New Bill to Aid Private Equity Firms Applying for ABC License

The California Senate Committee on Governmental Organization is considering a bill to streamline the process for qualification of private equity firms seeking to hold an interest in a state alcohol beverage license.  SB 796 would add Section 23405.4 to the California Business and Professions Code, which would allow a private equity fund to hold a license and avoid having each and every investor of that fund qualified so long as certain conditions are met.  Those conditions are:

  1. The fund holds a passive interest, meaning that neither the fund nor any manager, employee or agent of the fund has any management, control, or involvement in the licensed business;
  2.  The fund advisors are registered under the federal Investment Advisors Act, and the fund advisors are subject to Section 275.204(b)-1 of Title 17 of the Code of Federal Regulations;
  3. No investor holds more than 10% interest — directly or indirectly — in the fund; and
  4. No investor has direct or indirect control over the investment decisions of the fund.

Although the investors of the fund need not be qualified under the new regulation, the Department of Alcoholic Beverage Control (“ABC”) may require the fund manager to execute an affidavit to confirm compliance with these requirements.

The proposed regulation does not apply to hedge funds, liquidity funds, real estate funds, secured asset funds, and venture capital funds.

Although the fund investors need not each individually submit detailed material and fingerprints in order for the fund to qualify for a license, the regulation specifically states:

“This section is not intended to allow a person, by reason of his or her investment in a private equity fund, to hold an interest in a license issued by the department if that interest is not otherwise permitted under this division.”

In other words, it appears that proposed legislation would bar a private equity fund from qualifying for an alcohol beverage license if any of its investors, for example, holds a disqualifying tied-house interest in another alcohol beverage license.

The full text of SB 796 as introduced on March 12, 2015 can be found here.