Bass, Berry & Sims attorney Chris Lazarini commented on the case of Pransky vs. Falcon Group, Inc. in which the Plaintiff sought to void a Consulting Agreement claiming that the consultant should have been registered as a broker/dealer under the Michigan Securities Act. Chris outlines several factors that regulators contemplate when determining whether an unregistered consultant should, in fact, be registered as a registered broker:
- Active solicitation of potential investors
- Participation in the negotiation of the sales of securities
- Advising on the merits of the potential investment
- Involvement in multiple transactions, and
- Receipt of transaction-based compensation (i.e., “success fees”)
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Pransky vs. Falcon Group, Inc., Nos. 319266 & 319613 (Mich. App., 6/18/15)
A consultant or intermediary who brings together parties who may be interested in a securities transaction, but who does not play an active role in effecting the transaction, may be a finder and not subject to broker/dealer registration requirements.
Plaintiff and Defendant entered into a Consulting Agreement under which Defendant was to assist Plaintiff in obtaining financing for a health spa by introducing Plaintiff to potential investors and/or assisting her in securing a line of credit or mortgage. Plaintiff paid Defendant $20,000 toward an agreed upon $50,000 non-refundable retainer, and agreed to pay additional amounts depending on the amount and type of monies Defendant helped raise. Several months after signing the Consulting Agreement, Plaintiff demanded the return of her $20,000 deposit. Defendant refused, and this suit followed. Plaintiff alleged that Defendant’s activities required it to be registered as a broker/dealer under the Michigan Securities Act (“MSA”), Defendant was not registered and, therefore, the Consulting Agreement was illegal and void. The trial court granted Defendant’s motion for summary judgment, finding that Defendant was engaged in the activities of a “finder” under the MSA and did not have to be registered.
Conducting a de novo review, the state Court of Appeals notes that Plaintiff’s claims concern the legality of the Consulting Agreement which, in turn, depends on whether Defendant could perform the services outlined in the Consulting Agreement without being registered under the MSA. This prompts the Court to conduct a lengthy legislative intent analysis. Although modeled after the Uniform Securities Act, the MSA is unique, in the Court’s view, because it specifically addresses the activities of finders, while the Model Act and other jurisdictions do not. Under the MSA, 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.” The key distinction between “finders,” who do not have to be registered under the MSA, and broker/dealers, investment advisors and their agents, who must be registered, the Court concludes, is that “finders” limit their activities to “participating” in the offer or sale of securities while the latter group plays a more active role in “effecting” securities transactions.
The Court then examines the Consulting Agreement to determine if any of Defendant’s actions would require registration. The Court focuses on the clause requiring Plaintiff to pay Defendant a percentage of monies raised through Defendant’s efforts or connections. The Court concludes that registration is not required, however, because Defendant was not undertaking to advise Plaintiff or anyone else on the value of securities or the advisability of purchasing or selling securities, nor was Defendant undertaking to act as Plaintiff’s agent, even if Plaintiff ultimately issued securities. The Court finds, therefore, that, because Defendant was acting as a finder as defined under the MSA, registration was not required and the Consulting Agreement was not illegal.
Finders operating outside the regulatory rules have long been present in our economic system and may provide effective assistance to small businesses seeking to raise capital. The regulators have often expressed their concerns about the activities of finders and will consider the following factors, among others, in determining whether an unregistered finder has entered the realm of a broker who must be registered: active solicitation of potential investors, participation in the negotiation of the sales of securities, advising on the merits of the potential investment, involvement in multiple transactions, and receipt of transaction-based compensation (i.e., “success fees”). The decision above easily could have gone the other way, had the Court deemed the payment of percentage amounts based on dollars raised to be success fees.