Corporate and Securities

M&A Brokers Find Relief from SEC Registration

By Christian P. Fonss, Esq. and Mariel I. Estigarribia, Esq.

On January 31, 2014, the Securities and Exchange Commission, Division of Trading and Markets issued a letter of no-action (“No-Action Letter”) in response to a request by six attorneys from multiple law firms to grant intermediary business brokers also known as M&A Brokers (as the term is defined in the No-Action Letter) relief from registration under Section 15(b) of the Securities Exchange Act of 1934 (’34 Act). The No-Action Letter essentially allows M&A Brokers to receive transaction-based compensation for their involvement in the sale/purchase of a business under certain circumstances without having to register as a broker-dealer under Section 15(b) of the ’34 Act (although state registration may be required). In addition, it expands the limited relief that was previously granted to M&A Brokers in previous no-action letters by allowing a greater level of participation in the M&A transaction by the M&A Broker and doing away with the size requirement of the selling company.


Summary of Circumstances/Requirements to Receive Relief under the No-Action Letter

The SEC makes clear that the No-Action Letter applies only in circumstances where the M&A Broker is servicing (1) a privately held business (one that does not have securities registered or required to be registered with the SEC under Section 12 of the ’34 Act and is not subject to the public reporting requirements of Section 15(d) of the ’34 Act); and(2) an operating company that is a going concern.

In addition, the M&A transaction itself must adhere to the following requirements:

  1. The M&A transaction must not involve a public offering of securities;
  2. The M&A transaction must involve a sale to a buyer (or a group of buyers not formed by the M&A Broker) who will have control in the company after the M&A transaction is consummated. Control would exist if the buyer has the power, directly or indirectly, to direct the management or policies of the acquired company and would be presumed to exist if the buyer has the right to vote, sell, or direct the sale of at least 25 percent of voting securities or, in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25 percent or more of the capital;
  3. The M&A transaction must involve buyers that are seeking to actively manage the acquired company post-transaction;
  4. The M&A transaction must be in compliance with an applicable exemption from registration under the Securities Act of 1933; and
  5. The M&A transaction must not involve a buyer that would cease to be a shell company upon consummation of the transaction (other than a shell company formed specifically for purposes of the M&A transaction or to change corporate domicile).

To take advantage of the No-Action Letter, the M&A Broker must refrain from 1) binding a party to the M&A transaction; 2) having custody, control, or possession of, or otherwise handling, funds or securities issued or exchanged in connection with the M&A transaction or any other securities transaction for the account of others; and 3) providing financing for the M&A transaction, directly or indirectly, through affiliates.

M&A Brokers may not take advantage of this No-Action Letter if the M&A Broker has been barred by the SEC, any state or U.S jurisdiction or FINRA from association with a broker-dealer, or suspended from association with a broker-dealer.


Permitted M&A Broker Activity

Assuming the above requirements are met, the No-Action Letter allows the M&A Broker to 1) receive transaction-based compensation; 2) represent either or both parties, so long as, in the case of joint representation, there is disclosure of joint party representation and written consent is obtained by all parties; 3) participate in the transaction, including negotiations; 4) assess the value of the securities being sold; 5) advertise the company/business for sale with general description of business, geography and price range; 6) advise parties to issue securities or effect the transfer of the business by means of securities; and 7) provide assistance in obtaining financing from an unaffiliated third party provided certain restrictions/disclosure requirements are followed.

Klinedinst’s Corporate, Transactional and Securities team represents public companies, privately held businesses, startups, investors, entrepreneurs and other market participants with respect to public and private issuances of debt and equity, mergers and acquisitions, contract negotiations, corporate governance and securities-related matters. The opinions expressed in this newsletter are general in nature, and are not meant to provide specific legal advice. For more information, please contact Christian Fonss or Mariel Estigarribia. No attorney/client privilege is created or assumed by reading this newsletter.