Corporate Finance & Securities

SEC Issues No-Action Letter for M&A Brokers

SEC LogoThe SEC recently issued a no-action letter that provides relief for mergers and acquisitions brokers from certain federal registration requirements. Now, subject to certain restrictions, brokers can facilitate transactions without needing to register as a broker-dealer under Section 15(b) of the Exchange Act.

Background on Broker-Dealer Registration

Under federal law, a broker is “any person engaged in the business of effecting transactions in securities for the account of others.” So, if you receive compensation for connecting the buyer of business with the business it ends up acquiring, and the transaction is a purchase of company stock, you’re a broker. The SEC Guide to Broker-Dealer Registration provides the following examples of activities (assuming that compensation was received for these activities) that would qualify individuals as brokers under federal law:

  • Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
  • Finding investment banking clients for registered broker-dealers;
  • Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity;
  • Engaging in, or finding investors for, venture capital or “angel” financings, including private placements; and
  • Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved).

The registration process is a substantial hurdle for those who want to become M&A brokers. The process is generally both lengthy and expensive: According to a 2013 House Committee report, the “[i]nitial set-up and compliance related costs often exceed $150,000. On-going compliance costs often exceed $75,000 per year.”

Background on Previous M&A Broker Registration Requirements and No-Action Letters

The SEC had previously issued two important no-action letters describing a regulatory approach for M&A brokers. In 2006 it issued the Country Business, Inc. no-action letter, and 20 years before that, it issued the International Business Exchange Corporation no-action letter. Based on these two letters, M&A brokers could not engage in negotiations on behalf of a client, advise clients whether to issue securities, assess the value of any securities sold, assist with transactions that involved stock unless it was a sale of 100% of the company stock, or assist with transactions for large businesses under traditional compensation arrangements, unless they were registered at the federal level. This regulatory approach created a number of significant restrictions for unregistered M&A brokers and did not reduce compliance costs for M&A brokers.

New No-Action Letter Relief

Under the recently released no-action letter, brokers of mergers and acquisitions can facilitate certain business acquisitions, including acquisitions by stock, without federally registering as a broker-dealer. The no-action letter outlines a number of facts that underpin it’s decision not to take action against unregistered brokers facilitating certain transactions (in other words, you should not rely on the no-action letter for a given transaction if all of the following are not true):

  • the purchaser will control and operate the company; it will be presumed that a purchaser controls the company if the purchaser has 25% or more of a class of securities;
  • no transfer of interest will pass to a passive investor;
  • any securities purchased will be unregistered securities (not securities of publicly traded companies), and therefore will be restricted securities;
  • the broker will not hold customer funds or be able to legally bind any parties;
  • the broker will not provide financing for the transaction; and
  • the business being acquired is a going concern, and is not a shell company.

While the relief in the no-action letter is circumscribed by the above assumptions, the letter does provide significant clarity and relief for many M&A brokers. The no-action letter could relieve significant burdens on brokers in certain industries or who complete certain niche M&A deals, particularly where all of their business might fall within an exemption.

Still need to comply with state regulation

While state regulators sometimes defer to the SEC’s guidance on securities issues, it is important to note that M&A brokers may still need to register with state regulators even if the recent no-action letter makes it clear they wouldn’t have to register with the SEC.

If you are interested in learning more about securities law, mergers and acquisitions, and M&A broker registration, please comment below or contact us.


Kyle Hulten

When I'm not in the office I enjoy cooking, gardening, and watching my toddler son explore his little universe.

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