SEC Provides Exemption from Broker-Dealer Registration Requirements for M&A Brokers

On January 31, 2014 (revised February 4, 2014), the SEC issued a no-action letter to a group of attorneys who requested assurance on an issue that has long been on the minds of securities lawyers: are people who facilitate the sale of a controlling interest in a business involving a transfer of stock — which the Supreme Court has held to be a sale of securities under federal securities laws — required to register as broker-dealers under the Securities Exchange Act of 1934, with all of the attendant expenses and obligations?

Who is Affected

The attorneys requesting the no-action letter used the term “M&A Broker” to describe a person engaged in facilitating mergers, acquisitions, business sales, and business combinations. In its no-action letter, the SEC defined the term as follows:

 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 (as defined below) 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. A buyer could actively operate the company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things.

A “privately-held company” is one that isn’t a reporting company under the Exchange Act; it must be an operating company and not a “shell” company.

What M&A Brokers Can Do

Generally, the no-action letter gives assurance that the SEC staff would not recommend enforcement action if an M&A Broker effected securities transactions in connection with the transfer of a privately held company without registering as a broker-dealer by engaging in the following specific activities:

  1. Represent the buyer, seller, or both, as long as both receive disclosure and give written consent.
  2. Facilitate a transaction with a buyer or buyer group that, upon completion of the transaction, will control the business.
  3. Facilitate a transaction involving the purchase or sale of a privately-held company no matter its size.
  4. Advertise a company for sale with information such as the description of the business, general location, and price range.
  5. Advise the parties to issue securities or accomplish the transaction by means of securities, and assess the value of any securities sold.
  6. Receive transaction-based compensation, which generally means a commission or compensation the receipt of which depends on whether a transaction is successful, and/or the amount of which is determined by the size of the transaction. This is significant because the SEC has previously taken a hard line on transaction-based compensation (see this 2010 denial of a no-action letter), stating that transaction-based compensation is a “hallmark” of broker-dealer activity, requiring registration. The new no-action letter is a partial reversal of that position.
  7. Participate in negotiations.
  8. Receive “restricted securities,” which are securities acquired from the issuer or an affiliate in a transaction not involving any public offering (see prohibition on public offerings below). Restricted securities can’t be sold freely; in order to sell them, the recipient must qualify for an exemption from securities registration requirements, typically by holding the securities for one year and meeting other conditions.

What M&A Brokers Can’t Do

In issuing the no-action letter, the SEC noted the requesters’ representations that an M&A Broker would not do any of the following:

  1. Bind a party to a transaction.
  2. Directly or indirectly provide financing for a transaction.
  3. Handle funds or securities issued or exchanged in connection with a transaction or other securities transaction for the account of others.
  4. Be involved in a public offering of securities.
  5. Assist in forming a buyer group.

In addition, the M&A Broker and its officers, directors, and employees must not have been suspended or barred from association with a broker­dealer by the SEC, any state, or any self-regulatory organization.

Implications for State Broker-Dealer Registration

Federal securities law is not the only law that requires broker registration. State “blue sky” securities laws typically require registration of brokers who transact business in that state — whether they have an office in that state or do business with buyers or sellers in that state — and these laws aren’t affected by the SEC’s no-action letter. M&A brokers must determine whether their activities require registration in any given state or whether any exemptions from registration apply in that state, and perhaps confine their activities to the scope allowed by such exemptions. California, for example, does not require broker-dealer registration for “merger and acquisition specialists,” or those who effect securities transactions in California only in connection with mergers, consolidations, or asset purchases and do not receive, transmit, or hold for customers any funds or securities.  As an example of an exemption that applies to brokers doing business in a state other than where its office is located, Kentucky law exempts from registration a broker-dealer with no place of business there that during any period of 12 consecutive months does not direct more than 15 offers to sell or to buy into Kentucky to persons other than the issuers of the securities involved, other broker-dealers, or certain listed financial institutions or institutional buyers. This exemption may apply to some M&A brokers, especially given that the no-action request letter contemplates that such brokers may participate in only one or several transactions per year. In any event, state registration may turn out to be less burdensome than SEC registration because some states do not require FINRA or SIPC membership as part of the registration process.


The SEC’s new stance that business brokers do not need to register to conduct a broad range of M&A activities or receive transaction-based compensation would seem to open up new opportunities in the industry. In order for business brokers to take full advantage of these opportunities, however, states need to craft exemptions or adopt guidance that mirrors the M&A Broker definition and permitted activities in the no-action letter, or else brokers may still need to undertake the expensive and time-consuming process of registering and maintaining their registration in any states in which they hope to do deals.

© 2014 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Share your love
Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

Subscribe to Strictly Business

Enter your email address below and subscribe to our newsletter