As discussed in a prior KirklandPEN, the SEC staff recently raised a variety of broker-dealer registration concerns relating to private fund managers,1 including:

  1. receipt of transaction fees from portfolio compa- nies;
  2. use of unregistered finders in connection with raising private funds;2 and
  3. sales activities of manager personnel in connection with raising funds from limited partners.

However, the SEC staff recently issued a favorable no- action  letter  permitting  certain  “M&A  Brokers”  to facilitate mergers, acquisitions, business sales and busi- ness   combinations   (collectively,   M&A  Transactions) between a seller and buyer of a privately held compa- ny3 without registering as a broker-dealer under the Securities Exchange Act of 1934.4

While not explicitly addressing the three SEC-identi- fied concerns, the no-action relief provides greater flex- ibility to a private fund manager using an unregistered M&A Broker, in part by reducing the risk of liability for aiding and abetting a third party’s securities law vio- lations. Industry participants continue to dialogue with the SEC staff on the outstanding areas of concern with the hope that all or some of those topics will be addressed in the near term.

Background. The SEC historically requires an inter- mediary to register as a broker-dealer under the Exchange Act if such intermediary (1) advises buyers and/or sellers regarding private-company M&A Transactions involving securities (e.g., transactions structured as stock purchases rather than asset sales) and (2) receives transaction-based compensation (e.g., a percentage of the transaction value). Over the years, the SEC issued limited relief for certain deal finders or business brokers, but such relief contained various dif- ficult-to-meet  conditions  and/or  had  limited  utility.

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The recent M&A Broker no-action letter provides that an unregistered intermediary may effect a securities transaction solely (a) in connection with the transfer of ownership and control of a privately held company (whether through a securities transaction or asset sale) and (b) to a buyer or a buyer group not organized by the M&A Broker that will actively operate the acquired business. Permitted activities under the no-action letter include (1) advertising a privately held company for sale with information such as the description of the business, general location and price range, (2) involve- ment in negotiating the terms of the sale between or among the parties, (3) advice to either party about the value of the securities, and (4) advice regarding the structure of the transaction or form of consideration.

Conditions for Relief. The no-action relief permits an M&A Broker to facilitate an M&A Transaction for a privately held company without regard to the size of the transaction or target company, subject to the fol- lowing conditions:

  • M&A Broker will not have (1) the ability to bind a party to an M&A Transaction or (2) custody, control, possession of or otherwise handle funds or securities in connection with the M&A Transaction;
  • M&A Broker will facilitate an M&A Transaction with a buyer group (e.g., in a private equity club deal) only if the group is formed without the M&A Broker’s assistance;
  • Any buyer or buyer group will not be passive and instead will control5 and actively operate the company or business;
  • M&A Broker will not provide  financing  for  an M&A Transaction directly or through an affiliate (but may assist in arranging financing through an unaffiliated third party);
  • M&A Transaction must not involve a public offer- ing and must comply with an applicable exemption from Securities Act of 1933 registration;
  • M&A Broker can represent both the buyer and sell- er only if M&A Broker provides clear written dis- closure to the parties and obtains written consent to the dual representation; and
  • M&A Broker and any of its officers, directors or employees will not have been suspended or barred from association with a broker-dealer by the SEC, any state or any self-regulatory organization.

Effect on Private Fund Sponsors. While the no-action letter does not address the SEC staff ’s broker-dealer concern over a private fund manager’s receipt of trans- action-based compensation, it does provide relief for a private fund manager seeking to use an unregistered deal finder if the conditions of the no-action letter can be met.