New SEC Exemption from Registration for M&A Brokers

M&A BROKERS EXEMPTION

In December of 2022, President Biden signed the Consolidated Appropriations Act of 2023 into law.  The new law includes a “policy rider” for certain mergers and acquisitions brokers (M&A brokers) in Division AA, Title V, Small Business Mergers, Acquisitions, Sales and Brokerage Simplification. 

As a result, M&A brokers have the benefit of a federal exemption from SEC registration as a securities broker so long as a shell company is not involved in the transaction. The M&A exemption became effective in March of 2023.

SEC REGISTRATION EXEMPTION FOR M&A BROKERS

Section 15(a) of the Securities Exchange Act of 1934 (the “Securities Exchange Act”) requires securities brokers to register with the SEC, and Section 15(b) prescribes the manner of registration. Section 3(a)(4) of the Securities Exchange Act defines a broker as “any person who is engaged in the business of effecting transactions in securities for the account of others.”  The new M&A Broker Exemption provides an exemption from SEC broker-dealer registration for M&A brokers by amending Section 15(b) to add a new subsection (13) “Registration Exemption for Merger and Acquisition Brokers.” 

The new M&A Broker Exemption defines an M&A broker as a broker that is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, regardless of whether they are acting on behalf of a seller or purchaser, through the purchase, sale, issuance, exchange, repurchase, or redemption of, or a business combination involving, securities or assets of an eligible privately held company. 

An “eligible privately held company” is a company that has, in the fiscal year ending immediately before the fiscal year in which the services of the M&A broker are initially engaged with respect to the transaction: (i) no class of securities registered or required to be registered under Securities Exchange Act Section 12 and (ii) an EBITDA less than US$25 million and/or gross revenues less than US$250 million. 

“Control” means the power to directly or indirectly direct a company’s management or policies, whether through ownership of securities, by contract, or otherwise. There is a presumption of control if, upon completion of a transaction, the buyer or group of buyers has the right to vote, sell, or direct 25% or more of a class of voting securities or, in the case of a partnership or LLC, has contributed or has the right to receive upon dissolution 25% or more of the capital.  

For the M&A Broker exemption to be available, the M&A broker must reasonably believe that: 

(i) upon consummation of the transaction, any person acquiring securities or assets of the eligible privately held company, acting alone or in concert (aa) will control the eligible privately held company or the business conducted with the assets of the eligible privately held company; and (bb) directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company, including without limitation, for example, by electing executive officers; approving the annual budget; or serving as an executive or other executive manager; and 

(ii) in the event that any person is offered securities of an issuer in exchange for securities or assets of the eligible privately held company, before the transaction is consummated, the person will receive or have reasonable access to the issuer’s most recent fiscal year-end financial statements, any related statements from the independent accountant if the financials are audited, a balance sheet dated no more than 120 days before the offer date, and information about the business, its management, and any material loss contingencies. 

EXCLUDED ACTIVITIES AND DISQUALIFICATION 

The M&A Broker Exemption includes a list of activities that would fall outside the exemption and continue to require broker registration. Such activities include if the broker maintains custody of or transmits funds or securities to be exchanged by parties to the transaction, engages in a public offering or transaction involving a shell company (other than a business combination shell company, as defined in the M&A Broker Exemption), provides financing, represents both buyer and seller without obtaining consent or forms a group of buyers, engages in a transaction involving a passive buyer(s), or binds a party to a transaction. 

Furthermore, an M&A broker cannot assist any party to the transaction in obtaining financing from an unaffiliated third party without complying with Regulation T or other applicable law and disclosing any compensation in writing to the party. Lastly, any person who has been barred or suspended from associating with a broker-dealer under federal or state law or by a self-regulatory organization may not rely on the exemption. 

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com