On January 31, 2014 (revised February 4, 2014), the SEC issued a no-action letter to a group of attorneys who requested assurance on an issue that has long been on the minds of securities lawyers: are people who facilitate the sale of a controlling interest in a business involving a transfer of stock — which the Supreme Court has held to be a sale of securities under federal securities laws — required to register as broker-dealers under the Securities Exchange Act of 1934, with all of the attendant expenses and obligations?
Who is Affected
The attorneys requesting the no-action letter used the term “M&A Broker” to describe a person engaged in facilitating mergers, acquisitions, business sales, and business combinations. In its no-action letter, the SEC defined the term as follows:
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 (as defined below) 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. A buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things.
A “privately-held company” is one that isn’t a reporting company under the Exchange Act; it must be an operating company and not a “shell” company.
What M&A Brokers Can Do
Generally, the no-action letter gives assurance that the SEC staff would not recommend enforcement action if an M&A Broker effected securities transactions in connection with the transfer of a privately held company without registering as a broker-dealer by engaging in the following specific activities:
What M&A Brokers Can’t Do
In issuing the no-action letter, the SEC noted the requesters’ representations that an M&A Broker would not do any of the following:
In addition, the M&A Broker and its officers, directors, and employees must not have been suspended or barred from association with a brokerdealer by the SEC, any state, or any self-regulatory organization.
Implications for State Broker-Dealer Registration
Federal securities law is not the only law that requires broker registration. State “blue sky” securities laws typically require registration of brokers who transact business in that state — whether they have an office in that state or do business with buyers or sellers in that state — and these laws aren’t affected by the SEC’s no-action letter. M&A brokers must determine whether their activities require registration in any given state or whether any exemptions from registration apply in that state, and perhaps confine their activities to the scope allowed by such exemptions. California, for example, does not require broker-dealer registration for “merger and acquisition specialists,” or those who effect securities transactions in California only in connection with mergers, consolidations, or asset purchases and do not receive, transmit, or hold for customers any funds or securities. As an example of an exemption that applies to brokers doing business in a state other than where its office is located, Kentucky law exempts from registration a broker-dealer with no place of business there that during any period of 12 consecutive months does not direct more than 15 offers to sell or to buy into Kentucky to persons other than the issuers of the securities involved, other broker-dealers, or certain listed financial institutions or institutional buyers. This exemption may apply to some M&A brokers, especially given that the no-action request letter contemplates that such brokers may participate in only one or several transactions per year. In any event, state registration may turn out to be less burdensome than SEC registration because some states do not require FINRA or SIPC membership as part of the registration process.
The SEC’s new stance that business brokers do not need to register to conduct a broad range of M&A activities or receive transaction-based compensation would seem to open up new opportunities in the industry. In order for business brokers to take full advantage of these opportunities, however, states need to craft exemptions or adopt guidance that mirrors the M&A Broker definition and permitted activities in the no-action letter, or else brokers may still need to undertake the expensive and time-consuming process of registering and maintaining their registration in any states in which they hope to do deals.
Read more articles by Alexander Davie at Strictly Business, a business law blog for entrepreneurs, emerging companies, and the investment management industry.
© 2014 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
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