The Consolidated Appropriations Act, 2023, which was signed into law by President Biden in December, contains a provision exempting “M&A brokers” from having to register as broker-dealers with the U.S Securities and Exchange Commission (SEC) for transactions involving eligible privately held companies. The new exemption, codified as new Section 15(b)(13) of the Securities Exchange Act of 1934 (Exchange Act), went into effect March 29, 2023.
The exemption provides that “M&A brokers” involved in the sale of an “eligible privately held company” may receive a commission for their services without having to register as a broker-dealer with the SEC. Previously, many M&A brokers did not register as a broker-dealer based on a January 31, 2014 SEC no-action letter, which stated the SEC would not recommend enforcement against unregistered M&A brokers if their M&A activities satisfied certain conditions.
The New Law
Under the new law, an “M&A broker” is defined as a broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an “eligible privately held company” if the broker reasonably believes that:
- Upon consummation of the transaction, the purchaser will “control” (have the right to vote, sell or direct 25% of the equity ownership, or have the right receive 25% of the proceeds distributed upon dissolution if a partnership or LLC) the eligible privately held company or the business conducted with its acquired assets, and will be active in the management of the business; and
- The purchaser has received or has reasonable access to various disclosure documents (including, the eligible privately held company’s most recent fiscal year-end financial statements, and other information relating to the management and business of the eligible privately held company).
To be an “eligible privately held company,” the acquired company: (i) must not have any class of securities registered with the SEC pursuant to Section 12 of the Exchange Act or subject to the reporting obligations of Section 15(d) of the Exchange Act; and (ii) in the fiscal year prior to the engagement of the M&A broker, must have (a) an EBITDA of less than $25 million, or (b) gross revenues of less than $250 million.
Activities of M&A Brokers
In order to take advantage of the exemption, M&A brokers may not conduct certain activities. These activities include the following:
- Having custody of the purchaser or seller’s funds or securities;
- Engaging in any public offering of securities as part of the transaction;
- Providing financing for the transaction;
- Assisting any party in obtaining financing from an unaffiliated third party unless any compensation for such arrangement is fully disclosed to the parties and the financing arrangement otherwise complies with applicable laws;
- Facilitating a transaction involving a shell company (other than a shell company formed solely in connection with a business combination or reincorporation);
- Representing both the purchaser and the seller unless they have received appropriate disclosures and provided their consent;
- Assisting with the formation of a group of purchasers to buy the eligible privately held company;
- Facilitating a sale to a passive purchaser or group of purchasers; and
- Acquiring authority to bind either the seller or the buyer to a transfer of ownership of an eligible privately held company.
The exemption does not replace the no action letter. The exemption creates another avenue for M&A brokers to avoid having to register. Also, Congress notably did not preempt state law broker registration or other state law requirements. Therefore, although an M&A broker may be exempt from federal registration as a broker-dealer, that M&A broker may still be required to register with one or more states.