A no-action letter recently issued by the SEC’s Division of Trading and Markets is a welcome development  in  the private equity world as it permits “M&A Brokers,” subject to conditions, to provide advice regarding certain types of mergers and acquisition transactions (“M&A Transactions”), participate in the negotiation of the transaction, and receive transaction-based compensation, without registering as broker-dealers pursuant to Section 15(b) of the Securities Exchange Act.[1]  The letter goes far beyond the SEC’s previous guidance on permitted activities for unregistered intermediaries.[2]

In the letter, an M&A Broker is defined 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 who will actively operate the company or the business conducted with the assets of the company.”  The letter permits, subject to conditions, M&A Brokers to facilitate the sale of privately held businesses by way of mergers, acquisitions, business sales, and combinations, without regard to the size of the transaction.  Significantly, the relief does not restrict the type of compensation the M&A Broker can receive. 

          The relief is subject to a number of conditions, including the following:

  • The M&A Broker does not have the ability to bind a party to an M&A Transaction.
  • An M&A Broker may not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction.  However, subject to certain conditions, the M&A Broker may arrange financing with unaffiliated third parties.
  • An M&A Transaction may not involve a public offering.
  • Under no circumstances will an M&A Broker have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.
  • An M&A Broker may only facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance of the M&A Broker.
  • The M&A Broker, its officers, directors, and employees may not have been barred from association with a broker-dealer by the SEC, any state or other U.S. jurisdiction or any self-regulatory organization, or is not suspended from association with a broker dealer.

The letter does not provide any relief for the transfer of interests to a passive buyer or a group of passive buyers.  An M&A Transaction must result in a buyer or a group of buyers who control and actively operate the company or the business conducted with the assets of the business.  A buyer, or group of buyers will satisfy the control requirement if they have the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. 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.

While the no-action letter does not address important issues related to the sale of interests in private equity funds by persons or firms that are not registered as broker-dealers, it does provided needed clarity for private funds as to when they can pay M&A Brokers for participating in M&A Transactions without incurring regulatory and other risks that may be created when engaging in securities transactions with parties that are not registered as broker-dealers.[3]   Hopefully, the letter is the foundation for other initiatives to improve the broker-dealer regulatory scheme and also to assist in the creation of capital for privately-held companies.