Legal Updates

The passing of this legislation culminated a 16-year, industry-wide effort supported financially by all of the national business brokerage and M&A advisory associations to clarify – and hopefully, simplify – when do business brokers and M&A advisors need to also register with the SEC as securities brokers.

Title V amends the Securities Exchange Act of 1934 to add a conditional exemption from broker-dealer registration with the Securities and Exchange Commission (SEC) for business brokers and M&A advisors (M&A brokers) in qualifying private company M&A transactions. This statutory exemption closely tracks with (and will supersede) the 2014 SEC staff-issued M&A Brokers no-action letter. Being exempt from SEC registration, FINRA membership, registration, regulation, and jurisdiction are not applicable to the M&A broker. The new exemption permits M&A brokers to legally facilitate private securities transactions involving qualifying privately held businesses or their assets.

This exemption is only available for securities transactions involving the transfer of ownership of an “eligible privately held company” selling either its securities or business assets to a buyer acquiring “control” of the company’s management or policies through ownership, by contract, or otherwise. “Control” is presumed where a buyer acquires at least 25% of the stock or ownership-related rights of the company and, directly or indirectly, is actively involved in managing the business post-closing management. An “eligible privately held company” must be an operating company that does not have any class of securities registered, or required to be registered, with the SEC, or with respect to which the company files, or is required to file, periodic information, documents, and reports. In addition, the target company must come within either of two size caps. In the fiscal year ending immediately before the M&A broker is initially engaged, as determined by the historical financial accounting records of the target company must either: (i) have earnings before interest, taxes, depreciation, and amortization (EBITDA) less than $25,000,000; OR (ii) have gross revenues less than $250,000,000.

Certain conditions apply. Specifically, the M&A broker may not:

• Receive, hold, transmit, or have custody of the funds or securities to be exchanged by the parties to the transaction;
• Engage on behalf of an issuer in a public offering of any class of SEC-registered securities;
• Involve a shell company other than one formed solely for the purpose of effecting the business combination in that transaction;
• Provide financing related to the transfer of the company’s ownership;
• Facilitate the transaction with a group of buyers formed with the assistance of the M&A broker;
• Transfer ownership to a passive buyer or group of buyers; or
• Bind a party to a transfer of ownership of the company.

If these conditions are satisfied, the M&A broker may:

• Assist a party to obtain financing from an unaffiliated third party if (i) any lending-related compensation is disclosed to the party in writing and the financing complies with all the other applicable laws in connection with such assistance, including, if applicable, Regulation T; and
• Represent both the buyer and the seller in the same transaction by providing clear written disclosure as to the parties the broker represents and obtaining written consent from those parties to the joint representation.

The M&A broker exemption is not applicable to capital-raising from passive investors and is not available if the broker:

• Has been barred from association with a broker or dealer by the SEC, any state, or any self-regulatory organization; or
• Is suspended from association with a broker or dealer.

Importantly, this federal exemption from SEC registration does not preempt similar state-level securities licensing. To date, 20 states – including Florida – have granted similar M&A-related exemptive relief by law, rule, order, or interpretation of their blue sky laws. The association of state securities regulators, North American Securities Administrators Association (NASAA), has published a model M&A broker registration exemption to enhance state-level uniformity. More work is needed to persuade the remaining 30 states and Washington D.C. to harmonize their securities laws and regulations with this new federal statute.

For most business brokers and M&A advisors, this new statutory exemption represents a giant step forward in clarifying when registration as or with an SEC-registered securities broker-dealer is required to legally facilitate and be compensated for the purchase, sale, or business combination involving an ongoing, privately held business. This exemption from SEC registration avoids FINRA qualification exams required to register with a FINRA member broker-dealer. For most business brokers and M&A advisors, the conditions and prohibitions in this statute are consistent with their current best professional practices.

If you have questions about this new statute you may contact Mike Ertel at 813-299-7862, or [email protected], or Attorney Shane Hansen at 616-752-2145, or [email protected]

©2023 J. Michael Ertel PA