In early February the Securities and Exchange Commission’s Division of Trading and Markets issued a no-action letter [PDF] stating that mergers and acquisitions brokers wouldn’t necessarily face enforcement action if they facilitated a transfer of ownership of a privately-held company without registering as a broker-dealer.
“The division would not recommend enforcement action to the Commission under Section 15(a) of the Exchange Act if an M&A Broker were to effect securities transactions in connection with the transfer of ownership of a privately-held company under the terms and conditions described in your letter without registering as a broker-dealer pursuant to Section 15(b) of the Exchange Act,” the letter read.
Writing on the Federal Securities Law Blog, Porter Wright Morris & Arthur M&A practice group leader Mark Koogler states that, as defined in the letter, an M&A broker may not:
• Bind a party to such an M&A transaction
• Provide financing for said transaction
• In any way handle the funds or securities issued or exchanged in the transaction
• Facilitate a transaction with a group of buyers that the M&A broker had assisted in forming
Koogler writes that the letter further states that the buyer in such a transaction must “control and actively operate the company or the business conducted with the assets of the business.”
In light of the no-action letter, Koogler advised clients to keep a close watch on HR2274, which is also known as the “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013.” Having passed the House of Representatives, the legislation is now being considered by the Senate. If passed, the bill would exempt M&A brokers from registering as broker-dealers. Because it also contains provisions that are at odds with the contents of the SEC’s no-action letter, Koogler writes, the agency would have to revisit that guidance if the bill does become law.