The staff of the Division of Trading and Markets of the Securities and Exchange Commission (the "SEC") recently issued a No-Action Letter[1] that should reduce significantly the registration burdens upon certain brokers and facilitators. The No-Action Letter enables certain intermediaries that facilitate certain mergers, acquisitions, business sales, business combinations and similar transactions (together, "M&A Transactions") between privately owned companies to conduct such business without registering as a broker-dealer under the Federal securities laws. The No-Action Letter also provides that certain intermediaries of M&A Transactions may assist their clients in the negotiation of the transaction and does not restrict the type of compensation such intermediaries may receive as compensation for service.

The result of the issuance of the No-Action Letter is that M&A Brokers (as defined below) no longer need to burden themselves with the SEC's broker-dealer registration process and the associated regulatory regime. Entities looking to become M&A Brokers should consider the applicability of the restrictions set forth in the No-Action Letter and all applicable state laws.

Prior to the SEC's issuance of the No-Action Letter, an intermediary that facilitated an M&A Transaction involving an operating business would likely be deemed a "broker", as defined in Section 3(a)(4) of the Securities Exchange Act of 1934 (the "Exchange Act")[2], if such transaction involved the transfer of securities. Therefore, pursuant to Section 15(a) of the Exchange Act, such intermediary would be required to register with the SEC as a broker-dealer in accordance with Section 15(b) of the Exchange Act.

An inherent inconsistency in this regime existed because an intermediary to an M&A Transaction through a sale of assets, rather than securities, likely would not have to register as a broker-dealer although it may take many of the same actions, including soliciting bids, assisting with valuation, negotiating terms and executing documents, as an intermediary of an M&A Transaction through a sale of securities.

While this provides a bright line distinction, there are a variety of factors that drive purchasers and sellers when deciding whether to structure a transaction as a stock deal or an asset deal. Such decisions may not be made until after an intermediary has been contacted or has begun to provide advice on potential transactions. As such, intermediaries of private M&A Transactions have been forced to register as broker-dealers to account for the uncertainty associated with negotiating such transactions and the potential for asset deals to become stock deals during negotiations.

Broker-dealer regulations are in place primarily to protect customers from the abusive practices of the brokers or dealers that hold funds or securities for the accounts of their customers. This generally does not apply to intermediaries that facilitate private company M&A Transactions. Such intermediaries, more often than not, act purely as advisors to parties to the transaction and rarely act as true broker-dealers by holding funds or securities on behalf of their clients. The No-Action Letter applies to such intermediaries.


The No-Action Letter provides that the SEC will not recommend enforcement action to compel registration as "brokers" by intermediaries that limit their activities to facilitating M&A Transactions, resulting in the transfer of ownership interests in privately-held companies,[3] even if the M&A Transaction involves the transfer of securities. Such intermediaries are referred to as "M&A Brokers".

According to the No-Action Letter, M&A Brokers must be cognizant of the following when determining if this safe harbor from registering as a "broker" is applicable:

  1. The M&A Broker must not have the authority to bind the principal parties to the M&A Transaction.
  2. The M&A Broker must not provide financing, directly or indirectly, for the M&A Transaction.[4]
  3. The M&A Broker must not hold its client's funds or securities issued or exchanged in connection with the M&A Transaction.
  4. The M&A Transaction must not involve a public offering of securities.
  5. The M&A Broker may represent both parties in the M&A Transaction but, in so doing, must make clear disclosure of its multiple roles and obtain a written waiver from both parties.
  6. If the M&A Transaction involves a group of acquiring entities, the M&A Broker must not assist in the formation of the group.
  7. Upon completion of the M&A Transaction, the acquiring entity must control and actively operate the acquired business.
  8. The target entity may not be sold to a passive acquiring entity.
  9. Any securities sold to the acquiring entity will necessarily be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act of 1933.
  10. The M&A Broker must not have been barred or suspended from associating with a registered broker-dealer by the SEC, any state, or any self-regulatory organization.

If the M&A Broker complies with the requirements set forth above, it should be able to perform any of the following in connection with an M&A Transaction involving a privately held company without registering as a "broker":

  1. Facilitate an M&A Transaction involving the purchase or sale of control of a privately held company, without regard to the size of the transaction or the entities involved.
  2. Advertise a privately held company for sale with general information concerning the proposed transaction (e.g. description of business and price range).
  3. Advise its client on the structure of the M&A Transaction.
  4. Assess the value of securities sold in an M&A Transaction.
  5. Receive transaction-based compensation (e.g. based on value of stock or assets transferred).
  6. Participate in negotiations of the M&A Transaction.


Based on the No-Action Letter, M&A Brokers that tailor their businesses only to facilitating M&A Transactions involving privately held companies, and comply with the factors set forth above, may be able to avoid registration as a broker-dealer. They may also be able to receive a transaction-based fee for their services in facilitating the transaction, including solicitation of bids.

M&A Brokers also need to consider applicable state law in the state in which the M&A Broker is formed, and in states in which it conducts its business. Despite the No-Action Letter, M&A Brokers may still need to register with applicable state agencies. M&A Brokers that appropriately tailor their businesses and do not register as broker-dealers with the SEC may nonetheless need to file registrations at the state level and/or comply with additional state regulations.