SEC Issues No-action Letter Relieving M&A Brokers of Registration Requirements | Practical Law

SEC Issues No-action Letter Relieving M&A Brokers of Registration Requirements | Practical Law

The SEC issued a no-action letter relieving M&A brokers who advise on and arrange securities transactions solely in connection with the transfer of control of privately held companies from having to register as broker-dealers, subject to certain conditions.

SEC Issues No-action Letter Relieving M&A Brokers of Registration Requirements

Practical Law Legal Update 7-557-7286 (Approx. 3 pages)

SEC Issues No-action Letter Relieving M&A Brokers of Registration Requirements

by Practical Law Corporate & Securities
Published on 13 Feb 2014 • USA (National/Federal)
The SEC issued a no-action letter relieving M&A brokers who advise on and arrange securities transactions solely in connection with the transfer of control of privately held companies from having to register as broker-dealers, subject to certain conditions.
On January 31, 2014, the SEC's Division of Trading and Markets released a no-action letter that provides significant relief for financial advisors on private M&A transactions (M&A Brokers, SEC No-action Letter, (Jan. 31, 2014)). The letter provides that on satisfaction of certain conditions, advisors and arrangers of certain securities transactions in connection with private M&A transactions will not have to register as broker-dealers with the SEC.
A broker is any person engaged in the business of effecting transactions in securities for the account of others in exchange for a fee or commission (see Section 3(a)(4)(A) of the Exchange Act). Under this definition, any advisor to a party to an M&A transaction involving a transfer of securities should have to register with the SEC, absent an exemption. This has the potential to catch not only traditional investment-bank advisors, but private equity firms providing management services to their portfolio companies in exchange for fees. With the issuance of its no-action letter, the SEC has provided conditions for advisors to private M&A deals to avoid the registration requirement.
The conditions for the exemption are:
  • The broker does not have the ability to bind a party to an acquisition transaction.
  • The broker will not provide financing for the transaction, although it is permitted to assist the buyer in obtaining financing from unaffiliated third parties.
  • The broker will not have custody, control or possession of funds or securities issued in connection with the transaction.
  • The deal will not involve a public offering.
  • If the broker represents both buyers and sellers in a deal, it will provide written disclosure to the parties to the deal describing its role in the transaction, and obtain written consent to the joint representation from both parties.
  • The broker can only facilitate acquisition transactions with a group of buyers if the group is formed without the assistance of the broker.
  • The buyer will control and actively operate the target company. Control is presumed to exist if the buyer has the right to vote or dispose of 25% or more of a class of voting securities of the target.
  • The broker and its officers, directors and employees have not been barred or suspended from association with a broker-dealer.