Legislation Clarifies Federal Exemption for M&A Brokers

Mar 9, 2023

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While M&A brokers previously faced uncertainty with respect to federal broker-dealer registration requirements, a new statute provides a clear and unambiguous exemption based on specified, limited activities.  M&A brokers received an unanticipated but welcome surprise in legislation recently adopted by Congress that clarifies an exception from broker-dealer registration requirements.

Signed into law by President Biden under Title V of H.R. 2617 (the “Consolidated Appropriations Act of 2023”, otherwise known as the “Act”)) late in December 2022, Title V essentially codifies an exemption (the “Exemption”) from SEC broker-dealer registration requirements for M&A brokers contemplated under an SEC No-Action Letter that was filed in early 2014 (the “No-Action Letter”). The No-Action Letter provided basic guidelines for brokers to engage in the business of effecting merger and acquisition transactions on behalf of privately held companies without registering with the SEC as a broker-dealer.

Specifically, new subsection (13) (amending Section 15(b) of the Securities Exchange Act of 1934; the “Exchange Act”) defines an “M&A broker” as a broker, and any person associated with a broker, engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, regardless of whether the broker acts on behalf of a seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company. Any broker relying on the Exemption must reasonably believe that, upon consummation of the transaction, any person acquiring securities or assets of the eligible privately held company, acting alone or in concert will:

  1. Control the eligible privately held company or the business conducted with the assets of the eligible privately held company; and
  2. Directly or indirectly be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company, including without limitation, by electing executive officers, approving the annual budget, or serving as an executive or other executive manager.

Some key questions are raised by these standards, namely what is defined as “control” or an “eligible privately held company”. Fortunately, the Exemption goes on to state that an “eligible privately held company” has: (i) no class of securities registered or required to be registered with the SEC under Exchange Act Section 12; and (ii) annual EBITDA less than $25 million or annual gross revenues less than $250 million. In addition, “control” is defined as the power to, directly or indirectly, direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Control is presumed to be present if, upon completion of a transaction, the buyer or group of buyers has the right to vote, sell, or direct 25% or more of a class of voting securities or, in the case of a partnership or LLC, has contributed or has the right to receive upon dissolution 25% or more of the capital of a company.

Now that M&A brokers may rely on express language of the Exemption, there is increased clarity at the federal level as to their broker-dealer registration requirements. The Exemption supersedes the No-Action Letter. No longer having to rely on the No-Action Letter or NASAA Model Rule of 2015 (the “Model Rule”, which essentially tried to codify the No-Action Letter, but with subtle changes from the Exemption that was adopted), brokers can turn their focus to state regulation. M&A brokers that aim to rely on the Exemption should be aware that they must determine whether they are subject to broker-dealer or other registration requirements under applicable state laws. In passing the Exemption, Congress did not preempt state law broker-dealer registration requirements or other state laws, rules or regulations. Approximately 20 states had previously adopted some form of the Model Rule. However, knowing that Congress has now effectively codified the Model Rule, various states could follow suit in officially adopting a pro-M&A broker exemption.

If you have questions regarding the foregoing, please feel free to contact David J. Morris (312-224-1229; [email protected]) or the Fox Swibel attorney with whom you regularly work to address these issues.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances.  Under applicable rules of professional conduct, this content may be regarded as attorney advertising.

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