California IOUs are Securities, Says SEC Staff

Instruments issued by the state of California during its current budget crisis are securities, advised the SEC staff in an advisory statement. The state issued the instruments, commonly referred to as "IOUs," to individuals who were entitled to a tax refund or vendors who were entitled to payments. The release was staff advice, and did not involve any formal action by the Commission.

The staff stated that these instruments, described as “registered warrants” by the state, are not registered with the SEC because they are municipal securities. There is no registration requirement for such instruments, but the IOUs are subject to the rules of the Municipal Securities Rulemaking Board.

Holders of these IOUs and those who may purchase them are protected by the antifraud provisions of the federal securities laws, advised the staff. In addition, other provisions of the federal securities laws may also apply to the purchase and sale of the IOUs. The staff advised that those acting as intermediaries between buyers and sellers of the warrants may need to register either as brokers, dealers, municipal securities dealers, alternative trading systems or national securities exchanges.

The staff also advised that its characterization of the instruments as securities did not affect California’s right to issue or repay the IOUs.

In addition to the advisory statement, the staff issued an investor alert concerning the IOUs. The staff advised holders of the instruments of the risks of selling the IOUs below face value, and cautioned potential buyers to both know their sellers and to fully understand the terms of the IOU, including state law documentation requirements for transferring and presenting IOUs for payment.