New Federal Exemption for M&A Brokers: New Rules, Familiar Headaches for Practitioners

In Spring 2023, a new federal exemption became available for brokers of mergers and acquisitions (“M&A”) of small, privately held companies. This narrow exemption helps clarify existing federal guidance in this area but falls short of preempting state laws that may require registration, so caution is still warranted in this area. 

Generally, federal and state laws require a person to register as a broker if they are engaged in the business of “effecting a transaction” in securities for the accounts of others. Historically, M&A brokers have relied on a patchwork of guidance, namely a no-action letter from the staff of the Securities and Exchange Commission (“SEC”) from January 2014, and an attempt by the North American Securities Administrators Association to unify state and provincial laws on the issue by drafting a model rule based on principles similar to the no-action letter. 

Now, M&A brokers can use the exemption that was codified in Section 15(b)(13) of the Securities Exchange Act of 1934 (“Exchange Act”) as of March 29, 2023. The new rule exempts an M&A broker from registering as a broker under the Exchange Act if the M&A broker reasonably believes that the persons acquiring the eligible privately held company will retain control over the company and be active in the management of the company or its assets.

  • M&A broker means a broker, or a person associated with a broker, engaged in the business of effecting securities transactions solely to transfer ownership of privately held companies through the sale, exchange, issuance, repurchase, redemption, or business combination involving the securities or assets of a company. The M&A broker can represent the seller or buyer in the transaction. 
  • Eligible privately held company means a company that: 
    • does not have securities registered under the Exchange Act; 
    • is not required to file periodic reports under the Exchange Act; and 
    • had gross revenue of less than $250 million and/or EBITDA of less than $25 million in the fiscal year prior to engaging the M&A broker. 
  • Control means the power to direct the management or policies of a company. Control is presumed if, after the transaction, the buyer: 
    • has the right to vote 25% or more of a class of voting securities;
    • has the power to sell 25% or more of a class of voting securities;
    • has the right to receive 25% or more of the capital upon dissolution, in the case of a partnership or LLC; or
    • has contributed 25% or more of the capital in the case of a partnership or LLC.
  • Active in the management of the company or its assets can be shown through serving as an executive or manager, electing executive officers, or approving the company’s annual budget. 

A few cautionary notes: 

  • If the seller of the company receives securities from the buyer as part of the purchase price, the seller must receive the most recent financial statements of the issuer before becoming legally bound to complete the transaction. Additional requirements apply if the financial statements are audited. 
  • State laws still apply to M&A brokers, who may have to register or find a state-level exemption in each state where they operate.
  • This exemption only applies to M&A activities – it does not permit facilitating securities offerings or acting as a “finder.” 
  • The SEC still has jurisdiction over this activity, meaning federal antifraud laws still apply to M&A brokers’ activities. 
  • The new rule includes a laundry list of activities excluded from the exemption. If the M&A broker also engages in those activities, it will not be able to rely on the exemption.

Codifying this new rule will add certainty to smaller M&A transactions by setting clearer boundaries on the exemption from registering as a broker but does not eliminate all compliance risks from serving as or using an M&A broker. If you have any questions about the new rules regarding M&A brokers, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Mergers & Acquisitions groups for more information.

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