SEC No-Action Letter Provides Relief from Broker-Dealer Registration for M&A Brokers


On January 31, 2014, the SEC Division of Trading and Markets issued a no-action letter to Faith Colish and five other lawyers providing relief from broker-dealer registration for M&A Brokers engaged in activities related to the purchase or sale of a privately held company (the “M&A Broker Letter”).  The term “M&A Broker” is defined, for purposes of the letter, as “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.”

The M&A Broker Letter represents a new direction in guidance for unregistered persons advising companies in M&A transactions.  The two prior no-action letters in the area, International Business Exchange Corporation, SEC No-Action Letter (pub. avail. Dec. 12, 1986) and Country Business, Inc., SEC No-Action Letter (pub. avail. Nov. 8, 2006), focused on the question of whether the broker was engaged in the business of effecting transactions in securities and placed limitations on the way the broker could be paid and the ability of the broker to negotiate a securities transaction in connection with the sale of a business.  The M&A Broker Letter, by contrast, permits the M&A Broker to be engaged in the business of effecting securities transactions in connection with its business as an M&A Broker provided the conditions of the letter are met.

Additional definitions

The M&A Broker Letter uses the following additional defined terms:

  • Privately held company:  a company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15(d) of the Exchange Act.  A privately held company subject to the letter must be an operating company that is a going concern and not a shell company.
  • Shell company:  a company that (1) has no or nominal operations and (2) has (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.
  • Business combination related shell company:  a shell company that is (1) formed by an entity that is not a shell company solely for the purpose of changing the corporate domicile of that entity solely within the United States or (2) formed by an entity defined in Section 165(f) of the Securities Act of 1933 (the “Securities Act”) among one or more entities other than the shell company, none of which is a shell company.
  • Control:  a buyer, or group of buyers collectively, will have the necessary control of a company following the M&A transaction if it has the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract or otherwise.  The necessary control will be presumed to exist of, upon completion of the transaction, the buyer or group of buyers has the right to vote 24% or more of a class of voting securities; has the power to sell or direct the sale of 25% or more 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.

Conditions to Acting as an M&A Broker

The M&A Broker Letter lists the following 10 conditions to the availability of relief from broker-dealer registration for an M&A broker:

  1. The M&A Broker must not have the ability to bind a party to an M&A transaction.
  2. An M&A Broker may not, directly or indirectly through any of its affiliates, provide financing for an M&A transaction.  An M&A Broker may assist purchasers in obtaining financing from unaffiliated third parties and must disclose any compensation in connection with the financing in writing to the client.
  3. The M&A Broker may not have custody, control or possession of, or otherwise handle, funds or securities issued or exchanged in connection with the M&A transaction or other securities transaction for the account of others.
  4. The M&A transaction may not involve a public offering.
  5. To the extent an M&A Broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  6. If the M&A transaction will involve a group of buyers, the M&A Broker may not assist in forming the group of buyers.
  7. The buyer, or group of buyers, will, upon completion of the transaction, control the company (as defined in the letter) and actively operate the company or business conducted with the purchased assets.
  8. No M&A transaction may result in the transfer of interests to a passive buyer or group of passive buyers.
  9. Any 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 because the securities will have been issued in a transaction not involving a public offering.
  10. The M&A Broker (and, if the M&A Broker is an entity, each officer, director or employee of the M&A Broker): (i) has not been barred from association with a broker‑dealer by the SEC, FINRA or any state regulator and (ii) is not suspended from association with a broker-dealer.

State Law Regulation Not Affected

State laws requiring registration as a broker or dealer are not preempted or otherwise affected by the SEC no-action letter.  M&A brokers will need to determine whether they have exemptions or exclusions available in any state where they plan to do business, or register with the state securities administrator.

M&A Brokers, SEC No-Action Letter (pub. avail. January 31, 2014 (revised Feb. 4, 2014)).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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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