SEC Issue No Action Letter Exempting M&A Brokers from Broker-Dealer Registration

Securities and Corporate Attorney Joseph MarrowBy: Joseph Marrow

On January 31, 2014, the Securities and Exchange Commission (“SEC”) Division of Trading and Markets (the “Division”) issued a no action letter (the “No Action Letter”) providing relief to M&A Brokers (as defined below), in certain stated circumstances, engaged in the purchase or sale of privately-held companies from compliance with the registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). By reason of the no action relief, M&A Brokers may be entitled to receive transaction-based compensation without having to register as a broker-dealer under Section 15(a) of the Exchange Act. A link to the Division’s no action letter in combination with the letter from a group of attorneys requesting relief can be found here. Please be advised that the no action relief only applies to compliance with federal broker-dealer registration requirements. M&A Brokers must still consider state law registration regulations.

The Division’s No Action Letter represents a major shift in the SEC’s stance with respect to M&A Brokers. Traditionally, the SEC has taken the position that an M&A Broker that provides advice in connection with the sale of operating businesses through the sale of securities is required to register as a broker in accordance with the Exchange Act. The time and expense of such registration, particularly for brokers involved in just a few transactions, can be quite burdensome. M&A Brokers furnishing M&A advice in accordance with the parameters of the No Action Letter no longer will have to register as a broker-dealer to receive transaction-based compensation.

For purposes of the No Action Letter, an M&A Broker is defined as “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…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 “privately-held company” is one “that does not have any class of securities registered, or required to be registered, with the Commission under Section 12 of the Exchange Act, or with respect to which the company files, or is required to file, periodic information, documents or reports under Section 15(d) of the Exchange Act.” A “shell” company is excluded from the definition.

In issuing the No Action Letter, the SEC set a number of conditions to be followed, including: (i) a prohibition against the M&A Broker providing financing; (ii) the transaction not involve a public offering of securities; (iii) the M&A Broker not be involved in assembling a group of buyers; and (iv) the buyer control and actively operate the business after the transaction closes.

The No Action Letter permits the M&A Broker to engage in the following activities without the need to register as a broker-dealer: (i) received success-fee compensation in conjunction with the consummation of a transaction; (ii) advertise a privately-held company for sale with information including description of the business and a price range; (iii) provide the parties with advice regarding the issuance of securities or to assess the value of securities sold; and (iv) participate in the negotiation of the transaction.

For more information on this topic, please contact Joe.

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