Business brokers vary greatly in terms of size, services provided and types of business they target as clients. Generally, the more sophisticated and larger brokers are referred to as investment bankers. Whether referred to as a business broker, M&A broker, financial advisor or investment banker (referred to collectively as a “business broker”), they all try to assist either buyers or sellers in the process of selling a business and are often paid on a commission basis based on the purchase price of the business to be sold. 

If a business broker is involved in the sale of a business structured as an asset sale, rather than a sale of stock or other securities, then the business broker is not required to be registered with the SEC as a broker-dealer in connection with that transaction. However, if the same business is being sold through the sale of the stock of company operating the business or the sale or exchange of other securities, then the business broker would in all likelihood be required to register as a broker-dealer with the SEC. The SEC has issued a Guide to Broker Dealer Registration discussing these issues. For most, this is a strange result – same business, same broker and broker-related activities, but whether the business broker is required to be registered with the SEC as a broker-dealer is entirely dependent upon whether the transaction is structured as an asset sale or a stock sale. Now, thanks to a no-action request letter submitted by lawyers from several different law firms, business brokers have some relief available. 

While there is a lot of detail in the no-action request letter and the SEC staff’s response, in general, the SEC staff stated that the Division of Trading and Markets would not recommend enforcement action to the Commission if an “M&A Broker” were to effect securities transactions in connection with the transfer of ownership of “privately-held companies” under the terms and conditions described in the no-action request letter without registration as a broker-dealer, provided that a host of conditions are satisfied, including:

  • The buyer or group of buyers will, upon completion of the transaction, control and actively operate the business acquired; no passive buyers are permitted;
  • The M&A Broker not having the ability to bind a party to the transaction;
  • Neither the M&A Broker nor any affiliate may provide financing for the transaction;
  • The M&A Broker may not have custody or control of any funds or securities issued or exchanged in the transaction;
  • No public offering may be conducted; and
  • No party to the transaction may be a shell company.

For purposes of the no-action letter:

  • An “M&A Broker” is 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 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; and
  • A “privately-held company” is a company that does not have any class of securities registered, or required to be registered, with the SEC 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. Any privately-held company that is the subject of this letter would be an operating company that is a going concern and not a “shell” company.

In addition, under the no-action letter, the M&A Broker could advertise a privately-held company for sale with information such as a description of the business, general location and price range and facilitate transactions of any size. 

With this no-action letter issued by the staff of the Trading and Markets Division, M&A Brokers now have a clear roadmap to guide them in providing their services in connection with the sale of privately-held companies without registering as a broker-dealer pursuant to Section 15(b) of the Exchange Act.