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