DealLawyers.com Blog

If you haven’t encountered the problem of an unlicensed “business broker” who expects to be paid for their role in bringing a buyer & seller together, you probably haven’t spent much time doing deals at the lower end of the M&A food chain. These folks show up with alarming regularity in small deals, and they can create all sorts of headaches, because paying them can quickly cause the parties to run afoul of federal or state securities law restrictions on payments to unlicensed brokers.

The SEC has tried to take a practical approach to this situation, and in 2014 the Staff issued a no-action letter indicating that it would not take action against “M&A Brokers” that met the conditions laid out in that letter.  The problem is that positions expressed in a no-action letter are subject to change with little notices – and when it comes to no-action letters relating to broker-dealer licensing issues, the SEC has a history of being somewhat mercurial.  However, this Stinson memo says that provisions of the Consolidated Appropriations Act signed into law by President Biden in late December now codify an exemption for M&A Brokers from federal broker-dealer licensing requirements:

The Exemption defines an “M&A Broker” as a broker and any associated person that is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an “eligible privately held company” through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving securities or assets of the eligible privately held company, if the broker reasonably believes that:

– Upon consummation of the transaction, any person acquiring securities or assets, acting alone or in concert (1) will control the eligible privately held company or the business conducted with the assets of the eligible privately held company (for example, by electing executive officers, approving the annual budget, or serving as an executive or other executive manager); and (2) directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company

– Any buyer, before becoming legally bound to consummate the transaction, has received or has reasonable access to various disclosure documents, including, among others, the company’s most recent fiscal year-end financial statements, as well as information pertaining to the management, business, results of operations, and material loss contingencies of the issuer.

The exemption is limited to “eligible privately held companies,” which is defined as a company that has, in the fiscal year ending prior to the one in which the M&A broker is initially engaged: (i) no class of securities registered or required to be registered under §12 of the Exchange Act and (ii) EBITDA less than $25 million and/or gross revenues less than $250 million.

The exemption largely tracks the Staff’s 2014 no-action letter, and includes a laundry list of potentially disqualifying activities that the M&A Broker must not engage in. The exemption also does not preempt state blue sky restrictions on unlicensed brokers, so the parties will still have to navigate those compliance hurdles.

– John Jenkins