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SEC Guidance to M&A Brokers for Avoiding Broker Dealer Registration—with Major Limitations

by | Apr 29, 2021 | Mergers & Acquisitions

M&A Brokers discussing a new deal

In January 2014, the U.Due south. Securities & Commutation Commission issued a no-action letter that finer exempted certain intermediaries from registering equally broker-dealers when they are assisting in the auction of private companies.

While the SEC's 2014 letter offered a measure of relief, it also included a laundry listing of provisions limiting the scope of how and when the registration exemption could be deployed. Every bit a result, investment bankers and business brokers hoping to avoid an enforcement action by the SEC should practise circumspection when considering whether an exemption applies to them.

In the letter, the SEC'south Division of Trading and Markets said intermediaries involved in an Grand&A transaction for a privately held visitor may annunciate the auction with information such as a description of the business, its general location, and price range.

M&A brokers, according to the letter of the alphabet, is specifically defined as an entity or individual engaging in "the business concern of effecting securities transactions solely in connection with the transfer of buying and control of a privately held visitor through the purchase, sale, substitution, issuance, repurchase, or redemption of, or a concern combination involving, securities or assets of the visitor, to a heir-apparent that will actively operate the company or the business conducted with the assets of the visitor."

X LIMITATIONS

The broker definition, therefore, limits the registration exemption to sales involving individual companies and to those where the heir-apparent volition have an agile role in the enterprise. In its letter, the SEC also spelled out 10 specific limitations:

M&A brokers may not bind a party to an K&A Transaction.
An K&A broker may not provide financing for the transaction. It may assist purchasers in obtaining financing from unaffiliated third parties, and in doing so, must comply with all applicable legal requirements and disclose any compensation in writing.
The M&A broker may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A transaction or other securities transactions for the business relationship of others.
Transactions cannot involve a public offer. Whatever offering or auction of securities must be conducted in compliance with an applicable exemption from registration under the Securities Human activity of 1933, and no political party to whatsoever a transaction can be a shell visitor, other than a business combination-related beat out visitor.
When Yard&A brokers represents both buyers and sellers, it must provide articulate, written disclosure as to the parties it represents and obtain written consent from both parties to the articulation representation.
An M&A broker must facilitate an Thousand&A transaction with a group of buyers only if the group is formed without the aid of the broker.
As noted previously, a buyer, or grouping of buyers, must upon completion of a transaction, control and actively operate the company or the business.
An G&A transaction may not result in the transfer of interests to one or a group of passive buyers.
Any securities received past the buyer or K&A broker in an G&A transaction are restricted securities within the meaning of Rule 144(a)(3) under the Securities Act of 1933.
The M&A broker (and, if the 1000&A banker is an entity, any officer, director or employee of the broker) must non exist barred from clan with a broker-dealer past the SEC, whatsoever state or any self-regulatory organization or suspended from association with a broker-dealer.

NARROW PROVISIONS

The letter likewise stated that it was concerned only with "registration requirements of Section 15(a) of the Exchange Act. Other provisions of the federal securities laws, including but not express to the anti-fraud provisions, continue to employ." In improver, the letter of the alphabet does non exempt intermediaries from applicable state laws.

Though the exemption is limited, most legal commentators have noted that it represents a significant step forward by the SEC in recognizing that some transactions—particularly those involving smaller and medium-sized businesses—may benefit if intermediaries could help without the costly process of registering. Those costs are normally passed on to the companies attempting to execute a deal, thus creating an additional hurdle for them as they seek to combine. (In a like move, the SEC recently proposed providing an exemption from banker-dealer registration requirements for "finders," persons or entities that connect buyers and sellers.)

While the 2014 no-action letter may provide a measure of comfort to private companies and intermediaries concerned about liability, its provisions are narrow and specific. Intermediaries should go on advisedly and rely upon advice of trusted counsel if they are because assisting the sale of a visitor without registering.

To larn more well-nigh potential exemptions contact us for a consultation.