On January 31, 2014, the Securities and Exchange Commission (“SEC”) issued a no action letter indicating that it would not recommend enforcement against “M&A Brokers” who facilitate mergers, acquisitions, business sales and business combinations (“M&A Transactions”) in connection with the transfer of ownership of a privately-held company, without regard to the size of the company, without registering as a broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) if such M&A Broker complies with certain conditions.

The SEC has defined an “M&A Broker” 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.

In order to take advantage of this exemption enforcement action, M&A Brokers and the M&A Transactions they facilitate must meet the following criteria:

  • The M&A Broker must not have the ability to bind a party to an M&A Transaction.
  • The M&A Broker must not directly or indirectly provide financing for an M&A Transaction.
  • The M&A Broker must never obtain custody, control or possession of, or otherwise handle funds or securities issued or exchanged in connection with, an M&A Transaction or any other securities transaction for the account of others.
  • M&A Transactions must not involve a public offering of securities and must be conducted pursuant to an exemption from registration under the Securities Act of 1933, as amended. Parties to M&A Transactions cannot be shell companies (other than a shell company formed in connection with an M&A Transaction).
  • If it represents both buyers and sellers, an M&A Broker must provide clear written disclosure to all parties as to who it represents and obtain consent to the joint representation.
  • For M&A Transactions involving a group of buyers, the group must be formed without the M&A Broker’s assistance.
  • The M&A Transaction will not result in the transfer of interests to a passive buyer or group of buyers. The buyer or group of buyers in any M&A Transaction must have the right to vote or direct the sale of at least 25% of the voting securities of the company and must actively operate the business post-closing. 
  • Any securities received by the buyer or M&A Broker are restricted securities.
  • None of the M&A Brokers or any of its officers, directors or employees have been barred from association with a broker-dealer by the SEC or any state or any self-regulatory organization and none of them are suspended from association with a broker-dealer.

The SEC indicated that its no action position on this topic is limited to the broker-dealer registration requirements of the Exchange Act. Other provisions of the federal securities laws continue to apply, including but not limited to the anti-fraud provisions.