New Congressional Bill Would Exempt Business Brokers From Full SEC/FINRA Broker Registration

by Pepper Hamilton LLP

On November 4, 2013, the U.S. House of Representatives Committee on Financial Services, by a 57-0 vote,1 ordered H.R. 2274 to be reported for further consideration. The bill, named the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013” (H.R. 2274) would create a new class of “broker” (a so called "M&A broker")2 that would be exempt from most of the time-consuming requirements currently required of brokers, and direct the U.S. Securities and Exchange Commission (SEC) to implement regulations and interpretive guidance. M&A brokers would remain subject to the anti-fraud rule (just like registered brokers) and they would be required to establish, maintain and enforce written supervisory procedures governing their operations. M&A broker personnel would be required to meet the “standards of training, experience, competence, and such other qualifications as the [SEC] finds necessary or appropriate in the public interest or for the protection of investors,” just like registered representatives of fully registered brokers must. The SEC will have to define this by rule; traditionally, this requirement was satisfied by passing appropriate tests and maintaining appropriate licenses.

Pepper Point: Under the current regulatory scheme, broker-dealers engage in the buying and selling of securities either for their own account or for the accounts of others. Brokers often also engage in underwriting and other complex activities. For such parties, the current registration process is generally viewed as reasonable. However, there has always been a class of “brokers” who have a more limited role (i.e., M&A  services for small transactions and issues, and/or private placement related activities) and within the last few years, the process of becoming registered as a “$5,000 net capital”3 broker to conduct such activities has become significantly more involved and time-consuming. Currently, the time and work to register (or effect a change of control of) a $5,000 net capital broker that intends to engage in a few dozen transactions a year with sophisticated parties can approach what is required to register a small broker with a retail business.

Pepper Point: The expense of registration and compliance with the current scheme has led many smaller operations to: (a) become registered brokers; or (b) make arrangements with registered brokers that introduce varying (and sometimes quite significant) levels of cost and complexity to meet regulatory standards; or (c) restrict their business models; or (d) rely on the so-called “finder’s exceptions,” as applicable.

If adopted, the new, limited-scope M&A brokers envisioned by H.R. 2274 could engage in smaller fund-raising activities that are a common activity of $5,000 net capital brokers. The “broker” activities of an M&A broker would be limited to effecting the transfer of ownership of eligible privately held companies (regardless of whether the M&A broker acts on behalf of a seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company). In all cases, the new M&A broker would be required to “reasonably believe” that:

(1) upon consummation of the transaction, any person acquiring securities or assets of the eligible privately held company, acting alone or in concert, will control4 and, directly or indirectly, will be active in the management of the eligible privately held company5 or the business conducted with the assets of the eligible privately held company; and

(2) if any person is offered securities in exchange for securities or assets of the eligible privately held company (i.e., a non-cash deal), such person will, prior to becoming legally bound to consummate the transaction, receive or have reasonable access to the most recent year-end balance sheet, income statement, statement of changes in financial position, and statement of owner’s equity of the issuer of the securities offered in exchange, and, if the financial statements of the issuer are audited, the related report of the independent auditor, a balance sheet dated not more than 120 days before the date of the offer, and information pertaining to the management, business, results of operations for the period covered by the foregoing financial statements, and material loss contingencies of the issuer.

New M&A brokers would also be prohibited, in connection with the transfer of ownership interests in eligible privately held companies, from directly or indirectly receiving, holding, transmitting, or having custody of the funds or securities to be exchanged by the parties. M&A brokers also could not engage on behalf of an issuer in a public offering.

Under H.R. 2274 if enacted, registration for M&A brokers would be accomplished by “notice filing” – i.e., filing with the SEC an “electronic notice in such form and containing such information concerning the M&A broker and any persons associated with the M&A broker as the [SEC] may by rule prescribe as necessary or appropriate in the public interest or for the protection of investors.” Registration would be effective on receipt by the SEC of a “properly completed notice” (no delay for any review) unless the M&A broker or a person associated with the M&A broker had a significant negative disciplinary history.6 Updated filings would be required if information becomes inaccurate or incomplete in any material respect and filings would be available to the public.

H.R. 2274 anticipates that the SEC may (and, in practical terms, likely would) require M&A brokers to deliver to their clients a disclosure document describing their entity, their fees, and the affiliates, associated persons, services, any conflicts of interest of the M&A broker, “and such other information as the [SEC] considers necessary or appropriate in the public interest or for the protection of investors.”

Under a sub-section entitled “State Law Preemption,” H.R. 2274 states “Subsection (i)(1) shall govern the relationship between the requirements applicable to M&A brokers under this Act and the requirements applicable to M&A brokers under the law of a State or a political subdivision of a State. Except as provided in such subsection, this paragraph shall not preempt the law of a State or a political subdivision of a State applicable to M&A brokers.”

What is actually intended by this provision is not fully clear. The reference is to Section 15(i)(1) of the Exchange Act, which provides that state and local laws, rules or regulations may not establish capital, custody, margin, financial responsibility, record keeping, bonding, or financial or operational reporting requirements for brokers or select other entities different from or in addition to Exchange Act standards. Thus, the “preemption” paragraph appears to refer to a limited preemption already in the Exchange Act addressing books and records, and reporting requirements.

Pepper Point: The “gray area” surrounding unlicensed “finders” has caused much consternation of late as the SEC has made noise about flushing out and bringing to heel unlicensed persons acting as brokers under current law. Some recent high-profile enforcement actions have bared the regulatory teeth. At this moment, an unlicensed person cannot share fees with a licensed person and may not be paid or receive a success fee. The unlicensed person's role is limited to “consultative services,” like marketing advice and accounting services. We see H.R. 2274 as another move by Congress to be perceived as “business friendly,” continuing a theme first in evidence in the Jumpstart Our Business Startups Act (JOBS Act) of 2012, with the relaxation of the prohibition on general solicitation in private placements and the adoption of “funding portal” legislation for small crowdfunding operations (the latter still awaits final implementing regulations from the SEC).

Pepper Point: As currently drafted, H.R. 2274 would allow parties that meet the definition of an M&A broker and who do not also assist in non-M&A private financings (or, if they do engage in non-M&A financing activity, can rely on some other exception or mechanism) to conduct their business in a less regulatorily burdensome manner than they do now. If H.R. 2274 becomes law, we would expect most states (to the extent permitted) to require M&A brokers who meet the “broker” provisions of local state law to “notice file” and pay state fees as if they were a fully registered standard broker. We would also expect at least select states (to the extent permitted) to add on an enhanced qualification and/or disclosure process. Further, we would expect the states (to the extent not preempted) and possibly also the SEC to apply some form of testing and qualification standards for personnel of an M&A broker. In short, the M&A broker route would become a form of “broker-light” registration but still involve significant work by the broker and its employees and associates to register and stay in compliance.

H.R. 2274 is still just a proposed bill. Without a strong “legislative vehicle” on which to piggyback, its future is unclear. We will keep you apprised of developments.


1 Recorded vote available at

2 Of course, registered traditional brokers could also still conduct M&A activities.

3 Referring to the nominal minimum amount of regulatory capital that Security Exchange Act of 1934 Rule 15c3-1 requires of a “broker or dealer that does not receive, directly or indirectly, or hold funds or securities for, or owe funds or securities to, customers and does not carry accounts of, or for, customers and does not engage in any [select other activities.]”

4 Meaning having the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. There is a presumption of control for any person who is a director, general partner, member or manager of a limited liability company, or officer exercising executive responsibility (or who has similar status or functions); has the right to vote 25 percent or more of a class of voting securities or the power to sell or direct the sale of 25 percent 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 percent or more of the capital.

5 In H.R. 2274, the term “eligible privately held company” means a company that (1) has no class of securities registered or required to be registered with the SEC under Section 12 (i.e., traditional public companies) or that is required to make filings under Section 15(d) (companies that have made a “public offering” and have such publicly offered securities outstanding, but are not listed on an exchange); and (2) in the fiscal year ending immediately before the fiscal year in which the services of the M&A broker are initially engaged with respect to a securities transaction, the company meets either or both of the following conditions (determined in accordance with the historical financial accounting records of the company): (a) has EBITDA of less than $25 million and/or (b) gross revenues of less than $250 million (in both cases to be periodically adjusted by the SEC to compensate for inflation).

6 Specifically, if the M&A broker or a person associated with the M&A broker is subject to (1) suspension or revocation of registration, (2) a statutory disqualification (such as certain misdemeanor and all felony criminal convictions for a period of ten years from the date of conviction), or (3) disqualification under the rules adopted by the SEC under Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (in each case with the date of a notice filing with the SEC being the relevant period for any “look-back” bad-behavior period).

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.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.