By Jay Fishman, J.D.
Michigan is the first state to legalize the creation of a secondary market for privately crowdfunded securities now that Governor Rick Snyder signed House Bill 5273. The bill, complementing January 2014-effective crowdfunding legislation, allows broker-dealers to sell Michigan securities on the secondary market for investors having an equity ownership in Michigan businesses.
Legislative specifics. The legislation, placed in Michigan’s Uniform Securities Act as new article 4A, does the following:
- Defines an “intrastate offering exemption” as an exemption in section 451.2202a or any other from federal securities regulation under Securities Act, Section 3(a)(11) and Rule 147. And defines a “Michigan investment market,” as well as the terms “online,” “personal identifying information,” “resident of this state,” “service,” and “web portal”;
- Requires that only a Michigan-registered investment market transacts business in the state, by submitting a written application, consent to service of process, fee and other prescribed information;
- Mandates that the Michigan-registered or to-be-registered investment market create, maintain and preserve for at least seven years after the transaction date, written or electronic records of each transaction conducted between users through the investment market;
- Requires the Administrator to publish the Michigan investment market’s notice filing on the Administrator’s managed website where interested persons can submit written comments about the application, and where the administrator may revoke, suspend, condition or limit the investment market’s registration and/or impose a civil fine for violations; and
- Prohibits a Michigan investment market from: (1) servicing a business that has already used a portal, market or exchange to facilitate a secondary market for intrastate securities; (2) selling an individual’s personal identifying information to a third party without the individual’s consent; (3) effecting transactions except with Michigan residents; or (4) engaging in Michigan-specified fraudulent activities.
In addition to new article 4A, existing article 2’s exempt transaction section adds an exemption for any secondary market offer, sale, purchase or trade of securities facilitated by a Michigan investment market, provided this market effects the transaction in accordance with article 4A, and has made available to any secondary purchaser, within a reasonable period before effecting the transaction, general management and financial information about the securities issuer which includes the issuer’s preceding calendar or fiscal year’s financial documents, as well as interim financial information as of the issuer’s most recent calendar or fiscal quarter-end.
Lastly, existing article 4’s broker-dealer registration section adds a broker-dealer exemption for “a person that is registered as a Michigan investment market under article 4A and that deals in securities solely in its capacity as a Michigan investment market.