For decades, persons compensated for introducing potential investors or acquirers to companies, without registering with the Securities and Exchange Commission (the “SEC” or “Commission”) as a “broker” under Section 15 of the Securities Exchange Act of 1934[1], sought to rely on the concept of a “finder.” Limited guidance has been provided by courts and the SEC (through “no-action” letters asking the staff to decline a recommendation that the Commission pursue an enforcement action). Generally, when a person merely brings the parties to a securities transaction together without taking a more active role in the transaction, this allows the person to avoid registering as a broker. Involvement in activities such as negotiations, financial analysis, discussing details of the transaction and recommending an investment would often trigger the need to register as a broker. Despite decades of such traditional guidance, the “finder” exception remains a highly fact-specific analysis, addressed on a case-by-case basis. Further, no-action letters apply to particular parties and facts -- the customary SEC no-action advisory warns that “different facts and circumstances may cause us to reach a different conclusion. The relief in this letter is limited solely to the transactions described in your letter.” No-action letter determinations are also subject to change as general economic circumstances evolve. Accordingly, industry-wide reliance on no-action guidance is not fully satisfactory.
With respect to merger and acquisition ("M&A") deals, business brokers had relied on the guidance set forth in a 2014 no-action letter[2] (the “2014 Letter”), issued in response to an inquiry from a group of law firms. In that letter, the SEC Division of Trading and Markets stated it would not recommend that enforcement actions be brought against business brokers that failed to register under the Securities Exchange Act of 1934 (the “Exchange Act”) if they engaged in certain enumerated activities while finding buyers or sellers of private companies. After years of less-than-exact reliance on the 2014 Letter, Congress finally took action and, on December 29, 2022, President Biden signed the Consolidated Appropriations Act of 2023, P.L. 117-328[3]. Part of that statute added Section 15(b)(13) to the Exchange Act, which provided that, effective March 29, 2023, “M&A brokers,” as defined in the act, are exempt from registration.
New Section 15(b)(13) defines an “M&A broker” by limitations on the services that the broker can conduct for the privately held company that it represents. An M&A broker means a broker or associated person that “is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company,” provided the M&A broker reasonably believes that the purchaser will own and control the company[4] and be directly or indirectly active in its management[5].
The new statute introduced the concept of an “eligible privately held company” – the company being acquired must not have a class of securities registered or required to be registered with the SEC, or be a reporting company in the year before the company initially engages the M&A broker with respect to the securities transaction. If a person is being offered securities in exchange for the assets or securities of an eligible privately held company, that person must receive or have reasonable access to certain information regarding the issuer before becoming legally bound to consummate the deal.[6]
The 2014 Letter did not include any restriction on the size of the business being sold, but Section 15(b)(13) caps the size of the company being acquired: either the company’s EBITDA must have been less than $25 million, or its gross revenues must have been less than $250 million, in the fiscal year ending immediately before the year the company initially engages the M&A broker[7]. The SEC is authorized to amend these dollar amounts by rule.
The M&A broker definition also describes the information that the broker must reasonably believe has been disclosed in the transaction. It also disqualifies some brokers from being M&A brokers based on their disciplinary history with the SEC, state securities regulatory authorities or self-regulatory organizations or their suspension from association with a broker-dealer[8]. Also, Section 15(b)(13) does not restrict the form of compensation an M&A broker may receive.
Section 15(b)(13) lists the following activities that an M&A broker may not engage in, or the exemption from registration will not apply:
i. receiving, holding, transmitting or having custody of the funds or securities to be exchanged in the transaction;
ii. engaging in a public offering on behalf of an issuer;
iii. engaging on behalf of a party in a transaction involving a shell company, other than a “business combination-related shell company”[9];
iv. directly or indirectly providing financing related to the transaction;
v. assisting any party to obtain financing, unless the broker complies with all applicable laws and discloses any compensation in writing to the party;
vi. representing BOTH the buyer and seller, unless the broker provides written disclosure of this fact to both parties and obtains their written consent;
vii. facilitating a transaction with a group of buyers formed with the assistance of the broker;
viii. engaging in a transaction involving a sale to a passive buyer or group of passive buyers (the buyer must be directly or indirectly active in the company’s management); or
ix. binding a party to a transfer of ownership of an eligible privately held company.[10]
Lastly, reliance on the new federal law does not avoid the application of state securities laws or laws that require the registration of business brokers.
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[1] 15 U.S.C. 78o(b).
[2] SEC No-Action Letter dated January 31, 2014, revised February 4, 2014, from the SEC to Colish, Hewitt, Rohrer, Lerner, Silver and Nathanson
[3] Consolidated Appropriations Act of 2023, P.L. 117-328, Division AA, Title V, “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification,” adding a new subsection 13 to 15 U.S.C. §78o(b).
[4] “Control” means that the (buyer/buyers) (has/have) the right to vote or to sell or direct the sale of at least 25% of a class of voting securities of the company or, in the case of a partnership or limited liability company, the right to receive upon dissolution, or has contributed, at least 25% of the capital. 15 U.S.C. 78o(b)(13)(E)(ii)
[5] To be active in management, the purchaser must, without limitation, (i) elect executive officers, (ii) approve the acquired company’s annual budget, (iii) serve as an executive or other executive manager, or (iv) “carry out such other activities as the [Securities and Exchange] Commission may, by rule, determine to be in the public interest.” 15 U.S.C. 78o(b)(13)(E)(iv)(I)(bb).
[6] Information to be made available includes (i) the most recent financial statements of the issuer of the securities, with any related statement by the independent accountant that prepared it, if applicable, (ii) a balance sheet dated not more than 120 days before the date of the offer, and (iii) information pertaining to the management, business, results of operations for the period covered by the foregoing financial statements, and material loss contingencies of the issuer.
[7] The statute requires that these amounts be adjusted for inflation every five years. 15 U.S.C. 78o(b)(13)(E)(iv)(II)
[8] 15 U.S.C. 78o(b)(13)(C)
[9] A “business combination related shell company” is a company with no or nominal operations and no or nominal assets that is created solely for the purpose of changing the corporate domicile of the entity that formed it (which may not itself be a shell company) or solely for the purpose of completing a business combination transaction. 15 U.S.C. 78o(b)(13)(E)(i)
[10] 15 U.S.C. 78o(b)(13)((B)