SEC issues No-Action Letter providing M&A Brokers with relief from broker-dealer registration

Simon Riveles Broker Dealer Exemption, Broker Dealer Registration, M&A Broker, Private Equity Fund

By Simon Riveles and Simon M. Cooke

On January 31, 2014, the SEC’s Division of Trading and Markets (the “SEC”) issued a No-Action Letter allowing an M&A Broker (defined below), to effect securities’ transactions in connection with the transfer of ownership of a privately held company (also defined below), subject to certain conditions, without registering as a broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).


There has been a long standing discrepancy between the registration requirements for a person facilitating the asset sale of a business versus those facilitating the sale of the securities of a private business. While the latter were required to register as a broker-dealers, the former was not. This No -Action Letter substantially resolves this discrepancy as well as extending the activities an M&A Broker can conduct without registration.

M&A Broker & Privately Held Company

An M&A Broker is defined as a person who engages 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, to a buyer that will actively operate the company or the business conducted with the assets of the company.

A privately held company is defined as one that does not have any class of securities registered, or required to be registered, with the SEC, or one that files, or is required to file, periodic information, documents, or reports under the Exchange Act. It business is required to also required to operate as a going concern and not be a shell company.

Conditions to allowance of M&A Broker Activities without Registration

1. The M&A Broker will not have the ability to bind a party to a merger, acquisition, business sale or business combination (together an “M&A Transaction”).

2. The M&A Broker will only provide financing to purchasers through unaffiliated third parties and disclose any compensation in writing to the client. The Broker will not directly, or indirectly through any of its affiliates, provide financing to purchasers.

3. The M&A Broker will not have custody, control or possession or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities’ transactions for the account of others.

4. No M&A Transaction will involve a public offering and any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933 (the “Securities Act”).

5. No party to an M&A Transaction will be a shell company, other than a business combination related shell company (as defined in the Securities Act, Rule 405).

6. If an M&A Broker represents both buyers and sellers, it will provide clear written disclosure and obtain written consent to the joint representation from both parties.

7. An M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance of the Broker.

8. The buyer(s) in any M&A Transaction will, upon completion, control and actively operate the company or the business conducted with the assets of the business. The buyer(s) will have the necessary control if it has the power, directly or indirectly, to direct the management or policies of the company, whether through ownership of securities, by contract, or otherwise. The necessary control will be presumed if the buyer(s) has the right to vote 25% or more of a class of voting securities, sell or direct the sale of 25% or more of a class of voting securities or in the case of a partnership or limited li          ability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.

9. No M&A Transaction will result in the transfer of interests to a passive buyer(s).

10. Any securities received by the buyer or the M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

11. The M&A Broker and each officer, director or employee of the Broker; 1) has not been barred from association with a broker-dealer by the SEC, any state or any self-regulatory organization and 2) is not suspended from association with a broker-dealer.

Permitted M&A Broker Activities

1. To facilitate an M&A Transaction between buyers and sellers of privately held companies without regard to the size of the company.

2. To advertise a company for sale with information such as the description of the business, general location and price range.

3. To advise a client to issue securities, or otherwise to effect the transfer of a business by means of securities, or assess the value of any securities sold.

4. To receive transaction based or other compensation, as agreed by the parties, in connection with an M&A Transaction.

5. To participate in the negotiations of an M&A Transaction.


The Letter is of particular interest to private equity firms because it (i) addresses the registration issue for persons referring possible transactions to private equity fund sponsors with the expectation of transaction-based compensation if the sponsor completes the transaction; (ii) provides support for the proposition that there is no policy based reason to require broker dealer registration of persons effecting certain types of private company acquisitions; and (iii) suggests that private equity fund sponsors that charge portfolio companies transaction fees in connection with acquisition transactions should not be required to register with the SEC as broker dealers.

The Letter does not, however, address another issue front and center at the SEC regarding whether private fund personnel need register as broker dealers if they engage in activities such as marketing fund interests, soliciting or negotiating transactions in connection with the fund.

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