On January 31, 2014, the U.S. Securities and Exchange Commission’s (SEC) Division of Trading and Markets issued a No-Action Letter (Letter)1 that allows a private business broker (M&A Broker) to receive transaction-based compensation for assisting in effecting sales of privately-held companies without being registered as a broker-dealer under the Securities Exchange Act of 1934 (Exchange Act).

It is important to note that the relief granted in the Letter applies only to federal broker-dealer registration requirements.  M&A Brokers must still consider registration and licensing requirements under state laws that may apply to M&A Brokers.


The registration status of private business brokers was the focus of a 2005 report published by the American Bar Association (ABA). The ABA report noted that private business brokers, sometimes called M&A Brokers, operate only as “finders,” connecting potential buyers and sellers of private companies, and that the traditional broker-dealer registration model would impose significant costs on these brokers.

More recently, the U.S. Congress has introduced legislation, scheduled for consideration in 2014, that would exempt M&A Brokers from SEC registration in certain securities transactions that involve transferring ownership of a privately-held company.3  Importantly, the legislation would be limited to transactions involving companies with annual earnings of less than $25 million and annual gross revenue of less than $250 million.

The SEC No-Action Letter

The Letter permits M&A Brokers to facilitate certain types of securities transactions, including mergers, acquisitions, business sales and business combinations (collectively, M&A Transactions) without registering as a broker-dealer so long as specified conditions (discussed below) are met by the business being sold, the M&A Transaction, the buyer and the M&A Broker.  As explained in the Letter, an M&A Broker is a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.

Conditions for the Business Being Sold.  The business being sold must be a privately-held company. A “privately-held company” is a company that does not have any class of securities registered, or required to be registered with the SEC under Section 12 of the Exchange Act, or does not file, and is not required to file, periodic information, documents or reports under Section 15(d) of the Exchange Act.  The privately-held company must be a “going concern”4 and not a “shell” company.5   Significantly, the size of the privately-held company is not a consideration. 

Conditions for the M&A Transaction.  The relief is limited to a transaction involving the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.  Additionally, the M&A Transaction cannot involve a public offering of securities.  If the M&A Transaction involves an offering or sale of securities, the offering and sale must be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933 (Securities Act).  Moreover, any securities received by the buyer or the M&A Broker in connection with the M&A Transaction must be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

Conditions for the Buyer:  Upon completion of the M&A Transaction, the buyer must “control” and “actively operate” the company.  The necessary “control” would exist if the buyer has the power, directly or indirectly, to direct the management or policies of the company, and will be presumed to exist if the buyer, upon completion of the M&A Transaction, has the right to vote, sell or direct the sale of at least 25% of a class 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% or more of the capital.  The Letter also contemplates that a buyer could “actively operate” the company, among other ways, through the power to elect executive officers and approve the annual budget, or by service as an executive or other executive manager.  But the Letter clarifies that the relief would not cover a buyer that is a shell company upon the conclusion of the M&A Transaction (excluding shell companies formed to complete the M&A Transaction or change the corporate domicile).

Conditions for the M&A Broker:  To rely on the Letter, an M&A Broker cannot take custody, control, or possession, or otherwise handle any funds or securities issued or exchanged in connection with the M&A Transaction.  The M&A Broker also cannot provide financing, either directly or indirectly, for the M&A Transaction.  Nor can the M&A Broker have the authority to bind a party to the M&A Transaction. In addition, the M&A Broker cannot rely on the Letter if any officer, director or employee thereof has been barred from association with a broker-dealer by the SEC, any state, or any self-regulatory organization, or suspended from association with a broker-dealer.

Significantly, the Letter explicitly permits the M&A Broker to provide the following services without being registered as a broker-dealer:

  • Advertise the privately-held company for sale with information such as the description of the business, general location and price range.
  • Assess the value of any securities being sold.
  • Represent both the buyer and seller, so long as the M&A Broker gives both parties clear written disclosure of the joint representation and obtains their written consent.
  • Participate in negotiations for the M&A Transaction.
  • Assist buyers in obtaining financing from unaffiliated third parties, so long as the M&A Broker complies with all applicable requirements, including Regulation T, and discloses to the buyer in writing any compensation received by the M&A Broker for such services.
  • Advise the buyer and seller to issue securities, or otherwise effect the transfer of the privately-owned company by means of securities.

Most importantly, the Letter permits the M&A Broker to receive transaction-based compensation without being registered as a broker-dealer.

1 The SEC’s No-Action Letter, dated January 31, 2014, is available at http://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf.
2 The ABA Report and Recommendation of the Task Force on Private Placement Broker-Dealers, dated June 20, 2005, is available at http://www.sec.gov/info/smallbus/2009gbforum/abareport062005.pdf.
3 H.R. 2274, 113th Congress, 2d Session (introduced October 6, 2013), “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act,” available at http://docs.house.gov/billsthisweek/20140113/BILLS-113hr2274-SUS.pdf.
4 The Letter explains that a “going concern” need not be profitable, and could even be emerging from bankruptcy, so long as it has actually been conducting business, including soliciting or effecting business transactions or engaging in research and development activities.
5 The Letter explains that a “shell” company is a company with no or nominal operations that has (i) no or nominal assets, (ii) assets consisting solely of cash or cash equivalents, or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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