Corporate Law Blog

Relief for M&A Brokers in Form of No-Action Letter

Recently, the Division of Trading and Markets ("the Division") of the U.S. Securities and Exchange Commission released a no-action letter indicating that the staff of the SEC would not recommend enforcement action against an "M&A Broker", even though that person or firm will receive compensation for assisting in the private sale of the stock of a target company. Those in the financial industry have long argued that the role of an M&A Broker is different from that of institutional brokerages and those qualified as such should not have to deal with the full costs and regulatory burdens associated with broker-dealer registration.

For purposes of the letter, M&A Brokers are individuals or firms engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of privately-held companies through the purchase, sale, exchange, issuance, repurchase, or redemption of securities or assets of the company. Such individuals or entities must organize deals that transfer ownership and control to a buyer that will actively operate the company or the business conducted with the assets of the company.

A "privately-held company," as described by the letter, is one that does not have securities that must be registered, or required to be registered, with the SEC under Section 12 of the Exchange Act, or securities that require the company to file reports or information under Section 15(d) of the Exchange Act.

The letter must be read carefully, as there are numerous conditions that must be met before the M&A Broker is relieved of the registration requirements. The M&A Broker cannot:

(1) Bind parties;

(2) Provide financing for the transaction;

(3) Have custody, control or otherwise handle funds or securities;

(4) Form the buying group;

(5) Be barred or suspended from association with a broker-dealer (in the case of a firm, no officer, director or employee may be barred or suspended); or,

(6) Represent both the buyer and seller in the same transaction without disclosing the fact to both parties in writing and receiving their written consent.

The transaction:

(1) Cannot involve a public offering;

(2) Cannot transfer control of the target to passive investors;

(3) Cannot involve parties acting as a shell company; and, it must

(4) Involve only restricted securities.

Any person or firm who wishes to rely on the letter to avoid registration must carefully review the provisions and use due diligence to abide by its strict requirements. State laws should be considered in connection with the no-action letter, keeping in mind that each state can govern activities not otherwise regulated by the SEC.

For questions or additional information about the no-action letter or other M&A Broker regulations, contact the McBrayer Corporate Law Department today.

This article is intended as a summary of state and federal law and does not constitute legal advice.

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Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.