Skip to Content

Relief from SEC Broker-Dealer Registration for Private Company M&A Brokers

on Monday, 2 November 2015 in The Closer - M&A, Securities & Corporate Counsel: Kevin P. Tracy, Editor

Among professionals engaged in mergers and acquisitions, there has been a long-standing concern that advisors participating in M&A transactions and receiving transaction-based compensation fall within the definition of “broker” under Section 3(a)(4) of the Securities Exchange Act of 1934 (Exchange Act), where the transaction takes the form of the sale of the selling company’s stock (rather than a sale of company assets). A 2014 SEC No-Action Letter (February 4, 2014), referred to as the “M&A Broker Letter,” provides valuable guidance expanding the services that M&A brokers may provide in the context of private companies without registering as a broker-dealer.

Background: In a 1985 U.S. Supreme Court decision, Landreth Timber Co. v. Landreth, the Court reject the “sale of business doctrine” and held that the federal securities laws apply to a sale of all of the outstanding stock of a corporation, even though the transaction constituted a sale of the entire business and a transfer of all control because the transaction involved the sale of “stock,” which is expressly a “security” under the Securities Act of 1933. The Court’s decision extended the application of federal securities law to mergers and acquisitions involving the sale of stock, impacting M&A firms advising sellers and buyers in such transactions. Under federal securities laws, a “broker” is any person engaged in the business of effecting transactions in securities for the account of others. Section 15(a) of the Exchange Act requires broker-dealers engaged in interstate commerce to register with the SEC. Registered broker-dealers are required to become members of the Financial Industry Regulatory Authority (FINRA) and are subject to regulation by both FINRA and the SEC.

Although the securities laws would not apply to a similar M&A transaction structured as a sale of assets, in many cases, for various tax, liability or other reasons, the parties to the transaction may not know how the transaction will ultimately be structured (assets versus stock), and a transaction that begins as an asset sale may end up as a stock sale (or vice versa). There is also a significant difference in the role that traditional retail brokers play with their customers and the role played by M&A advisers, where the owners of the selling and buying companies are generally significantly involved in the negotiation process, including reaching agreement on the purchase price. Earlier SEC No-Action letters (International Business Exchange Corp. in 1986 and Country Business, Inc. in 2006) placed material restrictions on the role of M&A advisers, including limiting applicability to a “small business” and requiring that only assets could be offered for sale by any such intermediary.

SEC M&A Broker Letter: The SEC no action letter provides that the SEC Division of Trading and Markets will not recommend enforcement action to require registration by brokers who limit their securities activities to assisting in transactions which result in the transfer of ownership of privately-held companies, whether by stock sale, merger, issuance of new shares or other business combination.

The M&A Broker Letter sets out criteria that must be met by the M&A Broker:

  1. The M&A broker must not have the ability or authority to bind the principals in the M&A transaction.
  2. The M&A broker should not provide financing for the M&A transaction.
  3. The M&A broker must not have custody, control, possession or otherwise handle funds or securities issued in connection with the M&A transaction.
  4. The M&A transaction must not involve a public offering, or a shell company.
  5. If the M&A broker represents both the buyer and seller, it must provide written disclosure to both parties, and obtain their written consent to the joint representation.
  6. If the selling company is to be sold to a group of buyers, the M&A broker must not have assisted in the formation of the buying group.
  7. Upon completion of the M&A transaction, the buyer must have control of the selling company and actively operate the business.
  8. The M&A transaction may not involve the transfer of interests to a passive buyer.
  9. Any securities received by the buyer (or the M&A broker) must be restricted securities within the meaning of SEC Rule 144.
  10. The M&A broker must not have been barred or suspended from association with a registered broker-dealer.

State Law Considerations: Although the SEC M&A Broker Letter is very helpful guidance to M&A brokers under federal securities laws, it does not address state securities laws, which may have different tests for exemption from registration as a broker-dealer. In Nebraska, for example, applicable exemptions will depend on the type of security being issued or sold, the type of transaction and whether the M&A broker is located (or has a place of business) in Nebraska or outside Nebraska. Certain common securities registration exemptions under the Securities Act of Nebraska (such as the limited offering exemption to 15 or fewer nonaccredited investors in Nebraska, Section 8-1111(9)) limit commissions or other remuneration to registered broker-dealers. In light of these state-law requirements, careful review with legal counsel of both the federal and applicable state broker-dealer exemptions should be undertaken before an M&A broker enters into an M&A transaction in which it will be receiving a commission or other remuneration in connection with the transaction.

Dennis J. Fogland

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500

Law Firm Website Design