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Michigan Securities Law will Change Dramatically on October 1, 2009

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Matt G. Hrebec & Joel C. Farrar
Foster Swift Business & Corporate Law Update
October 2009

Important changes to Michigan’s securities laws will become effective on October 1, 2009. On that date, Michigan’s current Uniform Securities Act, which was enacted in 1964, will be replaced by the new Uniform Securities Act (2002) (the "Act"). The Act is based on the model law drafted by the National Conference of Commissioners on Uniform State Laws in 2002 and is intended to better align securities regulation in Michigan with federal law. Some of the Act’s most important changes are summarized below.

The Act makes major changes to the exemptions available from Michigan’s securities registration requirements. Most importantly, the Act revises and simplifies Michigan’s limited offering exemption. The revised exemption provides that sales by an issuer to 25 or fewer purchasers (excluding sales to institutional investors, federal investment advisers, and certain other persons) in Michigan during any 12-month period are exempt from registration if the issuer does not (1) engage in general solicitation or advertising, (2) pay a commission to anyone other than a Michigan-registered broker-dealer, or (3) knowingly sell the securities to individual Michigan residents who are purchasing for purposes other than investment. The Act also creates a new notice filing provision for "federal covered securities," and makes changes to many of the other exemptions that are available under current law.

The Act also affects the regulation of Michigan broker-dealers, "finders," and investment advisers. Importantly, for the first time investment adviser representatives will be required to register in Michigan unless exempted from the requirement. The Act provides few details on the registration requirement, which will likely be set forth in regulations issued by Michigan’s Office of Financial Insurance Regulation ("OFIR"), the agency with authority to interpret and enforce the Act. OFIR has issued temporary guidance whereby an investment adviser representative that is employed by or associated with a properly registered (or exempt) investment adviser is deemed to be exempt from registration through July 1, 2010, so long as the representative completes the registration process before July 1, 2010. Applications should be submitted by January 1, 2010, however, to provide sufficient lead time. Applicants will be required to comply with all web CRD/IARD registration requirements, and are also required to take and pass, within two years of the date of application, the S7 examination and either the S65 or S66 examinations, subject to certain exceptions. The Act will also require that a "finder" register as a broker-dealer, rather than as a type of investment adviser as required by current law. A "finder" is a person who, for consideration, participates in the offer to sell, sale or purchase of securities by locating, introducing or referring potential purchasers or sellers." Also notable, the Act does not prohibit, as does current law, an investment adviser from taking custody of clients’ funds or securities or accepting performance- based fees; however, OFIR has broad authority under the Act to issue rules or orders that prohibit or limit these activities.

Another important change from current law that might affect closely-held businesses in Michigan is the new rule that allows a seller to hold a purchaser liable for securities fraud. This new rule might permit a minority shareholder or member that is bought-out of a closely-held business to successfully sue the majority shareholder(s) or company for securities fraud in connection with the buyout. The Act will also increase issuers’ exposure to civil liability by enhancing OFIR’s enforcement authority and increasing civil penalties.

Finally, the Act contains transitional rules that determine whether current law or the Act will govern a securities transaction. Current law will continue to govern all causes of action based on events that occur before October 9, 2009, provided that such actions must be brought by October 9, 2012 or be barred. What’s more, current law will also continue to govern offers and sales of securities that are made before October 9, 2010 if such offers and sales are made pursuant to an offering made in good faith before October 9, 2010 based on an exemption available under current law.