UPDATE 2-SEC says California IOUs are legal "securities"

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By Jim Christie

SAN FRANCISCO, July 9 (Reuters) - "IOUs" the state of California has issued instead of payments amid its budget crisis are "securities" under U.S. law and their holders and potential buyers are protected by anti-fraud law, federal regulators said on Thursday.

The determination comes amid efforts by some entrepreneurs to establish a secondary market for the IOUs, which the government of the most populous U.S. state began issuing last week to vendors and to taxpayers owed refunds to maintain dwindling cash for priority payments, including payments to its bondholders.

Major banks in California have said they would no longer accept the IOUs, which are technically registered warrants, after Friday. Some analysts have said that decision could speed efforts to set up online trading platforms for the IOUs.

In response, California State Treasurer Bill Lockyer's office earlier this week said it would redeem IOUs sold through eBay (EBAY.O), Craigslist or other means only if accompanied by a notarized bill of sale signed by their listed payee.

More than $350 million worth of the IOUs have been issued since July 2, according to the state controller's office.

"In addition to the anti-fraud provisions of the federal securities laws, other parts of the federal securities laws also apply to the purchase and sale of the IOUs," said a statement issued by the U.S. Securities and Exchange Commission.

"Persons acting as intermediaries between buyers and sellers of the IOUs may need to register as brokers, dealers or municipal securities dealers, or as alternative trading systems or national securities exchanges," it said.

"Broker-dealers, as well as any potential secondary markets, should be aware that the requirements of the securities laws and the rules of the Municipal Securities Rulemaking Board apply to the IOUs."

While the IOUs are labeled as registered warrants, they are not registered with the SEC. "There is no registration requirement that applies because the IOUs are municipal securities," the SEC statement said.

CONCERNS IN STATE CAPITAL

Lockyer spokesman Tom Dresslar said the SEC sent a "clear warning to folks who plan to profit by buying and reselling IOUs: If you're not registered as a municipal securities broker-dealer, you run the risk of violating federal law."

"Recipients of IOUs also should understand that if they sell their IOU to anyone who is not a licensed broker-dealer, they could well have no remedy under federal law if they get victimized ... So, they should check before selling," he said.

The SEC notice came as talks between Gov. Arnold Schwarzenegger and lawmakers to avoid a cash crisis for the state government ground to a standstill. State finance officials plan to issue more than $3 billion of the IOUs this month in anticipation of a prolonged stalemate over closing a state budget gap estimated at $26.3 billion.

Concerns are growing in the state capital of Sacramento should major banks stop accepting the IOUs, which carry a 3.75 percent interest rate and are payable Oct. 2. Recipients would then have to turn to credit unions or to check-cashing storefronts and a secondary market should it emerge.