The Securities and Exchange Commission (SEC) recently provided advice in a “no-action letter” that it would not recommend enforcement action against an “M&A Broker” that is involved in advising privately held companies in M&A transactions where the M&A Broker, as defined by the SEC, failed to register as a “broker-dealer” pursuant to Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). In the past, the SEC had taken the position that third parties who participated in M&A transactions involving securities through advising, negotiating, or receiving transaction-based compensation should be subject to the traditional broker-dealer rules. According to the no-action letter, M&A transactions include mergers, acquisitions, business sales, and business combinations.
The SEC defined an “M&A Broker” as a person 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, where the buyer will actively operate the company or the business conducted with the assets of the company. A buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things. Other examples of when a buyer is deemed to have the necessary control include where the buyer (or group of buyers) has the power to directly or indirectly direct the management or policies of the company, and such control is presumed to exist if the buyer(s) will have the power to vote, sell (or direct the sale), or receive upon dissolution of the company, 25% or more of the voting securities or capital of the company.
A “privately-held company” for purposes is a company that does not have any class of securities registered, or required to be registered, with the SEC 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. This would not apply to a “shell” company, but would apply only to an operating company that is a going concern.
The no-action letter applied to a company based on several representations, some of which include:
• The M&A Broker did not have the ability to bind the party to an M&A transaction;
• The M&A Broker did not provide financing for the M&A transaction directly or indirectly;
• The M&A Broker at no time had custody, control or possession of the securities or funds issued or exchanged in the transaction;
• The M&A transaction did not involve a public company; and
• The securities received by the buyer were restricted securities within the meaning of Rule 144(a)(3) of the Securities Act of 1933.
It should be noted that Congress recently has made some effort to address this issue, and it is not clear what effect, if any, the no-action letter would have those efforts. See H.R. 2774, January 14, 2014, passed by the House of Representatives on January 14, 2014, and S. 1923 currently pending, both of which would amend the Securities Exchange Act of 1934 to exempt M&A brokers from the broker-dealer registration exemption with different applications.
The no-action letter can be accessed here: http://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf.