On January 31, 2014, the Securities and Exchange Commission issued a ground-breaking no-action letter (“SEC Letter”) stating that a financial intermediary that limits its business activity to advising privately held companies on M&A transactions need not register as a broker-dealer. This is a significant departure from the SEC’s long-standing position that treated M&A brokers in the same manner as traditional broker-dealers. 

The SEC Letter defines an “M&A Broker” 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 business through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination including securities or assets of the company, to a buyer that will actively operate the company or business conducted with the assets of the company.

Permissible Activities

Subject to the limitations and requirements described below, the SEC Letter now permits an M&A Broker to engage in the following activities in connection with an M&A transaction without being registered as a broker-dealer:

  • facilitating and participating in M&A transactions including the purchase or sale of a control of a privately-held business without regard to the size of the privately-held business;
  • advertising a privately-held business for sale with information such as a description of the business, general location and price range;
  • representing either the buyer or the seller, or both, so long as the M&A Broker provides clear written disclosure to both parties as to which parties it represents and has obtained written consent from both parties to any joint representation;
  • advising the parties to issue securities, or otherwise to effect the transfer of the business by means of securities, or assess the value of any securities sold;
  • receiving transaction-based or other compensation, as agreed by the parties, including compensation based upon the value of securities sold or acquired in the transaction; and
  • participating in negotiation of the transaction.

Condition and Limitations

The relief granted by the SEC Letter is subject to the following conditions and requirements:

  • The M&A Broker must not have the authority to bind the parties to the M&A transaction.
  • The M&A Broker must not provide financing, directly or indirectly, for the M&A transaction.
  • The M&A Broker must not hold its client’s funds or securities issued or exchanged in the M&A transaction.
  • The M&A transaction must not involve a public offering of securities.
  • If the M&A transaction involves a group of acquiring entities, the M&A Broker must not assist in the formation of the group.
  • The buyer, or group of buyers, upon completion of the M&A transaction must control and actively operate the acquired company or business. Control is presumed if the buyer or group of buyers, has the right:
    • to vote 25 percent or more of a class of voting securities;
    • to sell or direct the sale of 25 percent or more of a class of voting securities; or
    • in the case of a partnership or limited liability company, to receive upon dissolution or has contributed 25 percent or more of the capital. 
  • The M&A transaction may not result in the transfer of interests to a passive buyer or group of passive buyers.
  • The M&A Broker (and, if the M&A Broker is an entity, each officer, director or employee of the M&A Broker): (i) must not be barred from association with a broker-dealer by the SEC, any state or any self-regulatory organization; and (ii) must not be suspended from association with a broker-dealer.

State Securities Laws

The SEC Letter is limited to broker-dealer registration issues under the federal securities laws and does not pre-empt state laws. Thus, M&A Brokers could still be subject to registration or other requirements imposed under state law. M&A Brokers should consider the laws of the states in which they do business that may apply to them and the transactions in which they are involved.

Referral and Deal Fees

The payment by private equity firms and others to consultants, funders and others for referrals to investments and acquisition targets has previously raised questions as to whether recipients of such payments should be registered as broker-dealers and whether payment of such fees could expose the payors to liabilities for facilitating transactions by unregistered broker-dealers. The SEC Letter should alleviate concerns regarding such payments to persons who qualify as M&A Brokers under the SEC Letter.

Practice Pointer

The SEC Letter opens up many new potential opportunities for persons who qualify as M&A Brokers. Such persons should take care that their engagement letters are consistent with the requirements of the SEC Letter to allow them to take full advantage of qualifying as an M&A Broker under the SEC Letter.