As many are aware, Congress passed its own version of the US Securities and Exchange Commission (SEC) staff’s mergers and acquisitions (M&A) broker no-action letter in December 2022, creating a new exemption from broker registration in Section 15(b)(13) of the Exchange Act that largely tracks the SEC staff’s no-action letter, with one important tweak.
The M&A broker no-action letter provides relief from SEC registration for so-called “M&A brokers” that effect securities transactions in connection with the transfer of ownership and control of privately held companies where the buyer (or group of buyers) will actively operate the companies or the businesses conducted with the assets of the companies. The SEC staff seemingly issued the M&A broker no-action letter to avert congressional action in 2014 to create an explicit statutory exemption. M&A advisors have relied on the no-action letter since its 2014 issuance, but the new Section 15(b)(13) exemption provides M&A advisors firmer comfort than an SEC staff no-action letter, even though the exemption imposes new financial limitations on covered transactions.
Below are some key points for M&A brokers to consider:
- Financial Performance Limitation – Section 15(b)(13) adds a dollar limitation on eligible transactions by limiting the exemption to transactions involving privately held companies whose prior fiscal year earnings before interest, taxes, depreciation, and amortization (EBITDA) were less than $25 million or whose prior fiscal year gross revenues were less than $250 million (each of which the SEC may adjust through rulemaking). The no-action relief has no similar limitation, but this limitation aligns with the same limitation in the North American Securities Administrators Association (NASAA) Model Rule, adopted in 2015, with which M&A brokers may have already had to comply depending on the states in which they do business.
- SEC Staff Withdrawal of SEC Staff’s M&A Broker Letter – It is unclear whether the SEC staff will withdraw the M&A broker no-action letter, including because the Exchange Act M&A broker exemption is more restrictive than the no-action relief.
- State Law Requirements – Neither Section 15(b)(13) nor the SEC staff no-action letter explicitly address state laws governing brokers and related M&A broker exemptions. Accordingly, M&A brokers should remain attuned to potential state registration requirements and related exemptions, including state M&A broker exemptions (where adopted) and institutional exemptions.
- Proposed Finders Exemptive Order – The SEC has taken no further action on the finders exemptive order it proposed in October 2020 under former Chair Jay Clayton, in which the SEC posed the question of whether it should codify the M&A broker letter and which has since been removed from the SEC’s published rulemaking agenda. This is unsurprising given current Chair Gary Gensler’s priorities and policy leanings.