New Law Exempts M&A Brokers From SEC Registration – Securities

In short

The situation: Congress recently amended the Securities Exchange Act of 1934 (the “Exchange Act”) to exempt certain “M&A brokers” from registering as broker-dealers with the US Securities and Exchange Commission (“SEC”).

The Issue: While the new exemption essentially codifies previously granted no-action relief from the SEC’s Division of Commerce and Markets, its terms are narrower than the previous relief, which applied only to M&A transactions for small entity issuers. The new legislation also does not preempt state law registration requirements for M&A brokers.

Look ahead: After granting the previous SEC no-action relief, some states took steps to provide similar relief at the state level. It remains to be seen whether those and other states will either amend their current requirements or enact new laws or regulations exempting M&A brokers from state registration requirements to match the new statutory federal exemption.

Included in the Consolidated Appropriations Act, 2023 (HR 2617) at page 1080 (the “Act”), signed into law by President Biden on December 29, 2022, is a provision exempting brokers conducting small business M&A from registration with the SEC facilitates. Section 501 of Title V of Division AA of the Act amends Section 15(b) of the Exchange Act by adding a new subsection 15(b)(13), which provides an exemption (the “New Exemption”) from SEC- registration provided for so called “M&A brokers” who meet the conditions of the exemption. A person who meets the conditions of the New Exemption may receive commissions for his brokerage services—a feature of broker-dealer status that typically requires SEC registration—without registering with the SEC as a broker-dealer. The New Exemption is intended to facilitate small business change-of-control transactions and create cost-saving opportunities for small businesses.

Provisions of the New Statutory Exemption

For purposes of the New Exemption, an “M&A broker” is essentially defined as a broker (and its associated persons) engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an “eligible privately held company” by disposing of securities or assets of the qualifying privately held company, if the broker reasonably believes that:

  • Upon completion of the transaction, the buyer will “control” (eg have voting rights or the sale of 25% of the shares of) manage and be active in the management of the eligible privately held company or the business carried on with its acquired assets of the business (for example, by electing executive officers, approving the annual budget, or serving as an executive or other executive manager); and

  • Any buyer, before being legally bound to complete the transaction, has received or has reasonable access to various disclosure documents, including, without limitation, the company’s most recent fiscal year-end financial statements, as well as information relating to the management, business, results of operations, and material loss contingencies of the issuer.

To be a “qualifying privately held company,” the acquired company must (i) not have any class of securities registered with the SEC pursuant to Exchange Act Section 12 or subject to Section 15(d) filing obligations; and (ii) in the fiscal year prior to the appointment of the M&A broker, (a) have earnings of less than $25 million before interest, taxes, depreciation and amortization and/or (b) gross revenue of less than $250 million.

The New Exemption contains a list of activities which, if carried out by the M&A broker, would prevent it from benefiting from the exemption. These activities include, among others:

  • Directly or indirectly, receiving, holding, transferring, or custody of funds or securities of the parties in connection with the transaction;

  • To engage in a transaction involving a shell company, other than a business combination-related shell company formed solely for purposes of the transaction;

  • Directly, or indirectly through any of its affiliates, provide financing to a party to the transaction;

  • To assist any party in obtaining financing from an unaffiliated third party without (i) complying with all other applicable laws in connection with such assistance, including, if applicable, Regulation T; and (ii) disclose any compensation in writing to the party;

  • Representing both the buyer and the seller in the same transaction without providing written disclosure about the parties being represented and obtaining written consent of both parties to the joint representation;

  • Help form a group of buyers to acquire the eligible private company;

  • To engage in a transaction involving the transfer of ownership of an eligible private company to a passive purchaser or group of passive purchasers; and

  • Binding of a party to a transfer of ownership of a qualifying private company.

Further, to qualify for the New Exemption, neither the M&A broker nor its associates can be prohibited by the SEC, any state, or any self-regulatory organization (ie, an exchange or FINRA) from associating with a broker or dealer . suspended from association with a broker or dealer.

Previous SEC No-Action Relief in the Area is still in effect

The New Exemption is similar to relief previously provided by the staff of the SEC’s Division of Trading and Markets in its “M&A Brokers” 2014 No-Action Letter (the “SEC No-Action Letter”), but there are some significant differences. For example, while the SEC No-Action Letter applies to transactions involving private companies of any size, the New Exemption is limited to transactions involving a change of control of small business entities. However, the New Exemption expressly states that it does not limit the authority of the SEC to exempt any person from any provision of the Exchange Act, so M&A brokers should still be able to rely on the SEC No-Action Letter if they engage in M&A transactions involving larger private issuers and meet the conditions for that relief.

In addition, the SEC No-Action Letter provides relief, in part, on the fact that “[a]Securities received by the buyer or M&A broker in an M&A transaction will be ‘restricted securities’ within the meaning of Rule 144(a)(3) under the Securities Act of 1933 (the “Securities Act”) because the securities would have been issued in a transaction not involving a public offering.” Even though new Section 15(b)(13) does not expressly address the status (ie, restricted or otherwise) of any securities transferred in ‘ A transaction facilitated by an M&A broker in terms of the New Exemption will nevertheless require the acquirer to determine, as part of its compliance with the Securities Act, whether any securities it receives in such a transaction are restricted securities. Also, while the New Exemption only requires that the M&A broker has a reasonable belief that the buyer will control and be actively involved in the management of the qualifying private company, the SEC No-Action Letter requires that the buyer actuallycontrol and actively manage the private company.

Congress did not preempt state securities laws

Importantly, the New Exemption does not appear to preempt the registration of state law brokers or other requirements. In the wake of the 2014 No-Action Letter, the North American Securities Administrators Association (“NASAA”), an association representing state and local securities regulators in the United States, Canada and Mexico, developed a model rule (the ” Model Rule”) “) which, if adopted by a state, would exempt certain M&A brokers from state broker registration. As of November 2020, at least 19 states have adopted some form of exempt relief based on the model rule, the SEC No. -Action Letter, or a combination of both.

The provisions of the Model Rule, the SEC No-Action Letter, and the New Release differ from each other. For example, the model rule does not incorporate many of the restrictions on the activities of an M&A broker found in those other exemptions. Similarly, similar to the New Exemption, the Model Rule only requires that the M&A broker have a “reasonable belief” that the buyer will control and be actively involved in the management of the qualifying privately held company and does not require actual control and management not. required by the SEC No-Action Letter. The Model Rule also differs from the others in that it defines “control” of a privately held company as at least a 20% voting interest in the company, instead of at least a 25% voting interest to “control” for Exchange Act purposes to establish registration. purposes. Finally, unlike the SEC No-Action Letter, but similar to the New Exemption, the Model Rule imposes limits on the size of the acquired private company (either $25 million in earnings or $250 million in gross revenue). It remains to be seen whether any of the various states will adopt new exemptions or modify their current M&A broker exemptions to fit the provisions of the New Exemption.

Accordingly, even where an M&A broker is exempt from federal registration as a broker-dealer under either the New Exemption or the SEC No-Action Letter, the M&A broker must assure itself that it is not required to register with any particular state to register as a result. of its M&A brokerage activity in or with residents of that state.

The New Exemption is effective 90 days after entry into force (ie on 29 March 2023).

Three key takeaways

  1. Congress enacted a new conditional statutory exemption from federal broker-dealer registration for M&A brokers who facilitate change-of-control transactions involving certain small private companies.

  2. M&A brokers facilitating change-of-control transactions involving larger private issuers can still rely on the SEC staff’s 2014 M&A Broker No-Action Letter to avoid having to register with the SEC as a broker-dealer.

  3. Because the new exemption does not preempt state law, persons relying on the new statutory exemption to avoid SEC registration will nonetheless need to determine whether they are subject to broker-dealer registration under applicable state law.

The content of this article is intended to provide a general guide to the topic. Specialist advice should be sought regarding your particular circumstances.


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