Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

A bill that would provide a federal statutory exemption from the broker-dealer registration requirements under Section 15(a) of the Exchange Act for certain so called “M&A brokers” has been placed on the calendar for consideration by the U.S. House of Representatives. M&A brokers are generally defined as persons who are subject to Section 15(a) only by reason of brokering M&A transactions that involve the sale of securities.  The bill, titled the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015, is the latest form of proposed legislation that was first introduced back in June of 2013, in the 113th Congress.  The prior bill (identical in substance to the current bill) unanimously passed a house vote on January 14, 2014, but stalled in the Senate.  It is now being reintroduced to the House of Representatives of the 114th Congress.  However, this time around it may not receive unanimous support in the House, as democrats on the Committee on Financial Services appear to be opposing the legislation.

The sticking point is the omission of certain investor protections that Democrats now say are appropriate. Democrats claim that the original purpose of the bill was to spur the SEC to take action by granting exemptive relief to M&A brokers, which the SEC did on January 31, 2014 in its no-action letter providing that M&A brokers could receive transaction based compensation without running afoul of Section 15(a), provided that a number of requirements were met (you can find our explainer on the no-action letter here).   Since the SEC has now taken action, Democrats argue that the bill should be amended to include certain investor protections outlined by the SEC as conditions to relief in the no-action letter. From the committee report on the bill:

“To address this concern, Democrats offered an amendment that would amend the bill to include the several additional conditions that the SEC felt necessary to impose when providing the exemption. Those protections: exclude shell companies from eligible M&A transactions; exclude bad actors from being M&A brokers; prohibit M&A brokers from providing financing for the M&A transaction; require M&A brokers who represent both the buyer and the seller to obtain written consent from both parties to the transaction; prohibit passive buyers in the M&A transaction; prohibit M&A brokers from binding a party to a transfer of ownership of an eligible private company; and provide that any securities provided to the buyer or M&A broker in the transaction would be restricted securities. There has been no evidence that these conditions are inappropriate or onerous.”

Several of these investor protections were actually part of the bill as originally introduced, but were removed via amendment by the House Financial Services Committee in November of 2013. That action, along with the lack of a bad-actor disqualification in the bill, led the North American Securities Administrators Association to officially oppose the bill.

If adopted, the legislation would create new Section 15(b)(13) of the Exchange Act, which would exempt M&A brokers from registration under Section 15(a) as long as:

  • The sale of securities at issue relates to the transfer of ownership of an “eligible privately held company,” defined as a company (i) without any class of securities required to be registered or with respect to which the company is required to file periodic reports, and (ii) which, in the immediately preceding fiscal year, had EBITDA of $25 million or less or gross revenue of $250 million or less (subject to adjustment every five years)
  • The broker reasonably believes that after the transaction, the buyer or buyers (alone or with others) will control the eligible privately held company and will, directly or indirectly, be active in its management or the conduct of its business
  • If the seller will receive securities in the transaction, the seller is provided with certain financial disclosures of the issuer of the securities
  • The broker does not receive, hold, transmit, or have custody, directly or indirectly, of the funds or securities that are the subject of the transaction
  • The broker does not engage in a public offering on behalf of an issuer of a class of securities required to be registered or with respect to which the issuer is required to file periodic reports


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