SEC Issues No-Action Letter Regarding Broker-Dealer Registration Status of M&A Brokers

February 10, 2014

On January 31, 2014, staff of the Securities and Exchange Commission’s (“Commission”) Division of Trading and Markets (“Staff”) issued a long-awaited no-action letter permitting certain merger and acquisition brokers (“M&A Brokers”)1 to “effect transactions in connection with the transfer of ownership of a privately-held company under [certain] terms and conditions...without registering as a broker-dealer pursuant to Section 15(b) of the [Securities Exchange Act of 1934 (“Exchange Act”)]” (“M&A Broker Letter” or the “Letter”).2 Prior to the issuance of the Letter, unregistered persons generally were not permitted, among other things, to negotiate on behalf of their clients, provide advice to their clients regarding the issuance of securities or value the securities. The M&A Broker Letter significantly expands the Staff’s prior guidance in this area, and lays the foundation for the Staff to consider other broker-dealer registration issues, including those in connection with private equity funds.

M&A Broker Letter

The M&A Broker Letter permits M&A Brokers to facilitate mergers, acquisitions, business sales and business combinations (“Transactions”) on behalf of buyers and sellers of privately-held companies3 and receive transaction-based or other compensation in connection with the Transactions.4 Notably, the Letter does not limit the amount or type of compensation that M&A Brokers may receive. The guidance permits M&A Brokers to advertise the sale of a privately-held company and to include in such advertisements a description, general location and price range of the business. In order to utilize the relief available under the M&A Broker Letter, however, the M&A Brokers must satisfy ten conditions:

  • The M&A Broker may not have the ability to bind a party to a Transaction;
  • The M&A Broker may not provide financing for a Transaction, directly or indirectly, including through any of its affiliates. The M&A Broker may assist a purchaser with financing through an unaffiliated third party, but must comply with all applicable legal requirements and disclose to its client, in writing, the receipt of any compensation in connection with the financing.
  • The M&A Broker may not have custody, control, possession of or handle funds or securities issued or exchanged in connection with the transaction or other securities transaction for the account of others;
  • The transaction may not involve a public offering5 and no party to the transaction may be a shell company other than a business combination related shell company;
  • If the M&A Broker represents both buyers and sellers, it must provide clear written disclosure detailing the parties it represents and obtain written consent from both parties to the representation;
  • The M&A Broker may only facilitate a transaction with a group of buyers if the M&A Broker does not assist in the formation of the group of buyers;
  • The M&A Broker may not facilitate a transaction that will result in the transfer of interests to a passive buyer(s);
  • Any securities received by a buyer or M&A Broker in the transaction must only be restricted securities pursuant to Rule 144(a)(3) under the Securities Act of 1933;
  • The M&A Broker and each officer, director or employee of the M&A Broker, if any, may not be barred from association with a broker-dealer by the Commission, any state or self-regulatory organization and may not be suspended from association with a broker-dealer; and
  • The person(s) buying the target company must be the person(s) who will ultimately control and actively operate the company or business conducted with the assets of the business, upon completion of the transaction.6

The Staff stated that there is a presumption of “control” “if, upon completion of the transaction, the buyer or group of buyers has the right to vote 25% or more of a class of voting securities; has the power to sell or direct the sale of 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 the capital.”7 The definition of control is derived from the definition of control in Form BD and in the Investment Company Act of 1940. It is our understanding that, while control, under the right circumstances, could be established without reaching the above referenced thresholds, firms should be cautious and not assume control if the facts do not support it, particularly given the consequences of failing to meet the specified conditions in the Letter.8

It is our understanding that the M&A Broker Letter is intended to apply on a transaction-by-transaction basis and is not meant as an exclusive remedy. If an M&A Broker satisfies the conditions of the Letter for only certain of its transactions, it may rely on the Letter for those qualifying Transactions and on other applicable exemptions for non-qualifying transactions.

Into the Future

The Letter is, at best, a first step in efforts to resolve issues raised last year by David Blass, Chief Counsel of the SEC Division of Trading and Markets,9 regarding advisers to private funds — in particular private equity fund advisers brokering transactions for portfolio companies and advisors marketing interests in their funds to investors.

Although advisers to private equity funds are not expressly prohibited from using the relief outlined in the Letter, it seems unlikely that their activities generally will meet its conditions. In particular, a private equity fund adviser, when brokering a transaction for a portfolio company, likely will be stymied by the requirements that an M&A Broker (1) not have custody, control, possession of or handle securities issued or exchanged in connection with the transaction, and (2) not be permitted to bind a party to a Transaction. The M&A Broker Letter, moreover, does not address the sale of interests in private funds. In both instances the industry should continue to engage the SEC staff in dialogue with a view to pressing for further relief.

The SEC Staff seems to have several agendas in finally acting with regard to “business brokers.” First, the letter seems to draw a bright line, providing guidance both to the “business brokers” and also those in the SEC’s Division of Enforcement who may be considering whether various activities constitute violations of the broker-dealer registration requirements and require enforcement action. The SEC Staff also seems to be engaged in exploring the continuum of brokerage activities that may be ripe for further relief, whether through additional no-action letters or even, in time, rulemaking.


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1 M&A Brokers are defined as persons “engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company...through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.” See SEC No-Action Letter re: M&A Brokers (Jan. 31, 2014).

2 See SEC No-Action Letter re: M&A Brokers (Jan. 31, 2014).

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 Commission 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.” See SEC No-Action Letter re: M&A Brokers (Jan. 31, 2014).

4 It is our understanding that the Letter is not limited to U.S. firms. Foreign firms that satisfy the conditions outlined in the Letter can rely upon it.

5 Offerings or sales of securities must be exempt under the Securities Act of 1933 and therefore any offering or sale of securities in connection with the transaction must be conducted in accordance with the Securities Act. See SEC No-Action Letter re: M&A Brokers (Jan. 31, 2014).

6 See SEC No-Action Letter re: M&A Brokers (Jan. 31, 2014).

7 See Id.

8 Consequences could include putting the transaction at risk due to the rescission rights that arise when a securities transaction occurs in a manner that violated a provision of the Exchange Act. See Section 29(b) of the Exchange Act.

9 See the complete text of Mr. Blass's speech, "A Few Observations in the Private Fund Space," (Apr. 5,2013), at ; Bingham McCutchen LLP Legal Alert: SEC Trading and Markets Chief Counsel Comments on Private Fund Sales and Marketing (Apr. 8, 2013) ; Bingham McCutchen LLP Legal Alert: A Conversation with David Blass About Broker-Dealer Status Questions (Oct. 8, 2013).  


This article was originally published by Bingham McCutchen LLP.