In a significant departure from prior guidance, on January 31, 2014, the Division of Trading and Markets of the Securities and Exchange Commission (“SEC”) issued a No-Action letter1 that would permit a person giving advice on mergers and acquisitions transactions (“M&A Broker”) to receive transaction based compensation under certain conditions without having to register as a broker-dealer under Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).


The SEC’s traditional position had been that M&A Brokers who provide advice concerning corporate acquisitions that result in the sale of securities and who receive transaction-based compensation generally were required to register as broker-dealers under the Exchange Act.2 Registration required an arduous application process, membership with FINRA and the application of a myriad set of Exchange Act and FINRA rules that had only a tangential relationship to the business.

Definition of “M&A Broker”

In the 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 company3 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.

Relief Granted

M&A Brokers that facilitate mergers, acquisitions, business sales, and business combinations (together, "M&A Transactions") between sellers and buyers of privately-held companies, without regard to the size of the privately-held companies, may engage in such activities, including advertising a privately-held company for sale, with information concerning a potential transaction, such as the description of the business, general location, and price range, and receive transaction-based compensation without being required to register as broker-dealers under the Exchange Act under the following conditions:

  1. The M&A Broker will not have the ability to bind a party to an M&A Transaction.
  2. An M&A Broker will not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction. An M&A Broker that assists purchasers to obtain financing from unaffiliated third parties must comply with all applicable legal requirements, including, as applicable, Regulation T (12 CFR 220 et seq.), and must disclose any compensation in writing to the client.
  3. Under no circumstances may 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 transactions for the accounts of others.
  4. No M&A Transaction may involve a public offering. Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933 (the "Securities Act"). No party to any M&A Transaction may be a shell company,4 other than a “business combination related shell company.”5
  5. To the extent an M&A Broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  6. An M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance of the M&A Broker.
  7. The buyer, or group of buyers, in any M&A Transaction will, upon completion of the M&A Transaction, control and actively operate the company or the business conducted with the assets of the business. A buyer, or group of buyers collectively, would have the necessary control if it has the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise.6 In addition, the buyer, or group of buyers, must actively operate the company or the business conducted with the assets of the company.
  8. No M&A Transaction will result in the transfer of interests to a passive buyer or group of passive buyers.
  9. Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act because the securities would have been issued in a transaction not involving a public offering.
  10. The M&A Broker (and, if the M&A Broker is an entity, each officer, director or employee of the M&A Broker):
    1. has not been barred from association with a broker-dealer by the Commission, any state or any self-regulatory organization; and
    2.  is not suspended from association with a broker-dealer.


The guidance by the SEC staff in this letter represents a significant change in the SEC’s historical position that the receipt of transaction-based compensation in connection with effecting a securities transaction requires broker-dealer registration, even in the context of a merger and acquisition transaction. Firms and individuals providing M & A advice within the confines of the letter’s conditions no longer will have to register as broker-dealers in order to receive success fees in connection with their services.