United States: SEC Offers Relief To M&A Brokers

The Office of the Chief Counsel of the Division of Trading and Markets of the Securities and Exchange Commission recently issued an important "No-Action" Letter providing regulatory relief for participants in certain mergers and acquisitions transactions. The letter permits persons who qualify as "M&A Brokers" to facilitate the sale of private companies without registering with the Commission as a broker-dealer, subject to a number of restrictions. While many questions and considerations remain, the M&A Broker designation has the potential to relieve some of the burdens of registration for advisors specializing in private business combinations.

I. INTRODUCTION

On January 31, 2014, the Office of the Chief Counsel of the Division of Trading and Markets of the US Securities and Exchange Commission ("the Commission") issued a "No-Action" Letter1 permitting "M&A Brokers," a term generally defined to mean persons that intermediate the sale of private companies to persons that intend to operate those companies, to effect securities transactions in connection with the transfer of ownership of privately-held companies without registration as a broker-dealer under the terms and conditions described below.

II. THE HISTORIC TREATMENT OF M&A BROKERS: BROKER-DEALER REGISTRATION

Historically, the Commission has interpreted the terms "broker" and "dealer" in Section 15(a) of the Securities Exchange Act ("the Exchange Act") to require persons engaged in merger and acquisition activity to register with the Commission. For example, in a 1973 "No-Action" Letter to May-Pac Management Company, Commission Staff stated that "persons who play an integral role in negotiating and effecting mergers or acquisitions that involve transactions in securities" were likely to be deemed either brokers or dealers.2 The presence of transaction-based compensation, a key Commission consideration in determining broker-dealer status, made this finding almost certain.3

III. SUMMARY OF THE RELIEF

3.1 Summary of the Conditions to the Relief

Under the letter, Commission Staff recognize a new category of person exempt from registration as a broker-dealer: the M&A Broker. Under the new guidance, an M&A Broker may take part in buying or selling privately held companies without registering as a broker-dealer pursuant to Section 15(a) of the Exchange Act.

3.2 What Can an M&A Broker Do?

An M&A Broker may facilitate mergers, acquisitions, business sales, and business combinations between sellers and buyers of privately held companies without regard to the size of the company. The M&A Broker can represent both parties, participate in negotiations, advertise the company for sale, and receive transaction-based compensation. However, the company to be bought or sold must be a "going concern."4 Further, companies that are required to file information with the Commission under Section 15(d), companies with registered securities, and "shell"5 companies are not subject to relief. In addition, Commission Staff provided a list of 10 criteria M&A Brokers must meet in order to obtain relief from registration with the Commission:

  1. The M&A Broker must not have the ability to bind either party to the M&A transaction.
  2. The M&A Broker must not provide financing for the transaction, and if the M&A Broker assists in finding financing, it must disclose any compensation in connection with that role in writing to the client.
  3. The M&A Broker must not control securities or funds related to the transaction.
  4. The transaction cannot involve a public offering.
  5. If the M&A Broker represents both parties, written disclosure and consent must be obtained.
  6. An M&A Broker can only facilitate a transaction with multiple buyers if the group was formed without assistance of the M&A Broker.
  7. The buyer must control and actively6 operate the company when the transaction is complete.7
  8. The transaction cannot transfer an interest to a passive buyer.
  9. Any securities the M&A Broker or the buyer receive must be restricted securities.
  10. The M&A Broker cannot have been suspended or barred from association with a broker-dealer by the Commission, FINRA, or any state regulator.

3.3 What Can't an M&A Broker Do?

In addition to the qualifications above, an M&A Broker may not engage in other activities traditionally associated with a broker-dealer. These include, among other things:

  • Participation in private placements (other than M&A transactions, as described);
  • Intermediation of secondary market transactions (including private sales of "less than" control stakes);
  • Market making;
  • Other secondary market trading;
  • Securities lending and finance (including advisory);
  • Underwriting or other capital leasing;
  • Public M&A (M&A transactions involving a public offering); and
  • Receipt of other than restricted securities by the M&A Broker.

3.4 Policies and Procedures

In light of the many requirements Commission Staff have set out for M&A Brokers, companies planning on taking advantage of the exemption from registration should establish policies and procedures that are reasonably designed to (a) keep within the guidance and any other legal requirement that may be applicable (e.g., state law), and (b) allow M&A Brokers to demonstrate to applicable authorities that they are within the provided guidance.

IV. CONCLUSION

Many questions and considerations remain for companies wishing to take advantage of Commission Staff's guidance on M&A Brokers. In particular, how this guidance will play out in respect of various state law regimes requiring registration of brokers, dealers, and salespersons (or sales agents) remains an open question that will, of necessity, be answered on a case-by-case basis. The implications of the M&A Broker designation for anti-money laundering and "know your customer" principles, likewise remains to be seen. However, the M&A Broker designation has the potential to relieve some of the burdens of broker-dealer registration for advisors specializing in facilitating private business combination transactions.

Footnotes

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

2 May-Pac Management Co., SEC No-Action Letter, 1973 SEC No-Act. LEXIS 1117 (December 20, 1973).

3 In Russell R. Miller & Co., Inc., SEC No-Action Letter, 1977 WL 10938 (Aug. 15, 1977), Commission Staff allowed an intermediary playing only a finder's (i.e., introductory) role in connection with a transaction to avoid registration as a broker-dealer as long as it "does not play a direct role in the negotiations, does not deal substantively with the other party to the transaction on behalf of the client, and does not receive [transaction-based compensation]."

4 In this context, a "going concern" need not be profitable, and could even be emerging from bankruptcy, so long as it has actually been conducting business, including soliciting or effecting business transactions or engaging in research and development activities.

5 A "shell" company is a company that: (1) has no or nominal operations; and (2) has: (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.

6 A buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things. It remains unclear what level of involvement must be undertaken by a sponsor, such as a private equity or other purchaser, in order to meet this standard.

7 Under the guidance, the necessary control will be presumed to exist if, upon completion of the transaction, the buyer or group of buyers has the right to vote 25% or more of a class of voting securities; has 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, has the right to receive upon dissolution or has contributed 25% or more of the capital.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions