Davis Polk


M&A Brokers Receive No-Action Relief from Broker-Dealer Registration

February 12, 2014

The SEC’s Division of Trading and Markets recently issued an important no-action letter that effectively permits “M&A Brokers” to advise on and arrange certain securities transactions in connection with the purchase or sale of privately-held companies without registering as broker-dealers, subject to conditions.  Notably, the relief does not restrict either the types of compensation that eligible M&A Brokers can receive or the size of the privately-held company that is the subject of the transaction.


Under certain circumstances, a person that intermediates the sale of a business through the transfer of its securities may be considered to be a “broker” under Section 3(a)(4) of the Securities Exchange Act of 1934 (the “Exchange Act”) and be required to register with the SEC as a broker-dealer, absent an available exemption from registration.  The appropriateness of requiring broker-dealer registration for M&A advisers has often been questioned, given that no registration would be required if the same transaction were effected through a sale of the company’s assets, rather than its securities.

Scope of Relief

The no-action letter provides relief from broker-dealer registration to an “M&A Broker,” defined for these purposes as 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 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.

The relief only applies to M&A Brokers that facilitate mergers, acquisitions, business sales and business combinations (“M&A Transactions”) between buyers and sellers of privately-held companies.  A privately held company must not have any class of securities registered with the SEC under Section 12 of the Exchange Act, or file under Section 15(d) of the Exchange Act.  These privately-held companies must be operating companies and not “shell” companies.

Conditions for Relief

The relief is subject to a number of conditions, including, among others, the following:

  • the M&A Broker does not have the ability to bind a party to an M&A Transaction;
  • the M&A Broker does not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction (though the M&A Broker may arrange financing, subject to certain conditions);
  • the M&A Broker does not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others;
  • the M&A Transaction does not involve a public offering;
  • the M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance of the M&A Broker; and
  • the M&A Broker, its officers, directors, and employees have not been barred or suspended from association with a broker-dealer.

Importantly, the relief does not apply to a transfer of interests to a passive buyer or group of passive buyers.  Rather, the M&A Transaction must result in a buyer or group of buyers controlling and actively operating the company purchased.  “Control” would be the power, directly or indirectly, to direct the management or policies of a company, and is presumed to exist where the buyer or group of buyers obtains ownership or the power to direct the ownership of 25% of a class of voting securities or the right to receive upon dissolution or has contributed 25% or more of the capital.

The relief does not limit the compensation that an M&A Broker may receive.  As a result, M&A Brokers that qualify for the relief should be able to charge compensation based upon the value of the securities sold or acquired in the M&A Transaction.

The timing of the no-action letter coincides with Congress considering a bipartisan bill that unanimously passed the House of Representatives in mid-January that would exempt from broker-dealer registration brokers that intermediate the sales of small and medium-sized privately held companies.

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