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August 04, 2020

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August 03, 2020

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M&A Broker Exemption Bill Resurrects Financial Statement Replaced in 1988

Last week, the North American Securities Administrators Association withdrew its support for S. 1923 which, if enacted, would exempt “M&A brokers” from the broker registration requirements of the Securities Exchange Act of 1934.  In this letter to Senators Joe Manchin and David Vitter, Arkansas Securities Commissioner A. Heath Abshure blamed NASAA’s change in position on the “inexplicable removal from the bill of a basic and critical provision disqualifying ‘bad actors’ from qualifying for the registration exemption established by the bill . . .”.

As a former California securities regulator, I’m puzzled that an M&A broker exemption could engender such collywobbles.  California has exempted mergers and acquisition specialists from the requirement to register as a broker-dealer under the Corporate Securities Law since 1974, when Brian R. Van Camp headed the Department of Corporations.  10 CCR § 260.204.5.  To my knowledge, California’s exemption has not presented any significant investor protection problems in the two score years that it has been on the books.

There are a number of significant differences between the proposed federal exemption and California’s longstanding rule.  The federal exemption is much longer, consuming nearly 900 words as opposed to only 70 words for the California rule.  The federal exemption is also limited to “eligible privately held companies”, as defined, while the California rule includes no such limitation.  The federal exemption also would not be available if the broker engages on behalf of an issuer in a public offering of any class of securities that is registered, or is required to be registered, with the Securities and Exchange Commission under Section 12 of the Exchange Act or with respect to which the issuer files, or is required to file, periodic information, documents, and reports under Section 15(d) of the Exchange Act.  California’s rule contains no similar proscription.  Significantly, the proposed federal exemption, unlike the California rule, requires that a broker reasonably believe that upon consummation of the transaction, any person acquiring  securities or assets of the eligible privately held company, acting alone or  in concert, will control and, 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.

The proposed federal exemption imposes an additional condition on transactions in which securities are issued in exchange for securities or assets.  In these transactions, the broker must reasonably believe that prior to becoming legally bound to consummate the transaction, the recipient of the securities will receive or have reasonable access to the most recent year-end balance sheet, income statement, statement of changes in financial position, and statement of owner’s equity of the issuer of the securities offered in exchange, and, if the financial statements of the issuer are audited, the related report of the independent auditor, a balance sheet dated not more than 120 days before the
date of the offer, and 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.  The reference to “statement of changes in financial position” is archaic.  The Financial Accounting Standards Board replaced the SCFP decades ago when it adopted Statement of Financial Accounting Standards No. 95.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 258


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...