SEC says California IOUs are ‘securities’ under U.S. law


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As expected, the Securities and Exchange Commission late today decided that California’s IOUs are ‘securities’ under the agency’s definition.

The SEC’s move won’t have any effect on the state’s ability to issue the IOUs, because the agency has no jurisdiction over state governments.

Rather, the decision is aimed at limiting the potential for recipients of the IOUs to be defrauded by individuals or companies that offer to buy the scrip, which cash-strapped California is issuing to pay certain of its bills. The state says the IOUs will accrue tax-free interest at a 3.75% annualized rate and will be redeemed for cash on Oct. 2.


‘As securities, the IOUs are subject to the antifraud provisions of the securities laws,’ the SEC said in a statement. ‘As a result, buyers and sellers will have certain rights and remedies for fraud, and the Commission will be able to take action against any person committing fraud in connection with the purchase or sale of an IOU.’

What would constitute fraud? Say an individual decides to act as a dealer, buying IOUs from people who are stuck with them and offering to resell them to others. This individual tells a potential seller, ‘I have it on good authority that the state won’t repay these IOUs as promised on Oct. 2. You’d be smart to take 85 cents on the dollar right now.’

Assuming the state has said nothing about delaying repayment, the would-be dealer could be charged with misrepresentation under federal securities laws.

So the SEC’s move might keep some of the sharks at bay. But there’s a reason why sharks are at the top of the food chain: They’re good at going for the kill.

‘If you hold an IOU and wish to sell it prior to maturity you should consider whether you think you are getting a fair price,’ the SEC says. But how will you know what’s fair? That’s the problem.

Some independent electronic marketplaces, such as, have expressed interest in acting as intermediaries to bring buyers and sellers together. But there won’t be a central market for the IOUs similar to the New York Stock Exchange or Nasdaq for stocks.

And the idea of doing business with someone who has just popped up on the Internet to buy IOUs has caveat venditor written all over it.

The problem for IOU recipients who need immediate cash will become much bigger after Friday, which is the final day that major banks, including Bank of America and Wells Fargo, say they’ll redeem IOUs for customers. California credit unions may be the best alternative: Many say they’ll continue to redeem IOUs in full -- if you’re a member. Go here for a listing.


Californians wouldn’t have to worry about any of this if Sacramento would just pass a fiscal 2010 balanced budget. But the stalemate continues.

Too bad the SEC can’t charge the Legislature and governor with misrepresenting themselves as responsible public servants.

-- Tom Petruno