged in the business of effecting transac-tions in securities for the account of others,but does not include a bank.”30 A “dealer”is a “person en gaged in the business of buyingand selling securities for his own account,through a broker or otherwise.”31 Many unli-censed consultants and finders work for tran-sation-based compensation by erroneouslyrelying on an old, narrow SEC staff policyexception—the so-called “finder’s excep-tion”—to the broker-dealer licensure require-ment. For many years, knowingly or not,unregistered finders relied on a series of SECstaff no-action letters, including one in par-ticular, in which the staff in 1991 agreed thatM

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CA

LLA

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it would not take enforcement action againstentertainer Paul Anka for receiving a trans-action-based fee for introducing an investmentopportunity to persons whom he believed tobe accredited investors. The staff recognizedthat the transaction was a one-time occur-rence for Anka and that he was not in thebusiness of providing finder services.32 TheSEC’s interpretation at that time was predi-cated on the absence of the following factors,all of which tend to indicate broker/dealeractivity: participation in negotiations, coun-seling investors on the merits of investing,recommending the investment to investors,receiving compensation based on a percentageof the offering proceeds, holding securitiesor cash, providing details of the financing toinvestors, and conducting sales efforts.33

Unregistered Finders

Many unregistered finders, some of whomlabeled themselves as “investment bankers,”ignored, or were unaware of, the primary fac-tor in the SEC’s decision that the compensationwas a one-time occurrence. As a result, in2010, the SEC staff issued a no-action letterin which it declared that the receipt of trans-action-based compensation alone, which theSEC staff often describes as a “salesman’sstake,”34 may be sufficient to require licensure.In the letter, SEC staff recounted how the lawfirm of Brumberg, Mackey & Wall, P.L.C.,itself sought to receive a finder’s fee for intro-ducing its client to potential investors. Thelaw firm represented to the SEC staff that itwould not engage in any negotiations what-soever on behalf of its client, would not provideany potential investor with information aboutthe client that might be used as the basis fornegotiations for funding, and would not haveresponsibility for, nor make recommendationsconcerning, the terms, conditions, or provisionsof the financing.35 According to the SEC staff,“[a] person’s receipt of transaction-based com-pensation in connection with these activitiesis a hallmark of broker-dealer activity.”36 Onefederal district court has rejected the SECstaff’s interpretation of the law.37

As with the finder’s exception, unlicensedpersons sometimes mistakenly rely on the“issuer exemption” from broker registrationunder Securities Exchange Act Rule 3a4-1.That rule provides a nonexclusive safe harborfrom broker-dealer registration for an indi-vidual employee or agent of the issuer who,among other things, “is not compensated bythe payment of commissions or other remu-neration based either directly or indirectlyon transaction in securities.” Whether a par-ticular compensation arrangement is “otherremuneration” based either directly or indi-rectly on transactions in securities dependson the particular facts and circumstances.For example, in determining whether a par-

ticular compensation arrangement involvingthe payment of bonuses would not be per-missible under the rule, the following factorsmay be relevant: 1) when the offering com-mences and concludes, 2) when the bonus ispaid, 3) when it is determined that a bonuswill be paid, 4) when associated persons areinformed of the issuer’s intention to pay abonus, and 5) whether the bonus paid toparticular associated persons varies with theirsuccess in selling the issuer’s securities.38

Issuers sometimes view paying transac-tion-based compensation to unlicensed con-sultants and finders as the unlicensed person’sproblem. Indeed, some issuers sometimes usethe person’s unlicensed status as a basis tovoid the person’s compensation arrangement.39

However, paying an unlicensed broker tosolicit investors exposes an issuer to potentialsignificant civil liability, as there is authorityfor investors to seek rescission against suchan issuer.40 At the federal level, Section 29(b)of the Securities Exchange Act of 1934 pro-vides that “[e]very contract made in violationof any provision of this title … shall be void.”Many consider this language sufficiently broadto support a rescission claim against an issuerwho pays transaction-based compensation toan unlicensed broker-dealer.41 A number ofappellate courts have interpreted Section 29(b)to allow rescission by investors and by issuersof transactions in securities with unregisteredbroker-dealers.42 While the holdings of thesecases invalidated the agreement and transac-tion between the investor or the issuer andthe nonregistered finder, there is dicta in atleast one case that the offering itself, as evi-denced by the contract between the issuerand the investor, also could be invalidated bySection 29(b).43

In California, Section 25501.5 of the Cor -porations Code provides a right of rescissionto investors who purchase a security froman unlicensed broker-dealer. Section 1029.8of the Civil Code makes mandatory trebledamages (up to $10,000) against a personwho causes injury or damage to another per-son as a result of providing goods or per-forming services for which a license is requiredby specified statutes. It further provides thatthe court “may, in its discretion, award allcosts and attorney’s fees to the injured personif that person prevails in the action.”44 TheCalifornia legislature amended Section 1029.8to make specific reference to the broker-dealer and investment adviser registrationprovisions when it enacted Corpor ationsCode Section 25501.5.45

To facilitate capital access, the Californialegislature enacted a new law that took effectin January 2016, which attempts to offersome relief for finders in transactions ex -clusively within California.46 However, thenew California law does not include any

relief for solicitors who provide any morethan the most basic information about theissuer and offering. The law also requiresthat the finder file an information statementwith the Cal ifornia Department of BusinessOversight prior to the transaction.47 More -over, the law does not provide relief fromthe SEC’s strict interpretive position or fromevery other state’s broker-dealer registrationrequirements.

Lawyers are not immune from federaland state broker-dealer registration require-ments. Last year the SEC sued several lawyersand law firms, including one Los Angelesimmigration law firm, for acting as unregis-tered brokers.48 The law firms accepted com-missions in connection with investments madeas part of the federal EB-5 Immigrant Invest -or Program. An SEC press release quotedAndrew J. Ceresney, director of the SEC’sDivision of Enforcement: “Individuals andentities performing certain services and receiv-ing commissions must be registered to legallyoperate as securities brokers if they’re raisingmoney for EB-5 projects…[t]he lawyers inthese cases allegedly received commissionsfor selling, recommending, and facilitatingEB-5 investments, and they are being heldaccountable for disregarding the relevantsecurities laws and regulations.”49

Liabilities

The JOBS Act opened the door to nonac-credited investors who want to participatein the world of investing in unregistered secu-rities offerings. Prior to the JOBS Act, al -though Regulation D and most states allowedcompanies to accept investments from up to35 nonaccredited investors, securities lawyersfrequently counseled clients to steer clear ofthis investor class. The disclosure require-ments for nonaccredited investors were nearlyidentical to those required in a registeredpublic offering. And the risk of a liabilityclaim by an unsophisticated investor out-weighed any benefit of receiving the relativelysmall investments.

Lawyers counseling clients who undertakeexempt public offerings in the new paradigmunder the JOBS Act must appreciate thegreater exposure to liability—to their clientsand to themselves. Courts and the SEC havelong considered securities lawyers as occu-pying a unique role in advising companiesselling securities to the public. Both the SEC,in its civil enforcement actions, and the U.S.Department of Justice, which prosecutes crim-inal securities cases,50 have sued lawyers androutinely remind the public of attorneys’gatekeeping function. Exposure to securitieslaws claims is heightened in equity crowd-funding offerings in which there is typicallyno involvement of a professional intermediary,including an investment banking firm, which,

24 Los Angeles Lawyer February 2017

Los Angeles Lawyer February 2017 25

MCLE Answer Sheet #265

READY CAPITAL

Name

Law Firm/Organization

Address

City

State/Zip

E-mail

Phone

State Bar #

INSTRUCTIONS FOR OBTAINING MCLE CREDITS

1. Study the MCLE article in this issue.

2. Answer the test questions opposite by markingthe appropriate boxes below. Each questionhas only one answer. Photocopies of thisanswer sheet may be submitted; however, thisform should not be enlarged or reduced.

3. Mail the answer sheet and the $20 testing fee($25 for non-LACBA members) to:

Los Angeles Lawyer MCLE Test P.O. Box 55020 Los Angeles, CA 90055

Make checks payable to Los Angeles Lawyer.

4. Within six weeks, Los Angeles Lawyer willreturn your test with the correct answers, arationale for the correct answers, and acertificate verifying the MCLE credit you earnedthrough this self-study activity.

5. For future reference, please retain the MCLEtest materials returned to you.

ANSWERS

Mark your answers to the test by checking theappropriate boxes below. Each question has onlyone answer.

1. n True n False

2. n True n False

3. n True n False

4. n True n False

5. n True n False

6. n True n False

7. n True n False

8. n True n False

9. n True n False

10. n True n False

11. n True n False

12. n True n False

13. n True n False

14. n True n False

15. n True n False

16. n True n False

17. n True n False

18. n True n False

19. n True n False

20. n True n False

MCLE Test No. 265The Los Angeles County Bar Association certifies that this activity has been approved for Minimum ContinuingLegal Education credit by the State Bar of California in the amount of 1 hour. You may take tests from backissues online at http://www.lacba.org/mcleselftests.

1. An individual accredited investor must have anannual income of $200,000 in each of the two mostrecent years (or $300,000 joint income) and have anet worth in excess of $1 million, excluding homeequity.

True.False.

2. There is no limit on the amount of securities thatmay be sold in an offering pursuant to Rule 506 ofRegulation D.

True.False.

3. A company may not sell securities to a nonaccreditedinvestor pursuant to Rule 506(b) of Regulation D.

True.False.

4. Today, 99 percent of all private offerings underRegulation D are conducted pursuant to Rule 506.

True.False.

5. Securities offerings pursuant to Regulation A preemptstate securities “blue sky” laws.

True.False.

6. Investors in securities offerings pursuant toRegulation CF and Regulation A are not required tosatisfy any sophistication test.

True.False.

7. Companies that conduct securities offerings underTier 1 of Regulation A are subject to ongoing reportingrequirements.

True.False.

8. Equity crowdfunding offerings under Regulation CF(Title III of the JOBS Act) must be conducted using afunding portal regulated by the Financial IndustryRegulatory Authority (FINRA).

True.False.

9. There is no requirement that an investor in an equitycrowdfunding offering under Regulation CF be accreditedor sophisticated.

True.False.

10. If either an investor’s annual income or net worthis $1 million or more, there is no limit on the amountthat the investor may invest in all crowdfunding offeringsunder Regulation CF in a 12-month period.

True.False.

11. An issuer of securities in a crowdfunding offeringunder Regulation CF must file with the SEC an offering

disclosure statement on Form C.True.False.

12. A securities offering under Regulation CF may notcommence until the SEC qualifies the Form C.

True.False.

13. There are no restrictions on communications oradvertising securities offerings under Regulation CF.

True.False.

14. Before the JOBS Act, public offerings to unsophis-ticated investors required SEC registration or qualifi-cation.

True.False.

15. The so-called “finder’s exception” to broker-dealerlicensure requirements allows an unlicensed personto receive transaction-based compensation in connec-tion with the sale of a security, provided that the unli-censed finder does not negotiate the terms of theinvestment.

True.False.

16. Under the “issuer exemption” safe harbor Rule3a4-1 an employee who engages in the sale of theemployer’s securities may receive a cash performancebonus based on the amount of securities sold.

True.False.

17. Paying an unlicensed broker to solicit investorsexposes an issuer to potential significant civil liabil-ity.

True.False.

18. The investor plaintiff bears the burden of proof toestablish that the company defendant violated therequirements of the exemption from registration.

True.False.

19. Failure to satisfy the requirements of Rule 506(c),Regulation A or Regulation CF will result in loss of theexemption from registration and give rise to liabilityunder Section 12(a)(1) only if the investor plaintiffproves that the company defendant acted with scienteror negligently.

True.False.

20. In California, attorneys rendering securities lawadvice are held to a higher standard of care in legalmalpractice actions.

True.False.

MCLE test 265 is based on parts 1 and 2 of the article “Ready Capital,” on the JOBS Act. See Los Angeles LawyerDecember 2016 and February 2017 respectively.

as a registered broker-dealer, is required toconduct due diligence investigations in con-nection with the securities offering.51 In mostequity crowdfunding offerings, third-partydue diligence is left to the lawyers and accoun-tants, who often end up as the only deep-pocket defendants when investors sue torecover their losses.

Liability under federal and state securitieslaws is unlike liability under the commonlaw. Federal and state statutory securities-law remedies offer both procedural and sub-stantive benefits to investors unavailable tothem under rights of action at common lawand in equity for breach of contract, breachof warranty, and the tort remedy for commonlaw deceit.52 The purpose of the civil liabilityprovisions of California’s Corporate SecuritiesLaw of 1968 “is to create statutory liabilitythat eliminates some of the elements of com-mon law fraud, but balances this expansionof liability by placing other restrictions onrecovery.”53 The statutory securities rescissionremedies sometimes may be described as pro-viding for strict liability because unless thedefendant company is able to sustain affir-mative burdens of proof, it will be liable.More important, in the wake of the 1929stock market crash and Great Depression,Congress and the states imposed joint andseveral rescission liability on the individualswho control the company that violates thesecurities laws, unless the control person isable to sustain the burden of a due diligenceaffirmative defense.54

Two Bases

Section 12(a) of the Securities Act providesinvestors with two bases to assert a right ofrescission.55 Under Section 12(a)(1) investorshave a right of rescission against any personwho offers or sells a security in violation ofthe registration requirement. Thus, failure tosatisfy the requirements of rule 506(c), Reg -ulation A or Regulation CF will result in lossof the exemption from registration and giverise to liability under Section 12(a)(1). Itimposes almost absolute liability when theseller is unable to prove that it satisfied therequirements of the exemption. The plaintiffis not required to prove scienter or even neg-ligence by a company defendant that fails toestablish the requirements of the applicableexemption.

The second basis for rescission is pursuantto Section 12(a)(2), which provides investorsa right of rescission against sellers who offeror sell securities by means of a prospectus ororal communication that contains misstate-ments and omissions of material information.However, unlike Section 12(a)(1), Section12(a)(2) provides a due diligence affirmativedefense that the seller “did not know, and inexercise of reasonable care could not have

known, of such untruth or omission.”56 Hence,counsel must assist management in memori-alizing its reasonable basis for the statementsmade in its offering document. Section 12(a)(2)claims also are subject to a “loss causation”affirmative defense that the investor’s losswas not caused by the false or misleadingstatement or material omission.

In California, Corporations Code Sections25501 and 25503 provide a remedy similarto the federal remedies under Securities ActSections 12(a)(1) and 12(a)(2). Similarly,California provides for joint and several lia-bility of individuals who control the company.California’s joint and several control personliability provision, Corporations Code Section25504, is especially broad, providing that

[e]very person who directly or indirect -ly controls a [company] liable underSection 25501 or 25503, every partnerin a firm so liable, every principal exec-utive officer or director of a corporationso liable, every person occupying a sim-ilar status or performing similar func-tions, every employee of a company soliable who materially aids in the act ortransaction constituting the violation,are also liable jointly and severally liablewith and to the same extent as such[company], unless the other person whois so liable had no knowledge of or rea-sonable grounds to believe in the exis-tence of the facts by reason of whichthe liability is alleged to exist.A California court of appeal decision in

2011 makes it difficult to demur to lawsuitsseeking joint and several rescission liabilityagainst officers and directors. In Hellum v.Breyer, the investor plaintiffs sought to holdthe individual directors of a defendant com-pany jointly and severally liable for the rescis-sion liability of the company, based solelyon the outside directors’ status as directors.57

The outside directors, each of whom wasaffiliated with one of the company’s venturecapital fund investors, demurred to the com-plaint on the grounds that it failed to allegeany facts showing the outside directors’involvement in or knowledge of the offendingsecurities offering. The trial court grantedthe outside directors’ demurrer. The court ofappeal reversed the trial court ruling, stating,“We believe the plain language of §25504means that principal executive officers anddirectors are presumptively liable for theircorporation’s issuance of unqualified securi-ties, regardless of whether they participatedin the transactions at issue, or controlled thecompany.”58 The court rejected outright theoutside directors’ claim that the “weight ofauthority” supported their argument that theplaintiffs had to plead facts to show that theoutside directors controlled the company.59

Lawyers counseling clients who undertake

exempt offerings in reliance on Rule 506(c)of Regulation D, Regulation A, or RegulationCF must appreciate the greater exposure toliability in offerings made to the public. InCal ifornia, attorneys rendering securities ad -vice are held to a higher standard of care inlegal malpractice actions.60 Representing acompany conducting an exempt offering sub-jects the lawyer to the SEC rules govern ingstandards of professional conduct of law -yers.61 Equity crowdfunding offerings presentunique challenges for lawyers who engagein general business practices as well as secu-rities law. The absence of professional inter-mediaries in crowdfunded offerings, in ad -dition to sometimes leaving lawyers andac countants as the only deep-pocket defen-dants, assigns due diligence responsibilitiesto the company and its counsel. Establishingevidence of the requisite due diligence is para-mount to protecting the company and itscontrol persons because if the affirmativeburden of the due diligence defense when itis available is not sustained, liability to in -vestors is nearly absolute.

In determining if attorneys have performedadequate due diligence, California practi-tioners should be aware of the Ninth Circuitdecision in FDIC v. O’Melveny & Myers, inwhich the Federal Deposit Insurance Corp -oration (FDIC), as receiver for failed savingsand loan association American DiversifiedSavings Bank (ADSB), filed a lawsuit in theCentral District of California against O’Mel -veny & Myers claiming professional negli-gence in connection with its legal advice incounseling ADSB in private securities of -ferings.62 O’Melveny prepared two privateplacement memoranda and wrote substantialportions of the memoranda, edited other por-tions, and performed a due diligence review.It was undisputed that the memoranda con-tained false information about the company’sfinancial condition. The FDIC commencedits suit against O’Melveny, charging the firmwith professional negligence, negligent mis-representation, and breach of fiduciary duty.In reversing the trial court’s sum mary judg-ment in favor of O’Melveny, the Ninth Circuitstated:

Part and parcel of effectively protectinga client, and thus discharging the attor-ney’s duty of care, is to protect theclient from the liability which mayflow from promulgating a false or mis-leading offering to investors. An impor-tant duty of securities counsel is tomake a “reasonable, independent in -vestigation to detect and correct falseor misleading materials.” (Citationsomit ted.) This is what is meant by adue diligence investigation.63

The O’Melveny decision has been citedfor the proposition that the duty of care

26 Los Angeles Lawyer February 2017

http://www.lacba.org/renew

owed by an attorney to a client includes rea-sonably protecting the client from liabilitythat might flow based on its agent’s dissem-ination of false or misleading statements tothe public.64

Under the restrictive securities laws ineffect for the 90 years prior to the JOBS Act,entrepreneurs who did not have access tofriends and family who could provide seedcapital had little chance of getting their star-tups off the ground. Today, seed funding atthe attainable $250,000 to $750,000 level—not the millions of the past—could, withmodern technology, be just enough to ad -vance an entrepreneur’s ideas, develop a pro-totype, enter into a first contract, or otherwisevalidate a vision or business model in orderto get on the radar of institutional investorsand rise to the next level of success. Withoutsuch early funding, those entrepreneurialbusinesses would be lost in a sea of conceptsfloating over the transom to the inboxes ofmanagers at venture capital funds. Thus, intheory, Regulation CF enables anyone toreach out to capital sources and raise seedlevels of money. No doubt, without the ben-efit of professional financial intermediaries,such as investment bankers, entrepreneurson their own will face challenges raising capital. What the JOBS Act offers, however,is a pathway for companies eventually toreach these public equity markets, whichprior to the JOBS Act, were accessible toonly the most privileged few. It will be upto business lawyers to navigate the new secu-rities rules and regulations to ensure thattheir clients do not get lost along the way.“Fasten your seat belts, it’s going to be abumpy night.”65 n

1 Jumpstart Our Business Startups (JOBS) Act, Pub.L. No. 112-106, §§301–05, 126 Stat. 306, 315–23(2012) (codified in scattered sections of 15 U.S.C.). 2 For the full discussion of Rule 506 (c) of RegulationD and Regulation A of the JOBS Act, see Mark Hiraide,Ready Capital, L.A. LAWYER (Dec. 2016), availableat https://www.lacba.org/news-and-publications/los-angeles-lawyer.3 Press Release, The White House, Remarks by thePresident at JOBS Act Bill Signing (Apr. 5, 2012),available at https://www.whitehouse.gov/the-press-office/2012/04/05/remarks-president-jobs-act-bill-signing.4 Rob Walker, The Trivialities and Transcendence ofKickstarter,N.Y. TIMES MAGAZINE (Aug. 5, 2011), avail-able at http://www.nytimes.com.5 Stacy Cowley, Ever Wanted to Back a Start-Up?Indiegogo Opens the Door to Small Investors, N.Y.TIMES (Nov. 15, 2016), available at http://www.nytimes.com.6 Anthony Volastro, Indiegogo jumps into fledgingequity crowdfunding space, CNBC (Nov. 16, 2016),available at http://www.cnbc.com/2016/11/16/crowdfunding-giant-indiegogo-gets-into-start-up-equity-funding.html.7 17 C.F.R. §§227 et seq.; 15 U.S.C. §77d(a)(6). 8 17 C.F.R. §227.100.9 Securities issued in offerings under Regulation CF areexempt from the registration requirement of Section

28 Los Angeles Lawyer February 2017

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12(g) of the Securities Exchange Act of 1934, whichsubjects registrants to the full regulatory regime forSEC-registered publicly traded companies, until thecompany exceeds $25 million in total assets, afterwhich time it is granted a two-year transition periodbefore it is required to register its class of securities.17 C.F.R. §240.12g-6.10 17 C.F.R. §227.201.11 17 C.F.R. §201(t).12 17 C.F.R. §203.13 Funding Portals We Regulate, FINRA, available athttp://www.finra.org (last visited 12/20/16).14 SEC Chairperson Mary Jo White, Keynote Addressat the SEC-Rock Center on Corporate GovernanceSilicon Valley Initiative (Mar. 31, 2016). available athttps://www.sec.gov (last visited Dec. 21, 2016).15 17 C.F.R. §301(a).16 17 C.F.R. §204.17 15 U.S.C. §77d-1(b)(2). 18 17 C.F.R. §227.204.19 17 C.F.R. §227.205(b).20 17 C.F.R. §227.204(c).21 SEC Release No. 33-9974 (Oct. 30, 2015), Crowd -funding.22 Robb Mandelbaum, Will S.E.C. Advertising RulesCripple Equity Crowdfunding?, FORBES (May 31,2016), available at http://www.forbes.com.23 The JOBS Act at Four: Examining Its Impact andProposals to Further Enhance Capital Formation:Hearing Before the H. Subcomm. on Capital Marketsand Government Sponsored Enterprises, 114th Cong.(Apr. 11, 2016), available at http://financialservices.house.gov (last visited Dec. 21, 2016).24 Regulation Crowdfunding Compliance and Dis -closure Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/reg-crowdfunding-interps.htm [hereinafter Regulation Crowd fundingCDI].25 SEC Release 33-9974, n.553.26 See SEC Release no. 33-3844 (Oct. 8, 1957).27 See Regulation Crowdfunding CDI, Question 204.03(May 13, 2016), available at https://www.sec.gov/divisions/corpfin/guidance/reg-crowdfunding-interps.htm.28 See Instruction to Rule 204.29 Sara Hanks, Communications and publicity byissuers prior to and during a Regulation CF offering,Crowdcheck (June 2016), available at http://www.crowdcheck.com. Cochair of the SEC’s AdvisoryCommittee on Small and Emerging Companies, SaraHanks authored a widely circulated memorandum onadvertising rules under Regulation CF.30 15 U.S. Code §78c(a)(4).31 15 U.S.C. §78c(a)(5).32 Paul Anka, SEC no-action letter (July 24, 1991).33 See, e.g., Richard S. Appel, SEC no-action letter(Jan. 13, 1983); John DiMeno, SEC no-action letter,(Oct. 11, 1978).34 See, e.g., Herbruck, Alder & Co., SEC no-actionletter (June 4, 2002), available at https://www.sec.gov.35 No-action request letter from Brumberg, Mackey &Wall, P.L.C., (May 17, 2010), available at https://www.sec.gov.36 Id.37 SEC v. Kramer, 778 F. Supp. 2nd 1320 (M.D. Fla.2011).38 Persons Deemed Not To Be Brokers, Exchange ActRelease No. 22,172 [File No. S7-19-84] (June 27,1985).39 See Task Force on Private Placement Broker-Dealers,ABA Section of Business Law, Report and Recom -mendations of the Task Force on Private PlacementBroker-Dealers, 60 BUS. LAW. 959, 999 (May 2005).40 Id.41 Id.42 See, e.g., Regional Props., Inc. v. Financial & RealEstate Consulting Co., 678 F. 2d 552, 558 (5th Cir.

1982); Eastside Church of Christ v. National Plan.Inc., 391 F. 2d 357 (5th Cir.), cert. denied sub nom.Church of Christ v. National Plan, Inc., 393 U.S. 913(1968). See generally Samuel H. Gruenbaum & MarcI. Steinberg, Section 29(b) of the Securities ExchangeAct of 1934: A Viable Remedy Awakened, 48 GEO.WASH. L. REV. 1 (1979).43 Regional Props., 678 F. 2d at 561; see also WesternFed. Corp. v. Erickson, 739 F. 2d 1439, 1443-44 n.5(9th Cir. 1984).44 CIV. CODE §1029.8.45 A.B. 2167 (Correa) (Sept. 18, 2004).46 CORP. CODE §25206.1.47 CORP. CODE §25206.1(a)(8).48 SEC v. Hui Feng and Law Offs. of Feng & Assocs.P.C., No. 09420-CBM-SS (U.S.D.C. Central Dist. Dec.7, 2015), Complaint available at https://www.sec.gov/litigation/complaints/2015/comp-pr2015-274.pdf.49 Press Release, SEC: Lawyers Offered EB-5 Invest -ments as Unregistered Brokers, available at https://www.sec.gov.50 See, e.g., Press Release, SEC, SEC Charges NewOrleans-Based Energy Company and Executives WithFraudulent Stock Manipulation: Houston-BasedAttorney Charged With Facilitating Scheme in Gate -keeper Role, (Dec. 15, 2014), available at https://www.sec.gov; Press Release, U.S. Att’y’s Off., SecuritiesAttorney Arrested in Boston-Based Market Man ipu -lation Scheme (Nov. 6, 2014), available at https://www.fbi.gov.51 FINRA Regulatory Notice 10-22, Obligation ofBroker-Dealers to Conduct Reasonable Investigationsin Regulation D Offerings (Apr. 2010), available athttps://www.finra.org.52 Arei II Cases, 216 Cal. App. 4th 1004 (2013).53 CORP. CODE §§25000 et seq.54 15 U.S.C. §77o; 15 U.S.C. §78t(a).

55 The JOBS Act expressly made applicable Section12(b) to Title III and Title IV offerings. See discussionof Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995)(holding that the Section 12(a)(2) antifraud provisiondoes not apply to private offerings).56 15 U.S.C. §77l(a). 57 Hellum v. Breyer, 194 Cal. App. 4th 1300 (2011).58 Id. at 1308.59 The court noted that the California legislature usedmarkedly different language from that of the federalcontrolling liability statutes. See Id. at 1312 n.5.60 PAUL W. VAPNEK, ET AL., CAL. PRACTICE GUIDE:PROF’L RESPONSIBILITY ¶ 6:231 (2015). See also Wrightv. Williams, 47 Cal. App. 3d 802, 810 and FederalDeposit Ins. Corp. v. O’Melveny & Myers, 969 F. 2d744, 748 (9th Cir. 1992), reversed on other grounds512 U.S. 79 (1994) and opinion adopted in part, 613F. 3d 17 (9th Cir. 1995).61 See 17 C.F.R. §§205 et seq. Under SEC rule 205.2(a),an attorney is deemed to be an appearing attorneynot only by representing a client in an SEC proceed -ing but also by: 1) providing federal securities lawadvice concerning any document the attorney hasnotice will be submitted to the SEC or 2) advising aclient regarding whether information must be submittedto, or filed with, the SEC. See State Bar of California,Legal Opinions in Business Transaction (Excludingthe Remedies Opinion) (May 2005, rev’d 2007), avail-able at http://businesslaw.calbar.ca.gov (last visitedDec. 22, 2016).62 O’Melveny & Myers, 969 F. 2d 744.63 Id. at 748.64 Cf. Robert J. Haft, et al., Due Diligence—PeriodicReports and Securities Offerings §4.6 (2015).65 Statement made by the Margo Channing characteras portrayed by Bette Davis in the film All About Eve(1950).

Los Angeles Lawyer February 2017 29

30 Los Angeles Lawyer February 2017

MIC

HA

EL C

ALL

AW

AY

Securities and ExchangeCom mission’s (SEC) prac-tice of initiating adminis-

trative proceedings against defendants to beadjudicated by the SEC’s in-house adminis-trative law judges (ALJs) has taken placesince the 1940s. Presently, five ALJs overseethe SEC’s Administrative Law Court. All areappointed by the SEC’s Office of Admin -istrative Judges.

In the past few years, the SEC has dra-matically increased the percentage of casesit has filed as administrative proceedings asopposed to actions in the federal courts. TheSEC enjoys a much higher success rate insuch proceedings compared with those over-seen by an independent federal judiciary. Astudy by the Wall Street Journal demonstratedthat the SEC’s success rate in administrativeproceedings from October 2010 throughMarch 2015 was 90 percent compared withits 69 percent success rate in federal actionsover the same period. The study also showedthat when defendants who received an adverseruling from an ALJ appealed directly to theSEC, 95 percent of such appeals were resolvedin favor of the SEC.1

The SEC has acknowledged that it hasfiled more ALJ proceedings in the recent pastthan previously and has contended that suchincreases are due to changes under the Dodd–Frank Wall Street Reform and Consumer Pro -

tection Act of 2010 (Dodd-Frank) that per-mitted the SEC to seek certain penalties inALJ proceedings that it previously could onlyseek in actions filed in federal court. 2

Criticism against the SEC’s paradigm shifthas been levelled from many quarters, includ-ing from one federal judge.3 Critics contendthat the administrative arena lacks many ofthe due process protections of the federalcourts, including an independently appointedjudiciary, the opportunity for extensive dis-covery, and juries. Because the mere levyingof claims by the SEC may result in devastatingconsequences for defendants and their fami-lies—e.g., the loss of jobs, careers, and in -come—critics argue that the process shouldbe more fair and impartial. Indeed, the admin-istrative process is held to be unfair to defen-dants who are judged first by an ALJ app -ointed by and beholden to the SEC and againon an appeal to the SEC’s commissioners.Various commentators have said that a systemin which the hand of the SEC is so heavy inadministrative proceedings—from determiningwhether or not to institute proceedings toselecting the ALJ deciding the outcome to

Sarah A. Good is a partner in the San Franciscooffice of Pillsbury Winthrop Shaw Pittman LLP andco-leader of the firm’s securities litigation andenforcement team. Laura C. Hurtado is a seniorassociate in Pillsbury’s San Francisco office.

QuestionableProceedingsThe constitutionality of adjudication by SEC administrativelaw judges faces judicial and legislative challenges

THE U.S.

by Sarah A. Good and Laura C. Hurtado

determining on appeal whether or not anadverse judgment should be af firmed orreversed—is counter to the values of fairnessand integrity inherent in the American judicialsystem.4 They also have contended that theselection of ALJs by the SEC’s Office of Ad -min istrative Law judges rather than by thepresident violates the Appointments Clauseof the U.S. Con sti tution.5

Public Criticism

This public criticism and media attention hasresulted in two rounds of judicial challengesto the SEC’s administrative proceedings.Round one concerned the threshold issue ofwhen such a challenge could be mounted—before the ALJ process had concluded or atthe end of that process. This round largelyappears to be over. All circuit courts ofappeals that have considered the issue havefound that these challenges must wait untilthe ALJ process has run its course. Roundtwo addressing substantive arguments aboutthe constitutionality of the SEC’s ALJ processis just beginning. Already, a circuit split hasdeveloped on issues that could lead to reviewby the U.S. Supreme Court. If the SupremeCourt ultimately decides that the SEC’s ALJspresided over administrative proceedings inviolation of the Appointments Clause of theU.S. Consti tution, thousands of ALJ awardsover many years in contested hearings poten-tially may be invalidated.

In response to criticism that its court sys-tem lacks due process, the SEC proactivelychanged and proposed changes to some ofits administrative proceeding rules. However,these changes are not sufficient to rebutcritics’ concerns because they do not addressthe fundamental unfairness of proceedingsprosecuted and adjudicated by individualsemployed by the same agency.6

Finally, several legislative movements havebeen initiated by Republican members of theU.S. House of Representatives to addresssome of the concerns. It is unclear whatimpact a Republican in the White House willhave on these efforts; however, PresidentDonald Trump supports repeal of Dodd-Frank. If Dodd-Frank is repealed, the SECmay be forced to proceed in federal court ifit wishes to pursue certain penalties that willno longer be available in administrative pro-ceedings. Also, President Trump may supportthe legislative efforts of Republican Con -gressman Jeb Hensarling of Texas to repealand replace certain portions of Dodd-Frank,including a specific proposal to permit alldefendants in ALJ proceedings to removesuch cases to the federal courts. If such leg-islation were passed, most defendants likelywould choose removal to the federal courtsresulting in a dramatic reduction of ALJ pro-ceedings. Before round two in the courts has

concluded, it is possible that legislative effortsmay put an end to this issue and curtail orsignificantly reduce the SEC’s ability to bringcases in an administrative forum.

In 2014, defendants in SEC administrativeproceedings began filing suits in federal courtsto enjoin ALJ proceedings before they hadrun their course. The defendants contendedthat such proceedings were unconstitutionalbecause the ALJs were appointed in violationof the Appointments Clause. District courtsinitially reached different conclusions aboutwhether or not they had jurisdiction to reachthe merits of the constitutional challengesmade to an administrative proceeding underthe three-prong test outlined in Thunder BasinCoal Company v. Reich.7 Some courts foundthat they had jurisdiction to consider the mer-its,8 while others held that they did not.9

In the wake of these conflicting lowercourt rulings, appeals were taken. The Second,Fourth, Seventh, Eleventh and District ofColumbia circuit courts of appeals have heldthey lack jurisdiction to entertain constitu-tional challenges to ALJ proceedings untilsuch proceedings have run their course.10

No circuit court of appeals has disagreed.Accordingly, the first round of litigation

challenges to the SEC’s administrative pro-ceedings is over. Five circuit courts of appealsconcur that the lower courts have no juris-diction to consider constitutional challengesto the ALJ process until after the exhaustionof all administrative remedies. As a result,the U.S. Supreme Court will not take aninterest in this issue unless another circuitcourt of appeals takes a different tack andcreates a circuit split.

Constitutional Challenges

Round one simply delayed the day of reck-oning for courts to reach the merits. OnAugust 9, 2016, the District of ColumbiaCircuit Court of Appeals became the firstappellate court to do so.11

In Lucia Companies, Inc. v. SEC,12 defen-dants received an adverse ruling in an admin-istrative proceeding and exhausted all appealsto the SEC. On appeal, the commission foundthe defendants committed antifraud violationsand imposed the same sanctions as the ALJ.The commission also rejected the defendants’argument that the administrative proceedingwas unconstitutional because the ALJ wasnot appointed in conformity with the Ap -pointments Clause. Although the parties con-ceded that the president does not appointALJs, the commission found that its ALJsare employees and not officers and, therefore,the Appointments Clause does not govern.

The Lucia defendants filed a petition forreview to the District of Columbia CircuitCourt of Appeals and renewed the argumentconcerning the Appointments Clause. The

Lucia court’s analysis focused on whether ornot ALJs were officers subject to the Appoint -ments Clause or employees who are not sub-ject to the Appointments Clause. The court’sanalysis “begins, and ends” with a consid-eration of whether or not ALJs issue “finaldecisions of the Commission.”13 If ALJs donot issue “final decisions of the Commission,”they are employees who are not subject tothe Appointments Clause.

In their briefs to the court, the defendantpetitioners noted that an ALJ decision “be -comes the final word of the agency unless fur-ther review is granted” and thus “[t]he ALJ’sdecision is not replaced by a final agency order;the ALJ decision itself ‘become[s] final.’”14 Inother words, unappealed ALJ decisions auto-matically become the final action of the com-mission. Accordingly, the petitioners arguedthat ALJs do issue final decisions of the com-mission and therefore are officers subject tothe Appointments Clause. They also notedthat “ALJ’s rulings are in fact rarely disturbed”and that the ALJ involved in the underlyingmatter “has apparently never been reversedby the SEC in more than 50 cases.”15

The Lucia court, however, was not per-suaded. It held that “[t]he Commission’s finalaction is either in the form of a new decisionafter de novo review or, by declining to grantor order review, its embrace of the ALJ’sinitial decision as its own.”16 It further heldthat “the Commission’s ALJs neither havebeen delegated sovereign authority to actindependently of the Commission nor, byother means established by Congress, do theyhave the power to bind third parties, or thegovernment itself, for the public benefit.”17

Notwithstanding the evidence in the peti-tioners’ brief that ALJ decisions are rarelydisturbed by the commission, the court heldthat the “[p]etitioners offer neither reasonto understand the finality order to be merelya rubber stamp, nor evidence that initial deci-sions of which the Commission does notorder full review receive no substantive con-sideration as part of this process.”18

On December 27, 2016, in Bandimere v.SEC,19 the Tenth Circuit Court of Appealsissued a ruling directly contrary to Lucia.The court held that the SEC ALJ who presidedover an administrative proceeding was aninferior officer who held his office in violationof the Appointments Clause.

The Bandimere court disagreed with theLucia court’s creation of a litmus test todetermine whether or not the AppointmentsClause had been violated, that is, whetherthe SEC ALJs’ lack of final decision-makingauthority automatically means that the ALJswere not subject to the Appointments Clause.Instead, the Tenth Circuit held that such aconclusion should hinge on the ALJs’ dutiesand not on final decision-making power.20

32 Los Angeles Lawyer February 2017

In so doing, the court held that “[w]hetherSEC ALJs can enter final decisions is not dis-positive to our holding” but “the SEC’s argu-ment that its ALJs can never enter final deci-sions is not airtight.”21 The court noted thatthe SEC may decline to review an ALJ deci-sion or enter an order stating that the ALJ’sinitial decision is final without engaging inreview and that in fact 90 percent of all initialSEC ALJ decisions follow such “a path foran initial decision to become final withoutplenary agency review.”22 The court recog-nized that SEC ALJ duties are more thanministerial tasks and that the ALJs carry outimportant functions pursuant to the laws ofthe United States. The SEC’s power to reviewits ALJs does not transform them into lesserfunctionaries, the court said. Rather, it showsthe AJLs are inferior officers subordinate tothe SEC Commissioners.23 Since the SEC ALJheld his office unconstitutionally when pre-siding over the underlying administrativeproceeding, the Court granted the petitionfor review and set aside the SEC’s opinion.24

In Bandimere, a vigorous dissent by JudgeMcKay relies on Lucia to contend that SECALJs are not inferior officers and thus notsubject to the Appointments Clause becausethey cannot enter final decisions.25 The dis-senting opinion also contends that the major-ity’s holding is “quite sweeping, and I worrythat it has effectively rendered invalid thou-sands of administrative actions.”26 JudgeBriscoe’s separate concurring opinion refutesthe contention that the ruling potentiallyinvalidates all ALJs, and not simply SECALJs. 27 Judge Briscoe also criticizes the dis-sent’s reliance on Lucia’s reasoning andrepeats the conclusion of the majority thatwhether or not an ALJ possesses “final deci-sion-making authority” is not the “sine quanon of inferior Officer status.”28

In the immediate future, the SEC doubtlesswill seek a rehearing en banc in Bandimere.If that effort and the pending request for arehearing en banc in Lucia are unsuccessful,then this issue is on track for review by theU.S. Supreme Court to resolve the split betweenthe Tenth and District of Columbia circuitcourts of appeals. Other circuit courts ofappeals also will weigh in on this issue andchoose to follow either Lucia or Band imere.If the Bandimere decision holds through allappeals, the SEC potentially is facing the inval-idation of thousands of SEC ALJ adjudicationsand many additional litigated issues concerningthe scope and extent of such invalidations. Itwill be interesting to see what positions aretaken on this issue by a new SEC chair and anew presidential administration.

On July 13, 2016, the SEC adoptedamendments to its rules of practice governingadministrative proceedings. The amendmentsad dress, among other issues, the timing of

hearings in administrative proceedings, enti-tlement to depositions, the admissibility ofevidence, and the contents of an answer. Ina press release issued the same day, then SECChair Mary Jo White stated, “The amend-ments to the Commission’s rules of practiceprovide parties with additional opportunitiesto conduct depositions and add flexibility tothe timeliness of our administrative proceed-ings, while continuing to promote the fairand timely resolution of the proceedings.”29

The amendments became effective September27, 2016, and apply to all proceedings initi-ated on or after that date. The amended rulesalso apply to pending cases in certain instancesdepending on their stage.30

Significant Changes

The most significant changes to the SEC rulesof practice relate to the timing of hearingsand entitlement to depositions. The SEC’srush to trial in administrative proceedingshas been sharply criticized by defendantswho contend that the accelerated timelinefavors the SEC, which has several years toconduct its own investigation and build itscase, and thus disadvantages defendants whohave a limited amount of time to preparetheir defenses.31 The recent changes includean amendment to Rule 360, which governsthe filing of an initial decision by the hearingofficer and the timing of the initial stages ofthe administrative proceeding.

Under former Rule 360, the initial decisionof the hearing officer had to be filed within120, 210, or 300 days from the date of theservice of the order instituting proceedings(OIP). Under the former rule, the more timethe parties were afforded for pretrial prepa-ration and motion practice, the less time thehearing officer had to prepare and file theinitial decision, which incentivized compress-ing the pretrial schedule. By contrast, underamended Rule 360(a)(2)(i), the trigger datefor the time to file the initial decision is either30, 75, or 120 days from the date of thecompletion of post-hearing or dispositivemotion briefing or a finding of a default.

Amended Rule 360(a)(2)(ii) also extendsthe length of the prehearing period from amaximum of four months to 10 months.Notably, the SEC rejected commenters’entreaties for an open-ended and flexible pre-hearing period to be determined by hearingofficers and stated that the SEC “continue[s]to believe that timely completion of proceed-ings can be achieved more successfully withexpress deadlines for completion of the var-ious steps in the administrative proceeding.”32

Although Amended Rule 360 affords defen-dants additional time to prepare their cases,even the maximum prehearing period of 10months is a relatively short period of timeto prepare for a complex trial.

With respect to depositions, AmendedRule 233 now permits parties in 120-day pro-ceedings the right to notice three depositions,of up to seven hours each, per side in a sin-gle-defendant case and five depositions perside in multidefendant cases. Under AmendedRule 233(a)(3)(ii), the parties are permittedto seek leave to notice up to two additionaldepositions based on a showing of a “com-pelling need.” The depositions of witnessesunavailable to testify at the hearing do notcount against each party’s limit. AmendedRule 233 presents a marked shift from theformer Rule 233 that only permitted partiesto take the deposition of an unavailable wit-ness and only with the permission of the ALJ.Defendants in 30-day or 75-day proceedingsstill have no right to take depositions. By con-trast, under Federal Rule of Civil Procedure30, a party may notice up to 10 depositionswithout leave of court. Commenters criticizedthe “‘one-size fits all’ approach” of providinga fixed number of depositions and arguedthat “hearing officer discretion in the matterof depositions is necessary because each casepresents unique facts and circumstances.”33

The right afforded the parties by AmendedRule 233 to take a limited number of de -positions in 120-day proceedings will notdampen criticism concerning the lack of dueprocess in administrative proceedings.

The SEC’s recent amendments also clari-fied the standards for admissibility of evi-dence. Under former Rule 320, all evidencewas admissible in administrative proceedingsunless it was “irrelevant, immaterial or undulyrepetitious.” Amended Rule 320(a) also ex -cludes evidence that is unreliable. In addition,Amended Rule 320(b) clarifies that hearsaymay be admitted if it “is relevant, material,and bears satisfactory indicia of reliabilityso that its use is fair.” The admission ofhearsay evidence in administrative proceed-ings continues to be more permissive thanunder the Federal Rules of Evidence. Com -menters warned that the proposed rule, whichthe SEC adopted, would “fail to offer anymeaningful protection” and “provide[s] insuf-ficient guidance and [is] prone to unfair appli-cation.”34

While some of the SEC’s amendmentsprovide limited protections to defendants, atleast one of the amendments imposes a burdenon defendants. Amended Rule 220 requiresa defendant to disclose in its answer to alle-gations in an OIP whether the defendantintends to assert a so-called reliance defense,such as reliance on advice of counsel. Failureto make this disclosure in an answer may bedeemed to constitute a waiver of the defense.Asserting a reliance on advice of counsel de -fense requires careful consideration as it in -volves waiving the attorney-client privilege.Such decisions rarely can be made up front

Los Angeles Lawyer February 2017 33

34 Los Angeles Lawyer February 2017

in an administrative proceeding but requirethe benefit of discovery, including depositionsand document production, before a defendantcan thoughtfully consider if he or she wishesto make this defense. Requiring this defenseto be asserted early in the process or riskwaiver may be viewed as unfair and as anattempt by the SEC to gain insight into defen-dants’ trial strategy very early in the matter.For these reasons, Amended Rule 220 is trou-bling to defendants and their counsel andseems to go backwards in terms of addressingdue process concerns.

Legislative Efforts

Legislators have also joined the chorus ofcritics of the SEC’s use of administrative pro-ceedings. On October 22, 2015, RepublicanCongressman Scott Garrett of New Jerseyintroduced a bill titled the Due Process Res -toration Act of 2015.35 This proposed legis-lation would amend the Securities and Ex -change Act of 1934 to permit a defendantwithin 20 days of notice of an administrativeproceeding against him or her to terminatethe administrative proceeding if the agencyhas brought charges seeking a cease-and-desist order and a civil penalty.36 The agencywould then be forced to file a complaint infederal district court in order to pursue itsclaims against the defendant.37 The proposed

legislation also raises the burden of proof onthe agency requiring it to establish the defen-dant’s alleged misconduct by “clear and con-vincing evidence” rather than the lower “pre-ponderance of the evidence” standard.38 OnJuly 21, 2016, the Due Process RestorationAct was referred to the Committee of theWhole House on the State of the Union.39

In June 2016, Congressman Hensarling,chairman of the House Financial ServicesCommittee, informally introduced the Fin -ancial Choice Act, which aims to repeal andreplace portions of Dodd-Frank.40 The billwas formally introduced in the House ofRepresentatives on September 9, 2016.41 AHouse committee approved the bill on Sept -ember 12, 2016, and the bill was then referredto the Subcommittee on Regulatory Reform,Commercial and Antitrust Law and the Sub -committee on Commodity Exchanges, Energy,and Credit.42 The Financial Choice Act a f-f ords defendants in SEC administrative pro-ceedings the right to remove the SEC’s caseagainst them to federal district court.43 Whilethese legislative efforts are proceeding at arelatively slow pace, it remains to be seen ifPresident Trump will press for a repeal ofDodd-Frank, which could accelerate the leg-islative process.

Round two’s circuit split may deepen as other circuit courts of appeals consider

whether to side with Lucia or Bandimere.While those cases are underway and theprocess of seeking review of this issue by theU.S. Supreme Court proceeds, it is clear thatthe SEC ap pears to be losing on the ALJissue in the court of public opinion. Criticswonder why when the consequences of anadministrative proceeding are so dire doesthe SEC not elect to have such matters heardon a level playing field by the independentfederal judiciary and juries.44 Critics alsowonder if the SEC has chosen to proceedmore frequently in the administrative arenarather than in the courts because it is easierfor it to prevail there and to control the devel-opment of the securities laws.45 At least onefederal judge has made the point that usingadministrative proceedings more frequentlythan the federal courts impedes the growthand development of the securities laws in thefederal courts, which is to the detriment ofthe public.46

In the face of these questions, adversepublicity for the SEC, and a new presidentalong with anticipated leadership changesat the highest levels of the SEC, it is unclearwhether judicial resolution of these issuesor legislative developments will come first.Judicial resolution will decide whether SECALJ adjudications performed in the pastwere done contrary to the U.S. Constitution

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and if so, what will happen to the thousandsof past SEC ALJ adjudications. Legislativeefforts may permit a defendant in the futureto select whether to proceed in an admin -istrative proceeding or in federal court. Whenfaced with such a choice, defendants arebound to choose the federal courts everytime. n

1 See Jean Eaglesham, SEC Wins With In-House Judges,WALL ST. J. (May 6, 2015) [hereinafter Eaglesham].See also C. Mixter, The SEC’s Administrative LawEnforcement Record, 49 REV. SEC. & COMMODITIES

REG. 6 (Mar. 23, 2016) (from 2006-2015, observingthe SEC’s increasing election of an administrative pro-ceeding rather than a federal court action; over 87%success rate for SEC in administrative proceedingsthat rises to 91% when the SEC’s own review processis taken into account). One professor, however, hascontended that the high success rate for the SEC inALJ proceedings from 2010-2015 “can be attributedto the routine nature of most of the cases filed admin-istratively.” David Zaring, Enforcement Discretion atthe SEC, 94 TEX. L. REV. 1155, 1183 (2016).2 See Andrew Ceresney, Remarks to the American BarAssociation’s Business Law Section Fall Meeting (Nov.21, 2014), available at https://www.sec.gov. A recentarticle analyzing the SEC’s contested ALJ proceedingsin 2015-16 suggests that the SEC recently has limitedits use of its authority under Dodd-Frank to bringactions to an ALJ as opposed to federal court. If thisis true, the SEC has pulled back on ALJ proceedingssilently. The analysis states “[i]t is unclear whetherthe agency has restrained its use of its Dodd-Frank[administrative proceeding] authority based on a liti-gation strategy, as it waits for appellate courts toresolve the pending legal challenges, or a broaderreluctance to transfer a large portfolio of its litigationdocket to the administrative forum.” However, thedata outlined in the article is very small and insufficientto draw any definitive conclusions at this time. SeeDavid Kornblau and Sarah MacDougall, SEC In-House Practice Going Back To ‘Old Normal’, Law360(Nov. 18, 2016), available at https://www.law360.com.3 Hon. Jed. S. Rakoff, Is the S.E.C. Becoming A LawUnto Itself?, Keynote Address at PLI Securities Reg -ulation Institute (Nov. 5, 2014) available at https://secu-ritiesdiary.files.wordpress.com/2014/11/rakoff-pli-speech.pdf [hereinafter Rakoff].4 See Kent Barnett, Op-ed, Due Process vs. Admin -istrative Law, WALL ST. J. (Nov. 15, 2015); GretchenMorgenson, Crying Foul on Plans to Expand theS.E.C.’s In-House Court System, N.Y. TIMES (June26, 2015); David Bario, As the SEC Brings MoreAdministrative Proceedings, Criticism Grows, THE

AMERICAN LAWYER, (Feb. 26, 2015); Russell G. Ryan,Op-ed, The SEC as Prosecutor and Judge, N.Y. TIMES

(Aug. 4, 2014); Gretchen Morgenson, At the S.E.C. aQuestion of Home-Court Edge, N.Y. TIMES (Oct. 5,2013) [hereinafter Morgenson—SEC].5 U.S. CONST. art. II, §2. For a discussion of the casesraising the Appointments Clause issue see infra at 4-6.6 See all sources listed, Supra note 4. 7 Thunder Basin Coal Co. v. Reich, 510 U.S. 200,212-3 (1994).8 See, e.g., Hill v. SEC, 114 F. Supp. 3d 1297 (N.D.Ga. 2015); Duka v. SEC, 103 F. Supp. 3d 382 (S.D.N.Y. 2015).9 See, e.g., Spring Hill Capital Partners, LLC v. SEC,No. 15-CV-04542 (ER) (S.D. N.Y. June 26, 2015);Bebo v. SEC, No. 15-C-3, 2015 WL 905349 (E.D.Wis. Mar. 3, 2015).10 See Bennett v. SEC, No.15-2584, 2016 WL 7321231(4th Cir. Dec. 16, 2016); Hill v. SEC, Nos. 15-12831

and 15-13738, 2016 WL 3361478 (11th Cir. June17, 2016), reh’g denied, (11th Cir. Sept. 6, 2016);Tilton v. SEC, No. 15-2103, 2016 WL 3084795 (2ndCir. June 1, 2016) (Judge Droney wrote a lengthy dis-sent finding that the lower court had jurisdiction toconsider the constitutional argument under ThunderBasin, Id. at *12-18 (2nd Cir. Aug. 23, 2016)); Jarkesyv. SEC, 803 F. 3d 93 (D.C. Cir. 2015); Bebo v. SEC,799 F. 3d 765 (7th Cir. 2015), cert. denied, 136 S.Ct. 1500 (Mar. 28, 2016); see also Duka v. SEC, 124F. Supp. 3d 287 (S.D. N.Y. 2015), vacated andremanded, (2nd Cir. June 13, 2016) (in light of Tilton),reh’g denied, (2nd Cir. Aug. 23, 2016).11 See Raymond J. Lucia Cos., Inc. v. SEC, No. 15-1345, 2016 WL 1460234 (D.C. Cir. Aug. 9, 2016),reh’g en banc petition pending (D.C. Cir. Sept. 23,2016).12 Id.13 Id., slip op. at 11(D.C. Cir. Aug. 9, 2016). 14 Id., Petitioners’ Opening Brief at *35-36 (D.C. Cir.Apr. 13, 2016) (citation omitted).15 Id. at 40 (emphasis in original) (citing Sarah N.Lynch, SEC Judge Who Took On ‘Big Four’ Knownfor Bold Moves, REUTERS (Feb. 2, 2014), available athttp://reuters); Eaglesham, supra note 1.16 Lucia, No. 15-1345, slip op. at 13 (D.C. Cir. Aug.9, 2016).17 Id. (citation omitted).18 Id. at 15.19 Bandimere v. SEC, No. 15-9586 (10th Cir. Dec.27, 2016).20 Id., slip op. at 28.21 Id. at n.36; see also id., concurring op. at 11 (referringto the Commission’s review of ALJ adjudications as“faux ‘de novo’ review”).22 Id., slip op. at n.36.23 Id. at 37.

24 Id.25 Id., dissenting op. at 1-16.26 Id. at 11.27 Id., concurring op. at 1-11.28 Id. at 2.29 SEC Press Release, SEC Adopts Amendments toRules of Practice for Administrative Proceedings (July13, 2016), available at https://www.sec.gov.30 81 Fed. Reg. 50,228-30.31 Margaret A. Dale and Mark D. Harris, SEC AdoptsAmendments to Rules for Administrative Proceedings,N.Y. L.J., Aug. 10, 2016.32 81 Fed. Reg. 50,214.33 81 Fed. Reg. 50,215.34 81 Fed. Reg. 50,226.35 Due Process Restoration Act of 2015, H.R. 3798,114th Cong. §§1, 2, 40 (2015).36 Id. §§2, 40(a).37 Id. §§2, 40(b).38 Id. §§2, 40(c).39 H.R. Rep. No. 114-697 (2016).40 Victoria Finkle, Republicans Unveil Plan to RevampDodd-Frank, N.Y. TIMES (June 7, 2016).41 Financial Choice Act of 2016, H.R. 5983, 114thCong. (2016).42 H.R. 5983, 114th Cong., 162 Cong. Rec. D913-01,at D915, All Action (2016), available at https: //www.congress.gov/bill/114th-congress/house-bill/5983/all-actions?overview=closed#tabs.43 H.R. 5983 §418.44 See Letter from certain partners at Skadden, Arps,Slate, Meagher & Flom LLP to SEC providing commenton proposed amendments to the SEC’s Rules of Practice(Dec. 4, 2015 ), available at https://www.sec.gov; seealso Morgenson—SEC, supra note 4.45 Eaglesham, supra note 1.46 See Rakoff, supra note 3.

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36 Los Angeles Lawyer February 2017

closing argument BY MARSHA C. BRILLIANT

FRUSTRATION SUMS UP MY RECENT EXPERIENCE as an alternatejuror in a Los Angeles County criminal case that lasted about amonth. If you have ever received a jury summons in the mail, youare familiar with the drill—complete the summons, phone the courtto confirm the date and time when you must appear, and show upto wait in the jury assembly room to be called. I did all of that andwas called for a panel that very afternoon. When the courtroomclerk called the juror numbers, however, mine was way down thelist, making my chances of landing on the panel slim. Jury selectionbegan, including completion of a juror’s questionnaire. Toward theend of the third day—when both the defenseand prosecution accepted the jury panel—Ithought that was it as far as my being included,until my number was called as an alternatealong with about five others. A short timelater, when everyone had been dismissed exceptfor one other alternate and me, I was acceptedas first alternate and took the oath.

To be clear, my frustration was not causedby a lack of interest in the case or disappoint-ment in being part of the panel. To the con-trary, I was riveted by the proceedings andfelt that I was fulfilling my duty as a citizen. How then was it possiblethat I would not have an opportunity to deliberate when the casewent to the jury? As the case continued, more and more jurors camedown sick, including me. Amongst the various sounds associatedwith sniffling and hacking, I wondered if just one juror might betoo sick to continue or if some emergency might possibly ariserequiring a panelist to leave. Alas, neither occurred.

When the case went to the jury, my fellow alternate and I wereordered to stay in the jury assembly room and await further instruc-tions. As an alternate, I was not permitted to discuss the case withanyone until the verdict was rendered and all of the jurors wereexcused. Although it might seem that having nearly three uninterrupteddays (including hour-and-a-half lunches) to relax in the jury assemblyroom would be a welcome relief from normal daily life, it all feltlike a waste. I had definite opinions about the prosecution’s case,the various witnesses—including the defendant, who testified—andthe evidence that had been presented. Regardless, I would not havethe opportunity to contribute despite the fact that certain jurors onthe panel were obviously not interested in the case and would likelybring that indifference into their deliberations. That just seemedunfair.

Previous Jury Service

Having previously served as a juror in several criminal cases, I re -called that one shared quality was a group cohesion and intimacyforged by the experience that seemed very real at the time, but endedwhen we went our separate ways after each trial had concluded.While sitting in the jury assembly room during the deliberations, I

watched jurors from other cases come and go, including membersof a jury panel getting their certificates of completion and happilychatting with each other presumably after a job well done. I overheardthese jurors discussing getting together for a barbecue and wasreminded not only of my previous similar interactions with fellowjurors but how that typical juror connection was nonexistent in thiscase with each juror’s coming and going on his or her own withlimited social exchanges.

When the time finally came to take my seat in the jury box towait for the deliberating jurors to return to announce their verdict,

I was nervous and filled with anticipation. Would their decision jibewith my unspoken one? If not, would I understand their reasoning?The answer is mostly “no.” Of the two counts charged against thedefendant, the jury voted to acquit on the first and hung on thesecond, resulting in a mistrial on that count. I would have votedguilty on both counts. After being excused, as we quietly piled intothe elevator to get our certificates in the jury assembly room, andmade our way to the parking garage, I tried to be philosophicalabout the process.

One juror then struck up a conversation with my fellow alternateand me regarding our thoughts on the trial, how we as alternateswould have voted, and how the juror had voted. After the otheralternate left, the juror told me what a terrible experience he hadgone through while deliberating, and how he and one or more otherjurors had been pressured to change their votes. In addition, herelated how the jury foreperson directed the jurors to vote contraryto the court’s jury instructions, which none of the jurors reported tothe bailiff or judge. I, however, reported the jury misconduct to thedistrict attorney’s office.

I still wonder what my experience would have been like had Ibeen allowed to deliberate, but it was obviously not meant to be.Just like pinch hitters are necessary in baseball, so are alternatejurors for trials. Still, the experience felt, and feels, a little incomplete.It’s disappointing not to have a voice even if fate stepped in to makeit so. n

Reflections on the Plight of an Alternate Juror

I was riveted by the proceedings and felt that I was fulfilling my

duty as a citizen. How then was it possible that I would not have

an opportunity to deliberate when the case went to the jury?

Marsha C. Brilliant is a civil litgation and business transactions attorneywith Silver & Arsht in Westlake Village, California.

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