New Law Exempts M&A Brokers From SEC Registration – Securities

In short

Situation: Congress recently amended the Securities Exchange Act of 1934 (the “Exchange Act”) to exempt certain “M&A brokers” from registration as broker-dealers with the US Securities and Exchange Commission (“SEC”).

The Problem: The new exemption essentially mirrors the no-action relief previously granted by the SEC’s Division of Trade and Markets, whose rules are narrower than the earlier relief, applying only to M&A transactions for small entity issuers. The new legislation does not preempt state law registration requirements for M&A brokers.

Looking ahead: After previous SEC no-action relief, some states took steps to provide similar relief at the state level. It remains to be seen whether those and other states will amend their current requirements or enact new laws or regulations exempting M&A brokers from state registration requirements to match the new statutory federal exemption.

Included in the Consolidated Appropriations Act, 2023 (HR 2617) at page 1080 (the “Act”), signed into law by President Biden on December 29, 2022, is a provision exempting brokers who facilitate small business M&A from registration with the SEC. Section 501 of title V of section AA of the Act amends section 15(b) of the Exchange Act by adding a new subsection 15(b)(13), which provides an exemption (the “new exemption”) from SEC registration as “M&A brokers” that meet the conditions of the exemption. is called A person that meets the conditions of the new exemption can receive commissions for its brokerage services—typically a hallmark of broker-dealer status that requires SEC registration—without registering as a broker-dealer with the SEC. The new exemption is intended to facilitate small business change-control transactions and create cost-saving opportunities for small businesses.

New statutory exemption rules

For purposes of the new exemption, an “M&A broker” is essentially defined as a broker (and its associated persons) engaged in the business of effecting securities transactions in connection with the transfer of ownership of a “qualified private company”. By disposing of securities or assets of an eligible private company, if the broker reasonably believes that:

  • After the closing of the transaction, the buyer will “control” (for example, have the right to vote or direct the sale of 25% of its shares) the business conducted with the eligible privately held company or its acquired assets, and will be active in the management of the business (for example, electing executive officers, approving the annual budget or serving as an executive or other executive manager); And

  • Any buyer, before being legally bound to complete the transaction, has received or has reasonable access to various disclosure documents, including the company’s most recent fiscal year-end financial statements, as well as management, business-related information. Results of operations and material loss contingencies of issuers.

To be a “qualified private company,” an acquired company must not (i) own any class of securities registered with the SEC pursuant to Section 12 of the Exchange Act or pursuant to the filing obligations of Section 15(d); and (ii) have, in the fiscal year preceding the M&A broker’s engagement, less than $25 million in earnings before (a) interest, taxes, depreciation and amortization and/or (b) less than $250 million in gross revenue.

The new exemption includes a list of activities that, if carried out by an M&A broker, prevent it from taking advantage of the exemption. These activities include among others:

  • receive, hold, transmit or possess, directly or indirectly, the funds or securities of the parties in connection with the transaction;

  • Engaging in a business involving a shell company formed solely for the purposes of business other than the shell company relating to the incorporation of the business;

  • directly, or indirectly through any of its subsidiaries, provide financing to a party to the transaction;

  • Assisting any party in obtaining financing from an unrelated third party without (i) complying with all other applicable laws relating to such assistance, including, if applicable, Regulation T; and (ii) disclose any remedy in writing to the party;

  • representing both the buyer and the seller in the same transaction without providing written disclosure to the represented parties and obtaining written consent from both parties to joint representation;

  • helping to form a buyer group to acquire a qualified private company;

  • engaging in a transaction involving the transfer of ownership of an eligible private company to a passive purchaser or a group of passive purchasers; And

  • Binding party to transfer of ownership of qualified private company.

Further, to qualify for the new exemption, an M&A broker or its affiliates cannot be barred from association with a broker or dealer or suspended from association with a broker or dealer by the SEC, any state, or any other self-regulatory agency (ie, an exchange or FINRA).

A previous SEC no-action settlement in the area is still in effect

The new exemption is similar to the relief previously provided by the staff of the SEC’s Division of Trading and Markets in its “M&A Brokers” 2014 No-Action Letter (the “SEC No-Action Letter”), but with some notable differences. For example, while the SEC no-action letter applies to transactions involving private companies of any size, the new exemption is limited to transactions involving a change of control over smaller business entities. However, the new exemption clearly provides that it does not limit the SEC’s authority to exempt any person from any provision of the Exchange Act, so M&A brokers will be able to rely on the SEC no-action letter if they are involved in an M&A. Transactions involving large private issuers and meeting conditions for that relief.

In addition, the SEC No-Action Letter provides that the relief clause, in part, “[a]Securities received by a buyer or an M&A broker in an M&A transaction are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act of 1933 (the “Securities Act”) because the securities were issued in a transaction that did not involve a public offering.” New Section 15(b)(13) ) does not expressly state the status (ie, restricted or otherwise) of any securities transferred in a transaction facilitated by an M&A broker. The new exemption requires the acquirer, as part of compliance with the Securities Act, to determine whether any securities received in such transaction are restricted securities. Also, the new exemption requires the M&A broker to have a reasonable belief. A buyer of a privately held company controls and actively participates in its management, an SEC no-action letter requires the buyer to In factControl and actively manage a private company.

Congress did not preempt state securities laws

Importantly, the new exemption does not appear to preempt state law broker registration or other requirements. In the wake of the 2014 No-Action Letter, the North American Securities Administrators Association (“NASA”), an association representing state and local securities regulators in the United States, Canada and Mexico, developed a model rule (the “Model Rule”) that, if a state adopts, certain M&A Exempts brokers from state broker registration As of November 2020, at least 19 states have adopted some form of exemption relief based on the Model Rule, an SEC no-action letter, or a combination of the two.

The Model Rule, the SEC No-Action Letter, and the new exemption rules differ from each other. For example, the Model Rule does not incorporate many of the restrictions on an M&A broker’s activities found in other exemptions. Accordingly, like the new exception, the Model Rule requires that the M&A broker has a “reasonable belief” that the buyer controls and is actively involved in the management of the eligible privately held company and does not require the actual control and management required by the SEC no-action letter. The Model Rule differs from others in that it defines “control” of a privately held company as at least a 20% voting interest in the company, rather than the minimum 25% voting interest purposes to establish “control” for Exchange Act registration. Finally, similar to the SEC no-action letter but with a new exemption, the Model Rule imposes limits on the size of the privately held company being acquired ($25 million in earnings or $250 million in gross income). It remains to be seen whether any of the various states will adopt the new exemptions or amend their current M&A broker exemptions to accommodate the new exemption rules.

Consequently, even if the M&A broker is exempt from federal registration as a broker-dealer under the new exemption or SEC no-action letter, the M&A broker must assure itself that it is not required to register with any particular state. in its M&A broker activity or with residents of that state.

The new exemption is effective 90 days after its enactment (ie, on March 29, 2023).

Three key takeaways

  1. Congress enacted a new conditional statutory exemption from federal broker-dealer registration for M&A brokers that would facilitate change-of-control transactions involving certain small private companies.

  2. M&A brokers facilitating change-of-control transactions involving large private issuers may still rely on the SEC staff’s 2014 M&A Broker No-Action Letter.

  3. Because the new exemption does not preempt state laws, individuals relying on the new statutory exemption to avoid SEC registration will need to determine whether they are subject to broker-dealer registration under applicable state laws.

The content of this article is intended to provide a general guide to the topic. Expert advice should be sought regarding your particular circumstances.


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