Private Company M&A Brokers Exempt from SEC Registration

by Smith Anderson

The SEC has granted relief to Mergers and Acquisitions (M&A) advisory firms to allow them to facilitate private company M&A transactions and receive transaction-based fees without registering as broker-dealers. It has long been a concern of M&A intermediary firms that their receipt of transaction-based fees in a private company transaction will tag them as a broker-dealer which, in turn, would require them to register with the SEC and comply with an extensive and exacting regulatory scheme. A ground-breaking SEC no-action letter dated January 31, 2014, eliminates this concern for transactions that satisfy certain conditions outlined by the SEC.


The Securities Exchange Act of 1934 (Exchange Act) defines “broker” as a person engaged in the business of effecting transactions in securities on behalf of others and requires brokers engaged in interstate commerce to register with the SEC. The U.S. Supreme Court has made it clear[1] that an M&A transaction involving a target’s stock is a securities transaction. As a result, the SEC has historically required private company M&A advisors to register as brokers (or fit within narrow, and often impractical, exceptions) if they are advising their clients in a typical stock or merger transaction for which they receive transaction-based compensation. 

The problem is that the registration process is lengthy, and costs and fees, together with start-up and annual expenses, including legal, accounting and operating costs, are considerable, especially in relation to the fees typically earned by intermediaries advising on such transactions. As a result, intermediaries typically forego these types of transactions or attempt to structure deals around these restrictions. Some even take the risk that their activities will avoid the attention of regulators. This is not a sustainable model for advisors that effect just a handful of transactions every year. 

A number of organizations, including a special task force of the American Bar Association in 2005, have been lobbying to relax the burden of registration and compliance on M&A advisors operating in the private company arena. Their efforts have been rewarded with the SEC’s recent publication of the no-action letter.

No-Action Letter


The no-action letter states that the SEC’s Division of Trading and Markets will not recommend that the SEC take enforcement action against “M&A Brokers”[2] if the following ten conditions are met:

  1. The M&A Broker must not have the authority to bind the principals in the M&A transaction.
  2. The M&A Broker does not provide financing for the transaction.
  3. The M&A Broker must never have possession of customer funds or securities.
  4. The M&A transactions must not involve a public offering. Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933. In addition, no party to the M&A transaction may be a shell company other than a business combination related shell company.
  5. If the M&A Broker represents both the buyer and the seller, he or she must obtain written consents from both parties.
  6. The M&A Broker may only facilitate a transaction with a group of buyers if the M&A Broker does not assist in the formation of the group of buyers.
  7. Following the M&A transaction, the buyer must control and actively operate the acquired company.
  8. The M&A Broker may not facilitate a transaction that will result in the transfer of interests to a passive buyer.
  9. Any securities received by a buyer or M&A Broker in the transaction will be restricted securities.
  10. The M&A Broker (and its officers, directors and employees) has not been barred or suspended from association with a registered broker-dealer.

Permitted Activities

If the conditions above are satisfied, M&A Brokers are free to take the following actions to facilitate mergers, acquisitions, business sales and business combinations between buyers and sellers of privately-held companies resulting in the transfer of ownership of the acquired company, without regard to the size of the companies and without registering as a broker-dealer under the Exchange Act:

  • Receive transaction-based compensation (“success” fee arrangements are permissible);
  • Participate in negotiations (without the ability to bind either party to a transaction);
  • Advertise the company for sale with information such as the description of the business, general location and price range; and
  • Advise the parties to issue securities or otherwise to effect the transfer of the business by means of securities (in lieu of a sale of assets) and to assess the value of any assets and securities sold.

 Key Observations and Cautions

Transaction/Success Fees and Freedom to Operate

An M&A Broker’s ability to advocate for structuring a transaction as a stock deal is important because it allows true “deal” factors to be the drivers of the transaction structure – that is, the business, tax, accounting and legal reasons that should dictate how an M&A transaction is structured. Prior to the no-action letter, motivated by fear of running afoul of the broker-dealer regulations, M&A Brokers may have influenced the structure of a transaction (preferring asset purchases to stock transactions) or the type of consideration to be paid (preferring all cash transactions to those involving stock). The ability to implement transaction-based success fees now aligns the compensation paid to M&A Brokers with the true nature of the services that they provide, in addition to giving them flexibility in the marketing of their services and the management of their clients.  


The no-action letter is not the only item addressing reform of the registration requirements for M&A Brokers. U.S. House Bill 2274 (“HR 2274”) – Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013 – seeks to amend the Exchange Act to exempt M&A Brokers performing services in connection with the transfer of ownership of smaller privately-held companies. This Bill essentially would codify the SEC’s letter. The conditions in HR 2274 are similar to those in the no-action letter, except that the privately-held company either must have EBITDA of less than $25,000,000 or gross revenues of less than $250,000,000. HR 2274 passed the House on January 14, 2014 and has been referred to the Senate’s Committee on Banking, Housing and Urban Affairs for consideration.

State Registration Requirements

The no-action letter does not affect broker-dealer registration requirements in the states, so these state-level requirements continue to apply even where the no-action letter provides relief from federal registration requirements. Registration requirements vary from state to state, and an M&A Broker should consider applicable state-level requirements for each state in which it operates and the effect on such state-level requirements of withdrawing from or foregoing registration at the federal level with the SEC.[3]  


While fairly limited in scope, the SEC no-action letter provides long-overdue comfort to unregistered M&A Brokers facilitating the purchase and sale of private companies, signaling a more reasonable approach by the SEC to registration requirements for M&A Brokers and potentially opening the gateway for future SEC action and federal legislation addressing related issues more broadly in the future.

[1] Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985) and Gould v. Reufenacht, 471 U.S. 701 (1985).

[2] “M&A Broker” is generally defined in the no-action letter to be a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of privately-held companies.

[3] The States of California, Colorado, Ohio and Utah are among those that have recently modified their securities regulations to provide brokers with a limited exemption from state registration requirements or to permit reliance on the SECs no-action letter.

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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