I am a vendor who is now receiving IOU warrants from the State of CA. Are IOU warrants protected by securities laws?

Question: I am a vendor who is now receiving IOU warrants from the State of California in lieu of payment. Are these IOU warrants protected by securities laws and regulations?

Response:   Yes.  To set the stage – as described by the Securities and Exchange Commission (SEC), on July 2, 2009, “California began issuing the IOUs, or ‘registered warrants,’ . . . to certain individuals and entities, including citizens who were entitled to a tax refund or vendors who were entitled to payments. These IOUs bear interest and are negotiable, which means they can be sold to third parties.”  On July 9, 2009, the SEC released a statement that California's “recently issued IOUs are ‘securities’ under federal securities law.   As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities.” 

Identifying the IOUs as securities creates a regulated secondary market for them, which make it easier for their holders to sell them at a fair price.  The SEC recommended that the IOUs, which carry an annual interest rate of 3.75%, be regulated as municipal debt by the Municipal Securities Rulemaking Board. The Municipal Securities Rulemaking Board, an entity overseen by the SEC Commission, stated in mid-July 2009 that the California warrants are "municipal securities" subject to certain federal securities laws.

If you hold California IOU warrants and are thinking about selling or assigning your rights to these securities you should first consult an experienced securities attorney.  The SEC website also has critical information about the ramifications of such transfers of rights.

Additional Resources:

Answered by Jamilla Moore

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