January 25, 2022

Volume XII, Number 25

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January 24, 2022

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SEC (Securities and Exchange Commission) Says “M&A Brokers” (Mergers and Acquisitions) May Assist with the Purchase and Sale of Privately-Held Companies without Registering as a Broker-Dealer

On January 31, 2014, the Securities and Exchange Commission (“SEC”) issued a no action letter indicating that it would not recommend enforcement against “M&A Brokers” who facilitate mergers, acquisitions, business sales and business combinations (“M&A Transactions”) in connection with the transfer of ownership of a privately-held company, without regard to the size of the company, without registering as a broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) if such M&A Broker complies with certain conditions.

The SEC has defined 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 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.

In order to take advantage of this exemption enforcement action, M&A Brokers and the M&A Transactions they facilitate must meet the following criteria:

  • The M&A Broker must not have the ability to bind a party to an M&A Transaction.

  • The M&A Broker must not directly or indirectly provide financing for an M&A Transaction.

  • The M&A Broker must never obtain custody, control or possession of, or otherwise handle funds or securities issued or exchanged in connection with, an M&A Transaction or any other securities transaction for the account of others.

  • M&A Transactions must not involve a public offering of securities and must be conducted pursuant to an exemption from registration under the Securities Act of 1933, as amended. Parties to M&A Transactions cannot be shell companies (other than a shell company formed in connection with an M&A Transaction).

  • If it represents both buyers and sellers, an M&A Broker must provide clear written disclosure to all parties as to who it represents and obtain consent to the joint representation.

  • For M&A Transactions involving a group of buyers, the group must be formed without the M&A Broker’s assistance.

  • The M&A Transaction will not result in the transfer of interests to a passive buyer or group of buyers. The buyer or group of buyers in any M&A Transaction must have the right to vote or direct the sale of at least 25% of the voting securities of the company and must actively operate the business post-closing. 

  • Any securities received by the buyer or M&A Broker are restricted securities.

  • None of the M&A Brokers or any of its officers, directors or employees have been barred from association with a broker-dealer by the SEC or any state or any self-regulatory organization and none of them are suspended from association with a broker-dealer.

The SEC indicated that its no action position on this topic is limited to the broker-dealer registration requirements of the Exchange Act. Other provisions of the federal securities laws continue to apply, including but not limited to the anti-fraud provisions.

© 2022 Neal, Gerber & Eisenberg LLP.National Law Review, Volume IV, Number 59
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About this Author

Michael Gray, Partner, Neal Gerber Eisenberg Law Firm
Partner

Michael B. Gray concentrates his practice in mergers and acquisitions, private equity, venture capital, hedge funds, fund formations, and intellectual property. He represents investors, companies, and executives in private equity and venture capital transactions; mergers, acquisitions and restructurings; executive compensation; general contract and intellectual property agreements and the structuring of partnerships, corporations and limited liability companies. He also has extensive experience advising investors in funds and advising funds on their formation and compliance needs (both on-...

312-269-8086
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