Business-Minded Legal Solutions

M&A advisors and brokers catch a break in 2023

On December 29, 2022, President Biden signed into law H.R. 2617, the Consolidated Appropriations Act of 2023. This $1.7-trillion omnibus spending bill covers a lot of ground, but qualifying mergers and acquisition advisors and brokers got a late gift when lawmakers added a policy rider to Section 15(b) of the Securities Exchange Act of 1934 (SEA).

Effective March 29, 2023, the new exemption is intended to facilitate small business change-of-control transactions and create cost-saving opportunities for small businesses.

Simplifying things for smaller M&A deals

This change, which several Congresses proposed in different forms, offers an exemption from SEC broker-dealer registration for M&A advisors and M&A brokers. None of the previous versions were able to pass both the Senate and House as a standalone bill. However, proponents of the current versions (S. 3391/H.R. 935) were able to get the exemption into the must-pass federal funding measure.

The exception applies to securities transactions solely connected to transferring ownership of privately held companies through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company if the broker reasonably believes that:

  • The buyer will control at least 25% of the privately held company’s shares.
  • The buyer will actively manage the business.
  • The buyer received appropriate disclosure documents (including a most recent annual fiscal year-end statement).
  • The buyer received information about the management, business, profits, and material loss contingencies.

Company eligibility

The privately held company must not have any securities required to be registered with the SEC under Exchange Act Section 12 or Section 15’s filing obligations. The M&A broker must have earned less than $25 million (before taxes, depreciation and amortization) or grossed less than $250 million in revenue.

M&A broker cannot do the following

To take advantage of the exemption, brokers cannot:

  • Engage directly or indirectly in a shell company transaction unless it was formed solely for the transaction.
  • Directly or indirectly hold, receive, or handle funds or securities connected to the transaction.
  • Directly or indirectly provide financing for the transaction.
  • Assist in obtaining financing from a third party unless the broker complies with all related regulations.
  • Represent both buyer and seller without providing a written disclosure of their role signed by the seller and buyer.
  • Help form a group to buy the company.
  • Facilitate the transfer from an eligible active group of owners to a passive group of owners.
  • Bind a party to transfer ownership of the eligible company.

Previous no-action relief still in place

While this exemption is similar to previous ones provided to M&A brokers by the SEC, this one focuses on smaller transactions and privately held companies. Therefore, the SEC’s similar 2014 M&A Broker No-Action Letter to avoid registering with the SEC as a broker-dealer is still applicable.

State laws still in place

States still have their own securities laws. The new exemption does not preempt applicable state securities law. Therefore, brokers and advisors, and their clients, must determine whether they are exempt from M&A broker registration requirements under all applicable laws.