Investor Alert on California IOUs

Investor Alert on California IOUs

Earlier this week I was wondering if investing in California IOUs was a good idea.  Well the answer may be a big fat NO.  The SEC has issued an opinion that California IOUs are “securities,” and therefore those holding the IOUs are entitled to protections provided under federal securities laws.  Holders of the IOUs are protected by securities law provisions prohibiting fraud in the purchase or sale of securities.  This might be a small consolation to those individuals and businesses that are stuck with the IOUs.  Many banks who accepted the IOUs this week are saying they will no longer accept the warrants in the future.

On Thursday, July 9, 2009, the SEC determined that the IOUs are negotiable and can be sold to third parties.  However, the fact that the IOUs are securities does not impact California ’s right to issue or repay the IOUs.  Notwithstanding the fact that the IOUs are “municipal securities,” the SEC says the state is not required to register the securities with the Commission.

But, as a warning to investors, anyone buying or selling the IOUs should be registered as a market intermediary – for example, as a broker, dealer, or municipal securities dealer.  The SEC says the term “registered warrants” given to the IOUs by the state is a misnomer.  The IOUs are in fact not registered with the SEC. The actual terms of the IOUs are available from the state Controller’s office at http://www.sco.ca.gov/5935.html and the state Treasurer’s office at http://www.treasurer.ca.gov/warrants/index.asp.