In January 2014 the Securities and Exchange Commission (SEC) issued a no-action letter stating that, under certain circumstances, it will not require a finder, consultant or other intermediary helping to facilitate a private M&A transaction to register with the SEC as a broker-dealer.(1)

It has long been an unresolved legal question whether M&A brokers who refer targets to potential buyers or investors, and who are paid a fee based on successful completion of a transaction, constitute broker-dealers on account of their intermediary role in the sale of securities. The no-action letter did not take a position on this issue, but did clarify that the SEC staff will not recommend enforcement action against a so-called 'M&A broker' for failing to register as a broker-dealer, provided that the M&A broker arrangement and transaction meet certain conditions, including the following:

  • The M&A broker will not have the ability to bind either the buyer or seller to the transaction;
  • The M&A broker will not provide financing for the transaction;
  • The M&A broker will facilitate acquisitions with a group of buyers only if the group is formed without the assistance of the M&A broker;
  • The buyer, at the end of the transaction, must control and operate the target; and
  • The acquisition does not involve a public offering of securities.

This no-action letter creates no-action relief for many of the referral arrangements that private equity firms enter into with third-party finders or consultants. In addition, the letter may give some comfort to unregistered private equity sponsors that receive transaction-based fees in connection with portfolio company M&A transactions. While private equity sponsors often will not satisfy each of the specific conditions cited for this no-action relief, because their services in this regard are similar to services provided by M&A brokers, this letter provides a basis to suggest that private equity fund sponsors should not be required to register with the SEC as broker-dealers because of such activity.

For further information on this topic please contact Marko S Zatylny at Ropes & Gray LLP's Boston office by telephone (+1 617 951 7000), fax (+1 617 951 7050) or email (marko.zatylny@ropesgray.com). Alternatively, contact James C Davis at Ropes & Gray's Chicago office by telephone (+1 312 845 1200), fax (+1 312 845 5500) or email (james.davis@ropesgray.com). The Ropes & Gray website can be accessed at www.ropesgray.com.

Endnotes

(1) "M&A Brokers", SEC No-action Letter, 2014 WL 356983 (January 31 2014).