Martin A. Hewitt alerted me to this no-action letter issued on January 31, 2014 by the SEC’s Division of Trading and Markets.  The letter was issued in response to a request by six lawyers, including Mr. Hewitt.  In very broad terms the letter states that the Division would not recommend enforcement “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 describes an M&A broker as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) 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 a company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Securities Exchange Act of 1934, or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15( d) of that act.  To be subject to the letter, a privately-held company must be an operating company that is a going concern and not a “shell” company.

While this letter is likely to be welcomed by those struggling with the status of finders, it is crucial that it be kept in perspective.  First, this is a no-action letter.  This means that the staff won’t recommend enforcement.  It doesn’t mean that the SEC (i.e., the Commissioners) have adopted the staff’s position and it doesn’t mean that courts must adopt the same interpretation.   (The standards of judicial review of, and deference, if any, accorded to agency interpretations is too big a subject to cover in this post.)  Second, the relief granted in the letter, moreover is limited to the transactions described in the incoming letter.  Different facts might well yield different results.  In this regard, the letter “notes in particular” ten different representations that were made in the requesting letter.  These should be read carefully.  Finally, the letter doesn’t interpret or apply state laws and regulations governing brokers.

Three years ago, I wrote about California’s exemption from its broker-dealer registration requirement for merger and acquisition specialists.  Rule 260.204.5 exempts any person who effects transactions in securities in California only in connection with mergers, consolidations or purchases of corporate assets, and who does not receive, transmit, or hold for customers any funds or securities in connection with those transactions.  As I then pointed out, this exemption does not relieve anyone from California’s licensing requirements under the Real Estate Law.  That law defines a “real estate broker” as any person who sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.  Cal. Bus. & Prof. Code § 10131(a).  A “business opportunity” is defined in the Real Estate Law to include the sale or lease of the business and goodwill of an existing business enterprise or opportunity. Cal. Bus. & Prof. Code § 10030.  Finally, the California exemption provides no relief from the licensing requirements of other states.

As a reminder, this blog is not legal advice and you should consult with a qualified attorney if you have questions concerning these topics.