SEC Provides No-Action Relief for M&A Brokers

February 05, 2014

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.


In issuing the relief, the SEC staff highlighted the following representations made by the persons requesting the relief:

  • Inability to Bind Parties: M&A brokers may not bind parties to a transaction.
  • Prohibition on Financing: M&A brokers may not provide financing for M&A Transactions, whether directly or indirectly through an affiliate. M&A brokers can, however, assist purchasers to obtain financing from unaffiliated third parties, but the M&A broker must comply with all applicable requirements.
  • No Handling of Funds or Securities: The relief prohibits M&A brokers from having custody, control, or possession of, or from otherwise handling funds or securities issued or exchanged in connection with, M&A Transactions or other securities transactions for the accounts of others.
  • No Public Offerings or Shell Companies: The relief is not available to M&A Transactions involving public offerings of securities. Any offer or sale of securities must be conducted in compliance with an applicable exemption in the Securities Act of 1933 (Securities Act). In addition, no party to an M&A Transaction may be a shell company[4] other than a business combination related shell company.[5]
  • Disclosures Regarding Dual Representation: If an M&A broker represents both buyers and sellers, it must provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  • Group Representation: An M&A broker can facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance of the M&A broker.
  • Control: The relief contemplates that a buyer (whether individually or as part of a group) will control and operate the company or business conducted with the assets of the business. Necessary control can be exhibited if a buyer, or a group of buyers collectively, has the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Further, for purposes of the no-action letter, necessary control is presumed to exist if, upon completion of the transaction, the buyer or group of buyers has (1) the right to vote 25% or more of a class of voting securities; (2) the power to sell or direct the sale of 25% or more of a class of voting securities; or (3) in the case of a partnership or limited liability company, the right to receive upon dissolution or has contributed 25% or more of the capital.
  • Operations: In addition to the control requirements, a buyer, or a group of buyers, must actively operate the company or the business conducted with the assets of the company. The relief states that a “buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things.” No M&A Transactions covered by the relief may result in the transfer of interests to a passive buyer or a group of passive buyers.
  • Restricted Securities: Any securities received by a buyer or an M&A broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act because the securities would have been issued in a transaction not involving a public offering.
  • Barred Individuals: M&A brokers (and, if an M&A broker is an entity, each officer, director, or employee of the M&A broker) may not (1) have been barred from association with a broker-dealer by the SEC, any state, or any self-regulatory organization and (2) be subject to a suspension from association with a broker-dealer.

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 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


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.


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[1]. View the no-action letter here.

[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).

[8]. See David W. Blass, Chief Counsel, Div. of Trading and Markets, SEC, Remarks at American Bar Association’s Trading and Markets Subcommittee Meeting: A Few Observations in the Private Fund Space (Apr. 5, 2013), available here.

[9]. American Bar Association, Report and Recommendations of the Task Force on Private Placement Brokers (June 20, 2005), available here.