Monday, July 01, 2019

Michigan sets forth new securities rules

By Jay Fishman, J.D.

The Corporations, Securities and Commercial Licensing Bureau within Michigan’s Department of Licensing and Regulatory Affairs has rescinded all of its existing long-time securities rules and replaced them with entirely new rules. The purpose of this revision is to bring Michigan in line with other states that have adopted new rules following their enactment of the Uniform Securities Act of 2002. The Bureau has tried to align Michigan’s rules particularly with those rules adopted in Iowa, Kansas, Minnesota, and Missouri. Additionally, while some of the rules simply incorporate the information from Michigan’s Transition Orders 1 to 6, other rules adopt provisions which are brand new for Michigan, and in some cases contain entire provisions or provision parts that were not adopted in the other four states. The rules take effect July 3, 2019, except for the private fund adviser exemption rule which takes effect January 3, 2020.

The most significant of the new rules are these:

Bad actor disqualification. Current and predecessor issuers, their affiliates, and other specified persons are prohibited from claiming the following Michigan securities registration exemptions if these persons are subject to disqualification under either SEC Regulation D, Rule 506(d) or SEC Regulation A, Rule 262: (1) the not-for-profit organization securities exemption; (2) the note, bond, debenture, evidence of indebtedness transaction exemption secured by a mortgage or other security agreement; (3) the limited private placement offering transaction exemption for offers or sales made to not more than 50 purchasers in Michigan during any consecutive 12-month period; (4) the offer or sale to a non-Michigan resident, non-present-in-Michigan offeree or purchaser exempt transaction if the offer or sale made to them in the other state does not violate that state’s laws; and (5) the Michigan invests locally exemption from securities registration and advertising/filing requirements for offers or sales made relying on 15 U.S.C. 77c(a)(11) and SEC Rule 147 or 147A.

Broker-dealer definition exclusion. A “broker-dealer” does not include either: (a) a “finder” as defined in the Michigan Uniform Securities Act, Section 102(i); or (b) a person whose participation in a securities offer or sale for compensation (direct or indirect) is limited to introducing one or more SEC Rule 501 defined Michigan resident “accredited investors” to a Michigan-incorporated/organized issuer, or to introducing a Michigan incorporated/organized issuer to one or more Michigan resident accredited investors, but solely to facilitate a potential offer or sale of the issuer’s securities in a Michigan issuer transaction.

Merger and acquisition broker exemption. A merger and acquisition broker is exempt from broker-dealer registration unless the broker: (1) directly or indirectly receives, holds, transmits, or has custody of the funds or securities to be exchanged by the transacting parties in connection with an eligible privately held company’s transfer of ownership; (2) engages on an issuer’s behalf in a public offering of any SEC registered or to-be-registered class of securities under Exchange Act Section 12, or if the issuer files Exchange Act Section 15(d) required reports; or (3) engages on any party’s behalf in a public shell company transaction. A merger and acquisition broker is also not exempt from broker-dealer registration if the broker is subject to: (1) Exchange Act Section 15(b) registration-suspension or -revocation provisions; (2) an Exchange Act Section 3(a)(39) statutory disqualification; (3) an SEC Regulation D, Rule 506(d) disqualification; or (4) an Exchange Act Section 15(b)(4)(H) final order.

Private fund adviser exemption. A private fund adviser formed or domiciled in Michigan and a private fund adviser not domiciled in Michigan but offering its fund securities to Michigan residents is exempt from Michigan investment adviser registration if: (1) neither the private fund adviser nor any of its advisory affiliates are subject to SEC Rule 506(d)(1) “bad boy” disqualification provisions; and (2) the private fund adviser electronically files through the IARD the SEC-filed reports and amendments required for exempt reporting advisers by Rule 204-4 of the Investment Advisers Act of 1940. The exemption takes effect when the reports and amendments are filed and accepted by the IARD on Michigan’s behalf. Note that if a private fund adviser is subject to SEC Rule 506(d)(1)’s “bad boy” disqualification provisions, the Administrator may still permit the exemption on a showing of good cause that does not prejudice any other action of the Administrator.

Business continuity and succession planning. Investment advisers must create and maintain a written business continuity and succession plan based on the facts and circumstances of the adviser’s business model including the firm’s size, type and services provided. A plan must provide for at least: (1) the protection, backup, and recovery of books and records; (2) alternative ways to communicate with customers, key personnel, employees, vendors, service providers, third-party custodians, and regulators; communications would include notice of significant business interruption, cessation of business operations, and death or unavailability of key personnel; (3) office relocation when there is a temporary or permanent principal place of business loss; (4) assignment of duties to qualified responsible persons upon the death or unavailability of key personnel; and (5) steps and methods reasonably designed to minimize service disruptions and client harm that could reasonably be anticipated to result from a sudden, significant business interruption.

Michigan Investment Markets application. A Michigan investment market application must, in addition to complying with Michigan Act 451.2455, include: (a) the applicant’s primary street address; (b) the name, title, and telephone number of a contact employee; (c) the name and address of the applicant’s counsel; (d) the date the applicant’s fiscal year end; (e) the applicant's form of incorporation or organization (e.g., corporation, limited liability company, or partnership); and a certificate of good standing from the jurisdiction where the applicant is incorporated or organized; (f) a copy of the constitution, articles of incorporation or organization with all subsequent amendments and existing bylaws; (g) a copy of the corresponding rules of the Michigan investment market (as specified); (h) a copy of all written rulings, settled practices having the effect of rules, and interpretations of the governing board or other committee of the applicant respecting any provisions of the constitution, bylaws, rules, or trading practices of the applicant which are not included above in (g) of this rule; and (i) proof of compliance with Exchange Act Sections 5, 6, and 15, the proof shown, for example, by an SEC no-action letter.

Specified information must also be provided for each of the applicant’s subsidiaries or affiliates, as well as for any entity with whom the applicant has a contract or agreement relating to the operation of an electronic trading system to be used to effect transactions on the Michigan investment market.

Other new rules. Other Michigan new rules reiterate and/or flesh out the notice filing requirement for federal covered security Section 18(b)(2) investment company offerings; the use of the Electronic Filing Depository (EFD); broker-dealer, agent, investment adviser, investment adviser representative and federal covered investment adviser registrations or notice filings, including the use of CRD and IARD; brochure disclosures (for investment advisers); minimum net capital, bonding, recordkeeping, and custody requirements (for investment advisers); the nonprofit organization, limited private placement, and intra industry oil and gas exemptions; electronic signature policy; NASAA policy statement incorporations for securities registrations; recognized securities manuals for the statutory non-issuer transaction exemption for a registered or exempt broker-dealer; and definitions.