ARTICLE
10 April 2014

SEC Issues Broker-Dealer No-Action Letter For M&A Brokers

RG
Ropes & Gray LLP

Contributor

Ropes & Gray is a preeminent global law firm with approximately 1,400 lawyers and legal professionals serving clients in major centers of business, finance, technology and government. The firm has offices in New York, Washington, D.C., Boston, Chicago, San Francisco, Silicon Valley, London, Hong Kong, Shanghai, Tokyo and Seoul.
The SEC issued a no-action letter stating that it would not require certain finders helping to facilitate a private M&A transaction to register with the SEC.
United States Corporate/Commercial Law

In January 2014, the SEC issued a no-action letter stating that, under certain circumstances, it would not require a finder, consultant or other intermediary helping to facilitate a private M&A transaction to register with the SEC as a broker-dealer.

It has long been an unresolved legal question whether M&A brokers who refer target companies to potential buyers or investors, and who are paid a fee based on successful completion of a transaction, constitute broker-dealers on account of their intermediary role in the sale of securities. The no-action letter did not take a position on this issue but did clarify that the SEC staff will not recommend enforcement action against a so-called "M&A Broker" for failing to register as a broker-dealer, provided that the M&A Broker arrangement and transaction meet certain conditions, including that: (i) the M&A Broker will not have the ability to bind either the buyer or seller to the transaction; (ii) the M&A Broker will not provide financing for the transaction; (iii) the M&A Broker will facilitate acquisitions with a group of buyers only if the group is formed without the assistance of the M&A Broker; (iv) the buyer, at the end of the transaction, must control and operate the target company; and (v) the acquisition transaction does not involve a public offering of securities.

This no-action letter creates no-action relief for many of the referral arrangements that private equity firms enter into with third-party finders or consultants. In addition, this letter may give some comfort to unregistered private equity sponsors that receive transaction-based fees in connection with portfolio company M&A transactions. While private equity sponsors often will not satisfy each of the specific conditions cited for this no-action relief, because their services in this regard are similar to services provided by M&A Brokers, this letter provides a basis to suggest that private equity fund sponsors should not be required to register with the SEC as broker-dealers because of such activity. For more in-depth information about the no-action letter, see our February 11, 2014 Client Alert.

M&A Brokers, SEC No-Action Letter, 2014 WL 356983 (Jan. 31, 2014).

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