DealLawyers.com Blog

In an update to a prior alert (thanks to past John circa five years ago for this blog title!), Venable recently released a detailed memo providing an overview of when a person is acting as a so-called finder. As the memo notes, the term “finder” is not defined in federal securities laws but is limited by activities a person cannot perform lest they be deemed a “broker” or “dealer” and therefore subject to registration. As John noted, this is a murky and complex area, and it remains so even with the greater certainty provided by the recent legislative exemption for M&A brokers, which unfortunately is somewhat more limited than the withdrawn 2014 no-action letter that previously provided an exemption.

For anyone needing a summary of the legal issues, parameters of available exemptions and pitfalls of being classified as an unregistered broker, this is an excellent resource. Here’s an excerpt with an important reminder that, notwithstanding a federal exemption, state laws and regulations continue to apply:

Both the M&A Brokers No-Action Letter and the Federal Exemption do not affect state laws and regulations on the matter. While the Federal Exemption may motivate states to adopt corresponding exemptions, Congress’s decision not to preempt state law leaves unresolved the potential for conflicting requirements that would impair the usefulness of the Federal Exemption.

In response to the M&A Brokers No-Action Letter, the North American Securities Administrators Association adopted a uniform state model rule designed to provide an exemption for M&A Brokers from registration as brokers, dealers, and agents under state law. However, the model rule is not self-executing and must be adopted by a state before it becomes effective in a specific jurisdiction.

As a result, state-level broker registration remains an important consideration for M&A Brokers, even if an exemption exists at the federal level. Interestingly, New York has recently proposed, then failed to adopt, a state regulatory regime of business finders. Certain states, including California, Texas, and Michigan, have some form of a registration exemption for M&A Brokers. Therefore, finders should consult the applicable state broker-dealer regulations prior to engaging in activities in the particular state.

In light of the federal legislative exemption, states may be taking action on this front.  Keith Bishop points out on his blog that Nevada recently announced updates to the Nevada Administrative Code, which include a new exemption for certain M&A brokers that is similar, but not exactly the same as, NASAA’s model exemption.

– Meredith Ervine