On December 7, 2017, the U.S. House of Representatives passed the “Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2017 (H.R. 477).” The bipartisan bill passed the House by a vote of 426-0.
The bill seeks to exempt certain brokers who facilitate the merger or acquisition of small businesses, also known as M&A brokers, from SEC registration under the broker registration provisions in Section 15(b) of the Securities Exchange Act of 1934. M&A brokers have already enjoyed de facto exempt status from registration under Section 15(b) pursuant to a SEC No Action letter from 2014, but the new Act goes one step further in seeking to provide a codified exemption.
The bill contains a plethora of exceptions and restrictions on the conduct of M&A brokers in order to satisfy the exemption, including disqualification provisions for “bad actors.” The Act defines “M&A Broker” as:
- any broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, 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—
- upon consummation of the transaction, any person acquiring securities or assets of the eligible privately held company, acting alone or in concert, will control and, directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company; and
- if any person is offered securities in exchange for securities or assets of the eligible privately held company, such person will, prior to becoming legally bound to consummate the transaction, receive or have reasonable access to the most recent fiscal year-end financial statements of the issuer of the securities as customarily prepared by the management of the issuer in the normal course of operations and, if the financial statements of the issuer are audited, reviewed, or compiled, any related statement by the independent accountant, a balance sheet dated not more than 120 days before the date of the offer, and information pertaining to the management, business, results of operations for the period covered by the foregoing financial statements, and material loss contingencies of the issuer.
The bill defines an “eligible private company” as one (i) without a class of securities registered pursuant to Section 12 of the Exchange Act and (ii) has gross revenues under $250 million or EBITDA of less than $25 million in the year preceding that in which the M&A broker’s services are first used. The bill would also:
- Require an M&A broker that represents both the seller and buyer to provide them with written disclosures and obtain consent to that conflict of interest;
- Prohibit M&A brokers from using the exemption to raise capital, rather than transfer ownership of small businesses; and
- Prohibit shell companies from using the exemption.
Read the full text of the bill here.
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Drew Kuettel is a member of the firm’s corporate finance group.