On January 31, 2014, the Division of Trading and Markets (the Division) of the U.S. Securities and Exchange Commission released a no-action letter ¹   indicating that the staff of the Commission would not recommend enforcement action against an “M&A Broker” (as that term is defined in the no-action response²) even though that person or entity will receive compensation for assisting in the private sale of the stock of a target company. Such a sale must be to a buyer or group intending to operate the target company. The letter is consistent with a similar letter issued by the Division (then the Division of Market Regulation) in November 2006 providing comparable advice to Country Business, Inc., but is more precise and detailed.

The general concept embodied in the staff response is that persons who are engaged in activities that fall within broker-dealer registration requirements under the Federal securities laws can be excused from such registration under certain circumstances. This letter focuses specifically on unregistered parties that receive compensation for participating in the sale of an operating company from its owners to a buyer that proposes to assume the operation of that business. It appears that given the highly restrictive scope of the no-action position, the Division is of the view that the proposed activity does not present the kind of risk to investors that led to the adoption of the broker-dealer registration provisions.

The letter contains a list of 10 controlling requirements that must be satisfied to fall within the scope of the no-action position. The list includes requirements that the M&A Broker cannot bind parties, cannot have custody of funds or securities, cannot provide any funding for the transaction, cannot form the buying group, and must not have any “bad boys” involved in the transaction. The transaction must not involve a public offering, must not transfer control of the target to passive investors, and may involve only restricted securities. With these conditions in place, the opportunity for mischief is so circumscribed that the Division apparently does not expect that registration is required.

A word of caution

There are, however, some cautionary issues to consider. For example, any person that wants to rely on the terms of the letter to avoid registration as a broker-dealer must take extra care to make certain that the conditions are met as exactly as possible. Careful due diligence should be undertaken to assure that the unregistered party is not being put at risk.  In the event that a condition of the letter is not met, it is the unlicensed broker-dealer that will be placed in jeopardy. In addition, the use of an unregistered broker-dealer can have ripple effects on the issuer as well.

Of course, state securities laws also regulate broker-dealers. There have been some suggestions that at least some state securities administrators will be prepared to support the activity covered by this no-action letter, but no person should proceed in reliance upon this letter without checking the current state of the law in the jurisdiction(s) where these activities will occur.

¹  The inquiring letter to the Division was prepared by several attorneys faced with advising clients regarding the issues involved in the inquiry.  

²  An “M&A Broker” for purposes of the correspondence “is a person engaged in the business of effecting transactions solely in connection with the transfer of ownership and control of a privately-held company … to a buyer that will actively operate the company or the business conducted with the assets of the company.”