On April 5, 2013, David W. Blass, Chief Counsel, Division of Trading Markets for the U.S. Securities and Exchange Commission, delivered a speech to the American Bar Association entitled “A Few Observations in the Private Fund Space”. Mr. Blass noted that the SEC staff “has observed that advisers to some funds - for example, advisers to private equity funds executing a leverage buyout strategy - may also collect many other fees in addition to advisory fees, some of which call into question whether those advisers are engaging in activities that require broker-dealer registration. Examples include fees the manager directs a portfolio company of the fund to pay directly or indirectly to the adviser or one of its affiliates in connection with the acquisition or disposition (including an initial public offering) of a portfolio company or a recapitalization of the portfolio company. The fees are described as compensating the private fund adviser or its affiliates or personnel for “investment banking activity,” including negotiating transactions, identifying and soliciting purchasers or sellers of the securities of the company, or structuring transactions.”
Suffice it to say that Mr. Blass’ comments fueled widespread concerns that many private equity advisers and business transaction consulting firms might be regulated as broker-dealers.
In what some are calling a reversal of Mr. Blass’ views, earlier this week the staff of the SEC issued a no-action letter permitting “M&A brokers” to effect securities transactions in connection with the transfer of ownership of a privately-held company without such “M&A broker” registering as a broker-dealer with the SEC pursuant to Section 15(b) of the Securities Exchange Act of 1934. The no-action letter defines 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.”
The relief will enable M&A brokers to facilitate mergers, acquisitions, business sales, and business combinations between sellers and buyers of privately held companies. The relief also allows M&A brokers to provide certain advertising relating to the possible sale of a privately held company, and to participate in the negotiation of M&A Transactions. It also permits such M&A brokers to issue securities, or otherwise to effect the transfer of a business by means of securities, or assess the value of any securities sold; and receive transaction-based compensation.
Although there are a number of conditions to the relief, the no-action letter provides some desperately-needed clarity regarding the status of M&A brokers. Of course, interpretive issues regarding compliance with the terms and conditions of the no-action letter still remain. It is difficult, for example, to reconcile the staff’s position with the staff’s prior views regarding potential broker-dealer registration issues raised in connection with the receipt of transaction fees in the private equity fund space. As such, we encourage private equity advisers and other potential M&A brokers to contact us regarding the applicability of broker-dealer regulation to their precise business activities.