SEC No-Action Letter Allows Certain Kinds of “M&A Brokers” to Avoid Broker-Dealer Registration Under the Exchange Act

by Foley Hoag LLP

On January 31, 2014, the SEC’s Division of Trading and Markets issued a significant no-action letter permitting the involvement of “M&A Brokers” in business acquisition transactions involving privately-held companies. The no-action letter means that the SEC Staff will not seek enforcement action against the type of “broker” activity described in the letter. By adhering to the conditions specified in the no-action letter, an M&A Broker may advertise a privately-held company of any size for sale, with information such as the description of the business, its general location, and a price range, without fear of violating federal laws that require broker-dealer registration. State laws will still apply.

Subject to numerous limitations on the M&A Broker’s activities, the letter effectively exempts certain intermediaries from the considerable burdens of registration as a broker-dealer under Section 15(a) of the Securities Exchange Act of 1934 when involved in the sale of privately-held companies. The no-action letter, in a limited revival of the “sale of business doctrine,” provides a welcome source of clarity for these intermediaries involved in brokering the sale of private companies.

The Problem

The involvement of intermediaries in private company stock transactions has traditionally created uncertainty, because an individual or entity involved in soliciting the sale or purchase of any security is generally required to register as a broker. The failure of such an intermediary to comply with law could give other parties a right of rescission. The SEC has historically taken an expansive view of this requirement, and individuals involved in effecting the sale of private companies have typically been required to register where they are involved in bringing together the purchaser and seller, negotiating the sale or otherwise integrally involved in the process. The SEC has required broker registration of “finders” or “business brokers” that (i) were involved in the solicitation, negotiation or execution of the transaction; (ii) received transaction-related compensation; or (iii) handled the securities or funds in connection with the transaction.

What Is An “M&A Broker”?

The January 31 no-action letter provides relief on behalf of “M&A Brokers” without regard to the size of the transaction. The letter defines “M&A Broker” as:

a person [or entity] 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.

Thus the no-action relief is only available where the buyer both controls and operates the target company.

A buyer will be deemed to operate the company if, among other actions, the buyer elects executive officers, approves the annual budget or serves as an executive or other executive manager of the company. Further, control will be presumed if, upon completion of the transaction, the buyer or group of buyers has the right to vote 25% 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.

How Are the Activities of M&A Brokers Limited?

To avail themselves of the no-action relief, M&A Brokers must limit their activities to those set forth in the no-action letter. An “M&A Transaction” is a merger, acquisition, business sale or business combination. Thus:

  • An M&A Broker cannot have the ability to bind a party to the M&A Transaction;
  • An M&A Broker cannot directly or indirectly provide financing for the M&A Transaction and, where the M&A broker assists the parties in securing financing from unaffiliated third party lenders, must follow all applicable laws and disclose any compensation in writing to the client;
  • An M&A Broker can never 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;
  • The M&A Transaction must not involve a public offering, must be conducted under an applicable exemption from registration under the Securities Act of 1933, and may not involve a “shell company” except for a “business combination shell company” defined under Rule 405 of the Securities Act;
  • If and to the extent the M&A Broker represents both buyers and sellers, the M&A Broker must provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation;
  • The M&A Broker will facilitate the M&A Transaction with a group of buyers only if the group if formed without assistance from the M&A Broker;
  • The buyer(s) in the M&A Transaction will, upon completion of the Transaction, control and actively operate the target company as described above in this Alert;
  • No M&A Transaction will result in the transfer of interests to a passive buyer or group of passive buyers, including the use of non-business combination shell companies;
  • Any securities received by the buyer or the M&A Broker will be restricted securities as defined in SEC Rule 144(a)(3) (because the M&A Transaction cannot involve a public offering);
  • The M&A Broker (and, if the M&A Broker is an entity, any officer, director or employee of the M&A Broker) (i) must not be barred from association with a broker-dealer by the SEC, any state or any self-regulatory organization and (ii) must not be suspended from association with a broker-dealer.

Limited Application to Each Separate M&A Transaction

The January 31 no-action letter provides important and helpful clarification for non-registered individuals in connection with the sale of privately-held companies. Still, M&A Brokers should be mindful of the limited scope of the letter.

The relief offered will be applied on a transactional basis and does not apply broadly to exempt M&A Brokers from the more general requirements of registration when engaged in activities requiring registration under Section 15 of the Exchange Act. Accordingly, M&A Brokers should not rely on the no-action position without independent legal analysis of the facts and circumstances of a particular transaction. The conditions set forth in the letter will require additional due diligence efforts by M&A Brokers. Among other things, no-action relief is limited to the purchase or sale of companies with no securities registered or required to be registered under Section 12 of the Exchange Act, and prior failure of such a company to comply with those registration requirements would foreclose availability of the exemption.

Further, the no-action relief requires that the buyer control and actively operate the target. M&A Brokers should accordingly undertake due diligence to verify that control will be transferred and that the M&A Transaction structure will permit the buyer to “actively operate” the company after closing.

State Law Not Addressed

The January 31 no-action letter does not affect state law requirements and accordingly individuals, whether or not they are “M&A Brokers.” must still comply with any applicable state laws requiring registration of “finders” or “brokers.” The SEC specifically notes this in its guidance and, while the SEC’s analysis may be persuasive to many state authorities, a state securities regulator has no obligation to adopt the SEC’s views in applying state law. Proceed with caution.


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.

© Foley Hoag LLP | Attorney Advertising

Written by:

Foley Hoag LLP

Foley Hoag 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.