California IOUs are legal "securities": SEC

SAN FRANCISCO (Reuters) - "IOUs" the state of California has been issuing instead of payments to vendors and citizens for tax refunds amid its budget crisis are "securities" under U.S. law and their holders and potential buyers are protected by anti-fraud legislation, 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 maintain its 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.

More than $350 million worth of the IOUs have been issued since July 2, according to the office of California State Controller John Chiang.

"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."

Although 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.