The Broker-Dealer Section of the North American Securities Administrators Association is seeking comments no later than Feb. 16, 2015, on a proposed uniform state model rule exempting certain merger and acquisition brokers from registration as brokers, dealers, agents or broker-dealers under state securities laws. The proposed uniform model rule represents the evolution among regulators and Congress to exempt merger and acquisition brokers from some of the registration requirements in the federal securities laws.
The proposed state model rule would exempt from registration any broker or person associated with a broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, if the broker reasonably believes:
- Upon consummation of the transaction, the person acquiring securities or assets of an eligible privately held company, acting alone or in concert, will control and, directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the purchased assets; and
- If any person is offered securities in exchange for securities or assets of the eligible privately held company, such person will, before being legally bound to consummate the transaction, receive or have reasonable access to the most recent fiscal year-end financial statements of the issuer of the securities as customarily prepared by its management in the ordinary course of business and, if such financial statements are audited, reviewed or compiled, any related statement by the independent accountant; a balance sheet dated not more than 120 days before the exchange offer date; and information regarding management, business, results of operations for the period covered by the financial statements, and any material loss contingencies of the issuer.
For purpose of the proposed model state rule, an “eligible privately held company” means a company that (i) does not have any class of securities registered, or required to be registered with the SEC, or with respect to which the company files, or is required to file, periodic information, documents and reports under the 1934 Act; and (ii) in the fiscal year immediately preceding the fiscal year in which the services of the merger and acquisitions broker are initially engaged with respect to the securities transaction, the company meets either or both of the following.
- The earnings of the company before interest, taxes, depreciation and amortization are less than $25 million;
- The gross revenue of the company is less than $250 million.
A merger and acquisition broker is not exempt from registration under the proposed state model rule if the broker:
- Directly or indirectly, in connection with the transfer of ownership of an eligible privately held company, receives, holds, transmits or has custody of funds or securities to be exchanged by the parties to the transaction;
- Engages on behalf of an issuer in a public offering of any class of securities that is registered or is required to be registered with the SEC or with respect to which the issuer files, or is required to file periodic information under the 1934 Act; or
- Engages on behalf of any party in a transaction involving a public shell company.
For purpose of the excluded activities exception, a “public shell company” means a company that has any class of securities registered or is required to be registered with the SEC or is required to file periodic information documents and reports under the 1934 Act; has no or nominal operations; and has no or nominal assets, assets consisting solely of cash and cash equivalents, or any amount of cash and cash equivalents and nominal other assets.
In addition, a merger and acquisitions broker is not exempt from registration if the broker is subject to suspension or revocation of registration under the 1934 Act, or other disqualified under applicable law or order.