SEC staff action may head off congressional action to exempt M&A Brokers from registration.
On January 31, the staff of the Securities and Exchange Commission (SEC) issued a no-action letter[1] that permits an M&A broker (as defined below) to effect securities transactions in connection with the transfer of ownership of a privately held company without the M&A broker registering as a broker-dealer under section 15(b) of the Securities Exchange Act of 1934 (Exchange Act).
The relief contains terms and conditions that M&A brokers must comply with as well as a number of defined terms. The no-action letter comes as Congress was considering amendments to the Exchange Act that would have exempted M&A brokers from broker-dealer registration on terms similar to those in the letter.
Scope of Relief
The relief permits M&A brokers[2] to facilitate mergers, acquisitions, business sales, and business combinations (collectively, M&A Transactions) between sellers and buyers of privately held companies.[3] The relief contemplates that M&A brokers may (1) advertise a privately held company for sale with information such as the description of the business, general location, and price range; (2) participate in the negotiations of M&A Transactions; (3) advise the parties to issue securities, or otherwise to effect the transfer of the business by means of securities, or assess the value of any securities sold; and (4) receive transaction-based compensation.
Representations
In issuing the relief, the SEC staff highlighted the following representations made by the persons requesting the relief:
Legislative Efforts
The timing of the no-action letter is interesting in light of recent efforts in Congress to pass similar relief. On January 14, for example, the House of Representatives passed H.R. 2774, the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act.[6] On that same day, S. 1923 was introduced in the Senate, with a similar title and similar provisions.[7] Both bills, if adopted, would have amended section 15 of the Exchange Act to exempt M&A brokers from the broker-dealer registration requirements under that act. The following chart illustrates major differences between the no-action letter and the congressional bills.
|
No-Action Letter |
H.R. 2774 |
S. 1923 |
Size of Company |
No limitation on the size of a privately held company |
Exemption limited to companies with revenues or earnings of less than $25 million |
Exemption limited to companies with revenues or earnings of less than $25 million |
Control |
Control measured using 25% threshold |
Control measured using 20% threshold |
Control measured using 20% threshold |
Disclosures or availability of financials |
No mention |
Disclosures or availability required |
Disclosures or availability required |
Persons barred from associating with a broker-dealer |
Cannot rely on the letter |
No prohibition |
No prohibition |
Implications
While the relief provides clarity regarding the status of M&A brokers, it may also raise interpretive issues as persons try to comply with its terms. For example, although the relief does not appear to prohibit an associated person of a registered broker-dealer from acting as an M&A broker, such a person may be precluded from acting as such, given the broad prohibition on handling funds and securities in connection with M&A Transactions “or other securities transactions for the account of others.” In addition, although the relief is conditioned on the absence of a public offering and the offering being exempt from registration under the Securities Act, it is not clear whether a business combination relying on the Securities Act section 3(a)(10) exemption from registration would qualify. Securities Act section 3(a)(10) is often used in private business combinations when the number of target shareholders (including employees) prevent reliance on the private placement exemption. Further, the ability to receive transaction-based compensation in connection with a business combination or an acquisition without having to register as a broker-dealer or needing an exemption from registration stands in contrast to the SEC staff’s views in 2012 regarding potential broker-dealer registration issues raised through the receipt of transaction fees in the private equity fund space.[8] While the relief has been a long time in the making—the American Bar Association’s Task Force on Private Placement Brokers recommended similar relief in 2005[9]—it may have implications beyond the M&A space as market participants evaluate the scope of the relief and any spillover into other market practices.
Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
[2]. The relief defines an “M&A broker” as a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company to a buyer who will actively operate the company or the business conducted with the assets of the company.
[3]. A “privately held company” is defined as a company that does not have any class of securities registered, or required to be registered, with the SEC under section 12 of the Exchange Act, or with respect to which the company files, or is required to file, periodic information, documents, or reports under section 15(d) of the Exchange Act. There is no limitation on the size of the company.
[4]. Under the relief, a “shell” company is a company that (1) has no or nominal operations and (2) has (a) no or nominal assets, (b) assets consisting solely of cash and cash equivalents, or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets. 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]. The relief defines a “business combination related shell company” as a shell company (as defined in Rule 405 of the Securities Act) that is (1) formed by an entity that is not a shell company solely for the purpose of changing the corporate domicile of that entity solely within the United States or (2) formed by an entity defined in Securities Act Rule 165(f) among one or more entities other than the shell company, none of which is a shell company.
[6]. H.R. 2774, 113th Cong. (2014).
[7]. S. 1923, 113th Cong. (2014).