Congress Enacts New Registration Exemption for M&A Brokers

The Consolidated Appropriations Act, 2023 (P.L. 117-328), signed into law by President Biden on December 29, 2022, contains a provision exempting certain M&A brokers from the requirement to register as a broker-dealer with the Securities and Exchange Commission (SEC). This new exemption will be effective on March 29, 2023.

Background

Business brokers and other financial advisors assisting clients in the sale of privately held businesses through the sale of their securities could be viewed as falling within the definition of the term “broker” in the Securities Exchange Act of 1934 (Exchange Act), requiring registration as a broker-dealer with the SEC. In 2014, the Staff of the SEC’s Division of Investment Management addressed this concern by issuing a no-action letter providing relief from registration for brokers effecting securities transactions in connection with the transfer of ownership of privately held companies (M&A brokers) meeting the requirements set forth therein. Prior to the new legislation, brokers assisting privately held businesses in M&A transactions involving the issuance of securities would need to rely upon this no-action letter or register as a broker-dealer with the SEC.

New Federal Exemption

The new legislation now provides a statutory federal exemption from SEC broker-dealer registration for M&A brokers by adding new subsection (13) to Section 15(b) of the Exchange Act.

An “M&A broker” entitled to the exemption is defined as 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 eligible privately held company. To qualify for the exemption, the broker must reasonably believe that

upon consummation of the transaction, any person acquiring securities or assets of the eligible privately held company will control the company or the business conducted with the assets of the eligible privately held company and be actively involved in its management; and
any person offered securities in exchange for securities or assets of the eligible privately held company will, prior to becoming legally bound to consummate the transaction, receive or have reasonable access to the most recent fiscal year-end financial statements of the issuer of the securities as customarily prepared by the management of the issuer in the normal course of operations and, if the financial statements of the issuer are audited, reviewed, or compiled, any related statement by the independent accountant, a balance sheet dated not more than 120 days before the date of the offer, and information pertaining to the management, business, results of operations for the period covered by the foregoing financial statements and material loss contingencies of the issuer.

An "eligible privately held company" is a company that

has no class of securities registered or required to be registered under Section 12 of the Exchange Act; and
had EBITDA of less than $25 million or gross revenues of less than $250 million or both in the fiscal year prior to the fiscal year in which the M&A broker is initially engaged for the transaction.

The definition of “control” includes a presumption of control if, upon completion of a transaction, the buyer or group of buyers has the power to vote or sell 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 its capital.

Activities That Are Not Exempt

An M&A broker will not be entitled to the exemption if it engages in any of the following activities:

receives, holds, transmits, or has custody of the funds or securities to be exchanged by the parties to the transaction.
engages on behalf of an issuer in a public offering of any class of securities that is registered, or is required to be registered, with the SEC under Section 12 of the Exchange Act or with respect to which the issuer files, or is required to file, periodic information, documents, and reports under subsection (d) thereof.
engages on behalf of any party in a transaction involving a shell company, other than a business combination related shell company.
provides financing related to the transfer of ownership of an eligible privately held company.
assists any party to obtain financing from an unaffiliated third party without complying with all other applicable laws in connection with such assistance and disclosing any compensation in writing to the party.
represents both the buyer and the seller in the same transaction without providing clear written disclosure as to the parties the broker represents and obtaining written consent from both parties to the joint representation.
facilitates a transaction with a group of buyers formed with the assistance of the M&A broker to acquire the eligible privately held company.
engages in a transaction involving the transfer of ownership of an eligible privately held company to a passive buyer or group of passive buyers.

Disqualification

An M&A broker is not exempt from registration if such broker or any officer, director, member, manager, partner, or employee of such broker has been barred from association with a broker or dealer by the SEC, any state, or any self-regulatory organization or is suspended from association with a broker or dealer.

Important Considerations

It is important to note that the new federal exemption does not pre-empt state blue sky law registration requirements for M&A brokers. Those requirements will continue to apply to M&A brokers that qualify for the new federal exemption.

There are differences between the requirements of the SEC’s 2014 no-action letter and those of the new legislation. Most notably, the no-action letter does not impose any size limitation for an M&A broker’s client, while the new legislation does. It will remain to be seen if the SEC’s staff withdraws the no-action letter or otherwise modifies the requirements for the relief it provides.