Pransky v. Falcon Group, Inc.: Should “Finders” take solace?
The Michigan Court of Appeals in Pransky v. Falcon Group Inc. held that under Michigan’s Uniform Securities Act, MCL 451.2101 et seq. (“Securities Act”), finders, as defined in the Securities Act, are not required to register with the state as a “broker-dealer,” “agent” or “investment advisor.” While the Pransky Court seems to give finders a reason to rejoice, finders should remain wary since the holding in Pransky is severely limited by the facts of the case. Further, at the federal level, the Securities and Exchange Commission (“SEC”) has maintained its position that transaction-based compensation, the most typical compensation arrangement for finders, is a hallmark of broker-dealer status.
The Plaintiff in Pransky intended to open a wellness spa and entered into a consulting agreement with Falcon Group, whom she claimed promised to find investors for her spa. The consulting agreement represented that Falcon Group was in the business of providing non-legal advice and consulting services to individuals and to business entities concerning, among other matters: mergers and acquisitions, business opportunities, business operations, and financial issues and concerns. Upon executing the consulting agreement, Plaintiff agreed to pay Falcon Group a $50,000 non-refundable retainer, payable in two installments. The first $20,000 installment was paid at the time the consulting agreement was executed, and the remaining $30,000 was due upon receipt of the first investment. Further, the consulting agreement provided that Plaintiff would pay Falcon Group: (1) a “Success Fee” if Plaintiff was able to sell her business through Falcon Group’s efforts, (2) a fee of 10% of any money Falcon Group raised or cause to be raised by its efforts or through its connections, and (3) a fee of 3% of any financing that she might obtain through Falcon Group’s efforts or connections. Upon discovering that Falcon Group was not registered as a broker-dealer under the Securities Act, Plaintiff believed Falcon Group could not legally perform the services required by the consulting agreement. Plaintiff filed suit requesting rescission of the consulting agreement and return of the $20,000 retainer, which the trial court denied. On appeal, Plaintiff argued the trial court erred and reiterated her claim that the consulting agreement was illegal and void because Falcon Group acted as a finder and, thereby, was required to be registered as a broker-dealer.
The Court of Appeals began its analysis by reiterating that a party may rescind an agreement made in violation of the Securities Act. The Court explained that Plaintiff’s claims hinged on the legality of the consulting agreement. As such, the Court did not delve into a factual analysis of the types of services Falcon Group actually provided after entering into the consulting agreement.
The Court of Appeals held that finders are not required to register with the state as long as they constrain their activities to those stated under MCL 451.2102(i), which defines a finder as 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 Court agreed with the lower court’s conclusion that Falcon Group could in theory perform the required services outlined in the consulting agreement without being registered as a broker-dealer, agent or investment adviser, and as a result Plaintiff could not establish the illegality of the consulting agreement. Therefore, the Court held that Plaintiff’s claims failed.
Finders should be cautious about placing much stock in the Pransky decision. The Court clarified that it “offers no opinion as to whether Falcon Group might have violated the Securities Act during the performance of its obligations.” Rather, the Court limited its analysis to the consulting agreement. Moreover, it seems likely that this case would have had a different outcome had the relationship between the Plaintiff and Falcon Group proceeded further. If Falcon Group had secured an investor or if the suit had been filed by an actual investor, the acts of the finder may well have been found to have exceeded the scope of MCL 451.2102(i).
While the Court of Appeals has, to some extent, provided a justification for finders to avoid registration as broker-dealers, finders and businesses that utilize finders should be very vigilant and seek legal counsel before entering into such arrangements because risks remain and the factual circumstances of each case will carry great weight. More significantly, on a federal level, the SEC has stated that “[t]he SEC and SEC staff have long viewed receipt of transaction-based compensation [as] a hallmark of being a broker.” The SEC has been aggressive in pursuing unregistered broker-dealers and is not constrained by a ruling, like Pransky, which does not apply at the federal level for activities involving interstate commerce. Use of an unregistered broker-dealer in a securities offering may result in the loss of the exemption from registration of the securities and can provide investors with a right of rescission. Obviously, such severe consequences create serious obstacles to the activities of finders which are not necessarily ameliorated by the Pransky decision.
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