SEC No-Action Letter Relieves M&A Brokers from Registration Requirements

February 26, 2014


On January 31, 2014, the Securities and Exchange Commission’s Division of Trading and Markets (“SEC staff”) issued a no-action letter providing conditional relief to certain “M&A Brokers” from the broker-dealer registration requirements of Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”). In a departure from its prior position, the SEC staff’s no-action letter would provide relief to certain M&A Brokers who advertise privately-held companies for sale, participate in the sale negotiations, and provide transaction advice such as valuation and structuring, while receiving transaction-based compensation (generally, “M&A Transactions”).

Industry leaders have long maintained that the role of an M&A Broker is meaningfully different from that of institutional brokerages and does not warrant the full costs and regulatory burdens associated with broker-dealer registration.[1] The no-action letter, available here, is a solid step toward recognizing these differences.

Who Qualifies as an M&A Broker Under the Relief?

For purposes of the no-action letter, M&A Brokers are individuals engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of privately-held companies through the purchase, sale, exchange, issuance, repurchase, or redemption of securities or assets of the company. Such M&A Brokers must organize deals that transfer ownership and control to a buyer that will actively operate the company or the business conducted with the assets of the company.

Per the letter, a “privately-held company” is one that does not have securities that must be registered, or required to be registered, with the SEC under Section 12 of the Exchange Act, or securities that require the company to file reports or information under Section 15(d) of the Exchange Act. Further, a privately-held company must be a going concern and not a “shell” company.

What are the Conditions of the Relief?

There are numerous conditions that must be met for an M&A Broker to be relieved of the broker-dealer registration requirements:

  • The M&A Broker may not have the ability to bind a party to an M&A Transaction.
  • The M&A Broker (and its affiliates) cannot provide financing for an M&A Transaction, although it may assist a purchaser in obtaining financing from unaffiliated third parties. Any fee received for coordinating financing must be disclosed to the parties in writing.
  • The M&A Broker may not have custody, control, or possession or otherwise handle funds or securities in connection with an M&A Transaction for the account of others.
  • The M&A Transaction may not involve a public offering, and any offer or sale of securities must be conducted in compliance with an exemption from registration under the Securities Act of 1933 (“Securities Act”).
  • Neither party to the M&A Transaction may be a shell company, other than a business combination related shell company.[2]
  • If the M&A Broker represents both the buyer and seller in the same transaction, that fact must be disclosed to both parties in writing and the M&A Broker must receive written consent from both parties.
  • The M&A Broker may organize transfers between groups only if the broker played no role in organizing or creating the groups.
  • The buyer or a group of buyers who purchase the company must control and actively operate the company or the business conducted with the assets of the business. Further, the M&A Transaction may not result in the transfer of interests to a passive buyer or group of passive buyers.
  • Any security received by the buyer in an M&A Transaction will be a restricted security under Rule 144(a) (3) of the Securities Act.
  • The M&A Broker (and, in the case of an entity, each officer, director, or employee) has not been barred or suspended from association with a broker-dealer.

To satisfy the “control” condition in the no-action letter, buyers must have the power, directly or indirectly, to direct management or policy decisions. Control is presumed if the buyer or group of buyers has ownership, or the power to direct the ownership, of 25% of a class of voting securities, or has the right to receive upon dissolution or has contributed 25% or more of the capital.

What are the Effects of the Relief?

Despite the numerous conditions, the no-action letter provides meaningful relief for M&A Brokers. Importantly, the relief does not limit the compensation that an M&A Broker may receive. Persons engaged in mergers and acquisitions activities should closely review their activities to evaluate whether individual transactions fall within the scope of the SEC Staff’s no-action letter.

Private equity firms may also find the no-action letter useful. The letter would permit arrangements, if properly structured, wherein fund sponsors pay consultants that meet the definition of M&A Broker for referrals of acquisition targets and investments.

Finally, both houses of Congress have considered legislation that would provide relief from the registration requirement for M&A Brokers by amending the Exchange Act. While those bills would provide different relief than that outlined in the no-action letter, future legislative efforts remain unclear.

Contact Information

O’Melveny & Myers is able to advise M&A Brokers and effected parties on the issues in the SEC Staff’s no-action letter and compliance in future transactions. For questions or additional information, please contact Heather Traeger at (202) 383-5232 or htraeger@omm.com.

[1] Request for No Action Letter - M&A Brokerage Activities, January 31, 2014, page 3.
[2] A “business combination related shell company” is a shell company as defined in Rule 405 of the Securities Act.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Heather Traeger, an O'Melveny partner licensed to practice law in the District of Columbia and Texas contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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