On January 31, 2014, the Division of Trading and Markets of the U.S. Securities and Exchange Commission (SEC) issued a no-action letter that allows a class of “M&A Brokers” (defined below) to facilitate securities transactions in connection with the purchase and sale of privately-held companies and receive fee-based compensation (tied to the success and size of the transaction) without registering as broker-dealers under the Securities Exchange Act of 1934 (Exchange Act).
The relief only applies with respect to acquisition targets that are “operating companies” and in situations where the purchaser(s) will “control” the target and actively operate it. Having the power to elect officers and a majority of directors and approve an operating budget will suffice for determining whether the purchaser has “control;” so, too, will actually serving as an executive officer or other senior managerial employee. By contrast, acquiring a passive minority interest with merely the right to appoint a majority of the Board upon the occurrence (or non-occurrence) of defined threshold events or milestones will not constitute “control.” Thus, an M&A Broker introducing a private equity fund purchasing a minority interest in a company will not be able to take advantage of the SEC no-action letter.
Assuming all of the conditions cited in the no-action letter are satisfied, M&A Brokers no longer need to concern themselves with having to register as broker-dealers when engaging in typical business broker activities, such as:
• Participating in negotiations (without the authority to bind either party)
• Receiving transaction-based compensation
• Circulating “teasers” for the target company containing information such as the description of the business, general location, and price range
• Recommending to the parties that an acquisition be structured as a stock deal or merger (rather than an asset sale) and assess the value of the securities involved in the transaction
A Note of Caution: The no-action letter is not intended to give investment bankers or business brokers a “free pass” on financing activities. To the extent the M&A Broker assists purchasers in obtaining financing from an unaffiliated third party, the M&A Broker must comply with all applicable legal requirements and any compensation received by the M&A Broker must be disclosed to the client in writing.