The Division of Trading and Markets (Trading and Markets) of the Securities and Exchange Commission (SEC) recently provided relief in the form of a no-action letter (Letter) outlining a limited set of circumstances where a person could assist in the sale of a private business in the United States without registering as a broker-dealer under federal law even if the sale involves the sale of securities and transaction-based compensation is paid.1

Although the federal broker-dealer registration relief offered by the Letter is a welcome development for business brokers involved in merger and acquisition transactions for private companies that satisfy the Letter’s conditions, market participants should tread carefully in relying on the Letter due to its narrow focus and specific conditions.


Companies (and the persons that control them) routinely seek the assistance of investment bankers, consultants and other third parties to facilitate the sale of a business. These transactions may be structured as a sale of all or substantially all of the target’s assets or a sale of all or a controlling interest in the target’s outstanding securities. The SEC has historically taken the position that a person who assists in the purchase and sale of the target’s securities (particularly if that person receives transaction-based compensation) is required to have been registered under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) as a broker-dealer (absent an available exemption). However, a person engaged in identical activities relating to an asset purchase is not required to register as a broker-dealer under the Exchange Act.

A person who assists in the completion of the sale of a business through a securities purchase absent an exemption and absent being registered with the SEC as a broker-dealer could be subject to monetary penalties and injunctive relief. In addition, the participation of a person who was required to be registered as a broker-dealer, but was not, could result in the underlying transaction being voidable.

In light of the foregoing, various market participants have been campaigning for years for a rules change or other relief to address the practical difficulties posed by the SEC’s position relating to the sale of private companies. The SEC has now provided limited relief that expands the scope of activities that a person may undertake to facilitate the sale of a business through a securities purchase transaction without registration as a broker-dealer with the SEC.

New “M&A Broker” Exception Recognized

Limited relief. In general, the Letter permits an “M&A Broker” to facilitate mergers, acquisitions, business sales and business combinations (collectively, M&A Transactions) between buyers and sellers of “privately-held companies” (regardless of the size of the parties) when, among other requirements, the buyer will both “control” and “actively operate” the purchased company or the business conducted with the assets of the business upon the closing of the transaction.

Although the Letter does not explicitly address the payment to the M&A Broker of transaction-based compensation, relief relating to such compensation was clearly requested by the submitting parties and the Letter approved the transfer of ownership of privately-held companies on the terms and conditions specified in such parties’ request for relief. It will be interesting to see if the Letter’s allowance of transaction-based compensation under the terms and conditions set forth in the Letter represents the beginning of a reexamination of the SEC’s long-held presumption that such compensation makes someone a broker subject to federal registration or is merely a limited exception to that presumption.

The Letter provides welcome relief as private companies and private equity funds previously concerned about whether they had exposure for M&A Transactions facilitated by unregistered broker-dealers2 can rest easier where the intermediary satisfies the Letter’s requirements. However, market participants should tread carefully in relying on the Letter due to its narrow focus and its specific conditions. As noted in the Letter, the relief provided is “limited solely to the transactions described” and “different facts and circumstances may cause [Trading and Markets] to reach a different conclusion.”

The relief provided in the Letter is limited to the registration requirements under Exchange Act Section 15(a). The applicability of other provisions of the federal securities laws to M&A Brokers, including but not limited to the anti-fraud and investment adviser registration provisions, are not addressed in the Letter and may need to be considered. Moreover, the Letter expresses no view as to the application of state broker-dealer laws to the activities of an M&A Broker who engages in M&A Transactions.

Definitions of key terms. For purposes of the Letter:

  • M&A Broker means “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.”
  • “privately-held company” means a company that (1) “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” and (2) is “an operating company that is a going concern and not a ‘shell’ company.”3
  • “controls” ­means that a buyer or group of buyers must hold the “the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. The necessary control will be presumed to exist if, upon completion of the transaction, the buyer or group of buyers has the right to vote 25% or more of a class of voting securities; has the power to sell or direct the sale of 25% or more of a class of voting securities; or in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.”
  • “actively operates” could be demonstrated by the buyer “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.” Conversely, the transaction cannot effect transfers of securities to any person or group of persons who would be passive investors. This definition does not appear to be exclusive and other powers or governance structures likely could satisfy the active operation requirement.

Requirements and restrictions on the M&A Broker. In order to obtain the registration relief provided by the Letter, an M&A Broker cannot:

  • have the power to bind any of the parties to the M&A Transaction;
  • provide financing for the M&A Transaction, whether directly or indirectly through affiliates (however, an M&A Broker may assist in arranging for unaffiliated third-party financing if the M&A Broker complies with all applicable legal requirements, such as Regulation T, and discloses in writing to its client any compensation it will receive for arranging such financing);
  • hold, control, possess or handle any funds or securities related to the M&A Transaction or other securities transaction for the account of others;
  • represent both buyers and sellers absent providing clear, written disclosure to the parties it represents and obtaining written consent from all parties to the joint representation;
  • facilitate an M&A Transaction with a group of buyers if the group was formed with the assistance of the M&A Broker; or
  • have been barred from association with a broker-dealer by the SEC, any state or any self-regulatory organization, or be suspended from associating with a broker-dealer (if the M&A Broker is an entity this applies to each officer, director or employee of the broker as well).

Requirements and restrictions on the M&A Transaction. In order to obtain the registration relief provided by the Letter, no party to the M&A Transaction can be a shell company, other than a business combination related shell company.4 Moreover, the securities issued or exchanged in the M&A Transaction must not involve a public offering and must be issued pursuant to an applicable registration exemption under the Securities Act. Thus, any securities so issued or exchanged will be “restricted securities” in the hands of the buyer and, if applicable, the M&A Broker.

No advertising restriction. The M&A Broker in a qualified transaction will be permitted to advertise that the target business is for sale and, among other things, the targeted price range.

Practical Implications

The relief provided by the Letter, albeit limited, is a significant improvement over previous SEC relief in this area. For example, under a prior SEC no-action letter, relief from the registration requirements for persons providing similar services was limited to transactions involving selling companies meeting the definition of a “small business” under regulations issued by the U.S. Small Business Administration. Moreover, persons providing such services (1) could have only a very limited role in the negotiations between the parties, (2) could only assist if the transaction involved 100% of the equity of the target, (3) could not assist the purchaser in obtaining financing and (4) could not advise the parties whether to issue securities, or otherwise to effect the transfer of the business by means of securities, or assess the value of any securities sold. Each of these requirements under the prior no-action relief was relaxed under the Letter.

However, the relief provided by the Letter will not be helpful to persons who help place growth equity or venture capital where the placement is for less than 25% of the target or where the buyer will not actively operate the business upon closing. A placement of those investments would continue to be viewed as a purchase and sale of securities and not as the acquisition of a business.

Those seeking to rely on the relief provided by the Letter should carefully review the Letter and its terms and conditions. Moreover, market participants that can rely on the relief from federal broker-dealer registration requirements provided by the Letter must still consider applicable state broker-dealer registration requirements and other federal law requirements that may apply regardless of the limited relief from federal broker-dealer registration provided by the Letter.