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The Michigan Securities Act can be a trap for the unwary

The Michigan Securities Act can be a trap for the unwary

The Michigan Securities Act is a far-reaching statute to which many Michigan businesses have never paid significant attention. In the current world, “security” is generally thought to refer to computers and preventing unauthorized persons from entering the computer’s data base and stealing important information. In another sense, the word “security” has a crucial meaning that can spell catastrophe for the unwary. The statute – known as the Michigan Securities Act (the “Act”) is intended to prevent fraud in the sale and marketing of securities, but its reach is not limited to transactions that occur on regulated securities exchanges, such as the New York Stock Exchange.

Basic provisions of the Michigan Securities Act

The Michigan Securities Act makes it unlawful for a person to “employ and device, scheme or artifice to defraud” in connection with the “offer, sale or purchase of any security, directly or indirectly.” Any person who has knowingly or unknowingly resorted to fraud to sell a security has probably violated some section of the Act. The act contains a lengthy and detailed definition of “security” that is too long to repeat in this blog post. In essence, a security is any device by which one person gives money or some other type of consideration in exchange for an interest in some business or enterprise. The person or firm receiving the money is known as the “issuer,” and the person paying the money is usually called the “investor.”

Under this very broad definition, a new business that sells shares of its stock is an issuer, the stock is a “security,” the sale of the stock falls within the meaning of the statute. If the seller makes a false or misleading statement during the course of negotiations with the purchaser of the security, that person could be found guilty of violating the act.

Regulation of advertising

Whenever an issuer uses a written document to interest persons in purchasing a particular security, that document is called a prospectus, and its contents must be reviewed and approved by the Michigan Commissioner of Securities. If the prospectus is found to contain false or misleading statements, the sale of the securities may be postponed indefinitely. This provision of the Act contains several exemptions which may protect small businesses from the requirement of registering an offering.

The sale of an interest that could be defined as a “security” under the Act is a very complex transaction. Anyone considering financing a business venture through the sale of a securities should consult an experienced business attorney about the aspects of the transaction that may fall within the borders of the Act.