United States: SEC Issues No-Action Letter Relaxing Broker-Dealer Registration Requirements For M&A Brokers

On January 31, 2014, the staff of the Securities and Exchange Commission (the "SEC") issued a no-action letter (the "Letter")1 permitting M&A Brokers (as defined below) to engage in certain activities related to the purchase or sale of privately held companies without complying with the broker-dealer registration requirements of Section 15(b) of the Securities Exchange Act of 1934 (the "Exchange Act").  The Letter broadens the relief provided under prior no-action letters and represents a significant departure from the SEC's long-standing position that required M&A Brokers facilitating securities transactions to comply with the same registration requirements as more traditional broker-dealers.


In 1985, the U.S. Supreme Court held that the sale of all outstanding shares of a privately held company constitutes the sale of "securities" for purposes of federal securities laws.2  Because the Exchange Act broadly defines the term "broker" as anyone engaged in the business of effecting securities transactions on behalf of others,3 persons who facilitate the sale of operating businesses ("M&A Brokers") through the sale of a company's stock have long been required to register with the SEC as broker-dealers and become members of FINRA pursuant to Section 15(b) of the Exchange Act.  If, on the other hand, the sale of a business is effected through an asset sale rather than a securities transaction, M&A Brokers facilitating the transaction have not been required to register.

This is an anomalous result, both because the role of an M&A Broker bears little resemblance to the role of a traditional broker-dealer, and because the transaction structure is typically determined based on accounting or tax considerations without regard to the role of the M&A Broker or the applicability of federal securities laws.  In a 2005 report, the American Bar Association noted that the traditional broker-dealer registration model is ill-suited to M&A Brokers, who do not hold customer funds and merely facilitate transactions among parties who actively negotiate, typically with the assistance of counsel and other advisers.4 Previous SEC no-action letters addressing the issue afforded only limited relief by imposing transaction size limits, prohibiting M&A Brokers from participating in negotiations on behalf of clients, and leaving unclear whether an M&A Broker may receive transaction-based compensation without registering.5


The Letter, issued in response to a request by six attorneys who have represented clients in connection with mergers and acquisitions and similar brokerage transactions, permits unregistered M&A Brokers to facilitate certain securities transactions resulting in the sale of a business, provided that a number of conditions are met.  As a threshold matter, the transaction must result in the transfer of ownership of a privately held company, defined as a company that does not have any class of securities registered or required to be registered with the SEC.  Additionally, the transaction must result in the buyer obtaining control over, and actively operating, the selling business.  The Letter also sets forth ten criteria that must be satisfied in order for an M&A Broker to be able to rely on the SEC's no-action position:

  • The M&A Broker must not have the ability to bind any party to the transaction;
  • The M&A Broker must not directly, or indirectly through any of its affiliates, provide financing for the transaction;
  • The M&A Broker must not have custody, control, or possession of funds or securities exchanged in connection with the transaction for the account of others;
  • The transaction must not involve a public offering of securities, and no party to the transaction may be a shell company;
  • If the M&A Broker represents both buyers and sellers, it must provide clear written disclosure and obtain written consent to the joint representation;
  • The M&A Broker must not represent a group of buyers unless the group is formed without the assistance of the M&A Broker;
  • The buyers must, upon consummation of the transaction, control6 and actively operate the target company, which may be accomplished by electing executive officers, approving the annual budget, or serving as an executive or other executive manager, among other roles;
  • The transaction must not result in the transfer of interests to a passive buyer or group of passive buyers;
  • Any securities received by the buyers or the M&A Broker in connection with the transaction must be restricted securities; and
  • The M&A Broker must not be barred from association with any broker-dealer by the SEC, any state, or any self-regulatory organization, and must not be suspended from association with a broker-dealer.

Unlike previous no-action letters issued by the SEC in this area, the Letter imposes no restrictions based upon the size of the transaction, and permits unregistered M&A Brokers to receive transaction-based or other compensation as agreed by the parties.  M&A Brokers relying on the Letter may also participate in negotiations, advise the parties to the transaction to issue securities or otherwise effect the transfer of the business by means of an exchange of securities, and assess the value of any securities sold. 


The Letter represents a significant step toward relieving M&A Brokers of the SEC's broker-dealer registration requirements.  M&A Brokers, however, must still comply with all applicable anti-fraud provisions of the federal securities laws, and M&A Brokers seeking to rely on the Letter must also consider various state securities laws in determining whether registration with the SEC or state authorities will be required. 

M&A Brokers should also be aware of proposed changes in the law that may exempt M&A Brokers from broker-dealer registration requirements under circumstances that may differ from those outlined in the Letter.  Last month, the House of Representatives unanimously passed H.R. 2274, which would, if enacted, amend the Exchange Act to exempt from the broker-dealer registration requirements M&A Brokers who facilitate the sales of privately held companies, subject to limitations on the size of the company being sold.7 The bill has been referred to the Senate Committee on Banking, Housing and Urban Affairs, but it remains to be seen whether the measure will be brought to a vote, particularly given the timing of the Letter, which addresses many of the concerns of the bill's original sponsors.

Finally, though the Letter represents progress in clarifying the legal status of placement agents and brokers in the M&A context, market participants still face a great deal of uncertainty when engaging in private placement marketing activities in other contexts such as private funds, emerging companies, real estate and other areas.  In recent SEC speeches, the SEC has expressed a heightened enforcement focus on marketing and investment banking activities in the private funds area in particular.8


M&A Brokers (SEC No-Action Letter, Jan. 31, 2014), available athttp://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf .

2 Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985).

3 17 U.S.C. 78c(a)(4).

Report and Recommendation of the Task Force on Private Placement Broker-Dealers, American Bar Association (June 20, 2005), available athttp://www.sec.gov/info/smallbus/2009gbforum/abareport062005.pdf

See Country Business, Inc. (SEC No-Action Letter, Nov. 8, 2006); International Business Exchange Corporation (SEC No-Action Letter, Dec. 12, 1986).

6 The Letter specifies that a buyer is deemed to have the necessary control for purposes of the no-action relief 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."  Furthermore, the Letter states that control will be presumed to exist if, upon completion of the transaction, the buyer will have the right to vote 25% or more of a class of voting securities, the power to sell or direct the sale of 25% or more of a class of voting securities, or, in the case of a partnership or limited liability company, the right to receive 25% or more of the capital upon dissolution.

7 H.R. 2274, 113th Cong. (2014).

See David W. Blass, A Few Observations in the Private Fund Space (Apr. 5, 2013), available at http://www.sec.gov/news/speech/2013/spch040513dwg.htm .

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.

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