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Section 509(4) – Unregistered, Non-Exempt Broker-Dealers

Section 509(4) of the Michigan Uniform Securities Act states that “[a] person acting as a broker-dealer or agent that sells or buys a security in violation of section 401(1), 402(1), or 506 is liable to the customer.” MCL 451.2509(4) (emphasis added). Section 401(1) of the Act prohibits any person from transacting business in Michigan as a “broker-dealer” unless the person is registered as a broker-dealer or is exempt from registration as a broker-dealer under Section 401(2) or (4). MCL 451.2401.

“Broker-dealer” is defined under the Act as “a person engaged in the business [1] of effecting transactions in securities for the account of others or for the person’s own account,” except for “agent[s]” and “issuer[s]”, and certain other specified classes. MCL 451.2102(d). In cases construing the term “broker-dealer” under the federal Securities Act of 1933, which contains substantially the same definition of the term “broker-dealer” as the Michigan Act, courts have considered several factors when analyzing whether a person or entity qualifies as a broker, including the following: “regular participation in securities transactions, employment with the issuer of the securities, payment by commission as opposed to salary, history of selling the securities of other issuers, involvement in advice to investors and active recruitment of investors.” S.E.C. v George, 426 F3d 786, 797 (6th Cir 2005). “The most important factor in determining whether an individual or entity is a broker” under the Securities Act of 1933 is the “regularity of participation in securities transactions at key points in the chain of distribution.’” SEC v Bravata, 2009 WL 2245649, *2 (ED Mich 2009).

Individuals who “find[] investors for ‘issuers’, even in a ‘consultant’ capacity’ may qualify as securities ‘brokers.’” SEC Guide to Broker-Dealer Registration, 2008; see also, Goldman v Cohen, 123 Mich App 224, 231; 333 NW2d 228 (1983)(concluding, albeit in dicta, that the “plaintiff was engaged in the sale of a security”, not in negotiating the purchase or sale of a business or business opportunity, where the plaintiff sought out a potential investor to invest $300,000 in the defendants’ real estate development project).

However, in the context of the Securities Act of 1933, “a series of cases [have] identified a so-called ‘finder’s exception’ that permits a person or entity to ‘perform a narrow scope of activities without triggering the broker/dealer registration requirements.’” S.E.C. v Kramer, 778 F Supp 2d 1320, 1336 (MD Fla 2011). The finder’s exception has been described as follows:

Merely bringing together the parties to transactions, even those involving the purchase and sale of securities, is not enough” to warrant broker registration under Section 15(a). Rather, the evidence must demonstrate involvement at “key points in the chain of distribution,” such as participating in the negotiation, analyzing the issuer’s financial needs, discussing the details of the transaction, and recommending an investment. Even if the “finder” receives a fee “in proportion to the amount of the sale”-i.e., a percentage of the total payment rather than a flat fee-the Commission (in a series of “no-action” letters) “has been willing to find that there was no need for registration ….” The distinction between a finder and a broker, however, remains largely unexplored, and both the case law and the Commission’s informal, “no-action” letter advice is highly dependent upon the facts of a particular arrangement

Id. (citations omitted).

As stated above, issuers of securities are expressly excluded from the definition of “broker-dealer” under the Act.” “Issuers generally are not ‘brokers’ because they sell securities for their own accounts and not for the accounts of others” and because “they do not . . . sell their securities for their own accounts as part of a regular business.” SEC Guide to Broker-Dealer Registration, 2008. However, “[t]he employees and other related persons of an issuer who assist in selling its securities may be ‘brokers,’ especially if they are paid for selling these securities and have few other duties.” Id.; see also, S.E.C. v Hansen, 1984 WL 2413, at *10 (SDNY 1984).

A plaintiff who prevails on a claim under Section 509(4) of the Act may maintain an action for recovery of actual damages, which are defined in Section 509(2) as “the amount that would be recoverable upon a tender less the value of the security when the purchaser disposed of it and interest at 6% from the date of purchase, costs, and reasonable attorney fees determined by the court.” MCL 451.2509(2), (4).

A person is barred from bringing an action under Section 509(4) against a person transacting business in Michigan as a “broker-dealer” if the action is not commenced within 1 year after the violation occurred. MCL 451.2509(10).

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[1] For a person to be engaged in the “business” of effecting transactions in securities or commodities contracts for purposes of being a broker-dealer, he must have performed such transactions often enough to demonstrate that they are, in fact, part of his business. Heligman v Otto, 161 Mich App 735, 411 NW2d 844 (1987). Under certain circumstances, a person may be deemed to be engaged in the business of effecting transactions in securities where only one securities transaction has been effected. Id.