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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