In a no-action letter dated January 31 and revised on February 4
(the "M&A Brokers Letter"), the Securities and
Exchange Commission (SEC) Division of Trading and Markets permitted
business brokers to facilitate mergers, acquisitions, business
sales and business combinations (collectively, "M&A
Transactions") between buyers and sellers of privately held
companies without registering as broker-dealers under Section 15(b)
of the Securities Exchange Act of 1934 (the "Exchange
Act") - even if such transactions are effected through sales
of securities. The M&A Brokers Letter brings much-needed
clarity to this area of broker-dealer regulation.
Before the issuance of the M&A Brokers Letter, business brokers
that effected transactions structured as sales of securities were
required to register as broker-dealers, whereas business brokers
that effected transactions structured as asset sales (in which
there is no distribution, sale or exchange of securities) were not.
Many commentators had questioned the validity of this distinction
and noted that full-blown broker-dealer registration was not an
appropriate regulatory framework considering the limited functions
performed by business brokers.
The new relief is limited to business brokers that facilitate sales
of privately held companies to buyers that, upon completion of the
transaction, will control and actively operate the company. The
M&A Brokers Letter stated that a buyer 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.[1] A buyer could
actively operate the company through the power to elect executive
officers and approve the annual budget or by service as an
executive or other executive manager, among other things. Only
sales of companies that are going concerns and not shell companies
will qualify for the no-action relief.
Previously, unregistered business brokers were advised to limit
their activities to introducing potential buyers and sellers.
Pursuant to the no-action relief, a business broker may now take an
active role in facilitating an M&A Transaction without being
subject to broker-dealer registration. The business broker may
advertise a privately held company for sale with information such
as the description of the business, general location and price
range. The broker may also advise the parties to issue securities
or to effect the transfer of the business by means of securities.
Significantly, the business broker may participate in the
parties' negotiations, provide assistance in obtaining
financing from an unaffiliated third party and receive
transaction-based compensation, typically viewed by the SEC as a
hallmark of broker-dealer activity.
Business brokers seeking to take advantage of the no-action relief
are prohibited from (1) having the authority to bind the principals
in an M&A Transaction; (2) directly or indirectly providing
financing for an M&A Transaction; (3) having custody, control,
or possession of or otherwise handling funds or securities issued
or exchanged in connection with the transaction; (4) facilitating a
transaction with a group of buyers if the group is formed with the
assistance of the business broker; and (5) facilitating a
transaction resulting in the transfer of interests to a passive
buyer. Moreover, the exemptive relief is not available if the
business broker or any officer, director or employee of the
business broker has been barred from association with a
broker-dealer by the SEC, any state, or any self-regulatory
organization or is suspended from association with a
broker-dealer.
The M&A Transaction may not involve a public offering, and any
securities received will be restricted securities. To the extent
that the business broker represents both buyers and sellers, it
must provide clear written disclosure as to the parties it
represents and must obtain from both parties written consent to the
joint representation.
Business brokers whose participation in an M&A Transaction
qualifies for relief from broker-dealer registration under the
Exchange Act, as provided by the M&A Brokers Letter, must still
comply with the securities laws of the states in which they
transact business. Many states require business brokers that engage
in securities transactions to register with the state securities
authorities, although several states have limited exemptions for
business brokers.
[1] The necessary control will be presumed to exist if, upon
completion of the transaction, the buyer or group of buyers has the
right to vote 25 percent or more of a class of voting securities;
has the power 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, has the right to receive upon
dissolution or has contributed 25 percent or more of the
capital.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
