M&A Broker Exemption

M&A Broker Exemption

On January 4, 2024, the North American Securities Administrators Association (the “NASAA”) published a proposed amendment to their model rule which exempts certain mergers and acquisitions brokers who receive a commission (“M&A Brokers”) from federal broker-dealer registration (the “Proposed Model Rule”)[1]. The Proposed Model Rule was published in response to the Consolidated Appropriations Act, 2023, effective March 29, 2023, which enacted a statutory exemption from federal broker-dealer registration for M&A brokers (the “Federal Exemption”)[2].

On the effective date of the Federal Exemption, the SEC withdrew[3] their no-action letter dated January 31, 2014, the previous authority used by M&A Brokers to claim an exemption from federal broker-dealer registration (the “No-Action Letter”)[4]. The Federal Exemption codifies most of the substance of the SEC No-Action Letter, and also, notably, establishes new limitations on the size of private companies in eligible transactions, based on revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) figures. The Proposed Model Rule will align with the Federal Exemption and may provide states with a blueprint for their own state-level M&A Broker exemption, which is absent from the Federal Exemption.

M&A Brokers should familiarize themselves with the Federal Exemption’s approach to a buyer’s involvement in the control of the target company. Previously, M&A Brokers were exempted only if the transaction resulted in the buyer controlling and actively operating the business. Under the Federal Exemption, M&A Brokers will only need to have a reasonable belief that the buyer will control and actively operate the business.

The SEC’s No-Action Letter

The No-Action Letter exempted M&A Brokers from broker-dealer registration under the Securities Exchange Act of 1934 (the “Exchange Act”). M&A Brokers are those involved in privately-held company transactions where the buyer “will actively operate the company or the business conducted with the assets of the company.” In drawing from the No-Action Letter, the Federal Exemption copied many of the same qualifiers. Under both the No-Action Letter and (now) Federal Exemption, M&A Brokers seeking an exemption from federal broker-dealer registration cannot:

(i)  bind parties to an M&A transaction;

(ii) directly, or indirectly, provide financing (unless assisting party with unaffiliated third-party financing and disclosing assistance in writing);

(iii) maintain custody of the buyer’s or seller’s funds or securities;

(iv) engage in an M&A transaction involving a public offering or public shell company;

(v) represent both buyer and seller without disclosure and written consent

(vi) facilitate an M&A transaction with a group of buyers formed with the assistance of the M&A Broker; and/or

(vii) facilitate a transaction involving passive buyers or buyers who do not control and actively operate the business.

Also, an M&A Broker that has been (x) barred by the SEC, any state, or any self-regulatory organization, and/or (y) suspended from associating with a broker-dealer cannot rely on the Federal Exemption.

Key Differences in the Federal Exemption

Under the No-Action Letter, a “Privately-Held Company” was defined as a company that (i) has not registered and is not required to be registered under Section 12 of the Exchange Act, (ii) is required to file under Section 15(d) of the Exchange Act, and (iii) is not considered a “shell” company. Under the Federal Exemption, Congress kept the registration and filing requirements in items (i), (ii), and (iii), but has also added limitations to the size of the company involved, defining an “Eligible Privately Held Company” as one with:

·   an EBITDA of less than $25 million in their last complete fiscal year; and/or

·    gross revenues of less than $250 million in their last complete fiscal year.

Under the No-Action Letter, M&A Brokers who engaged in transactions with Privately-Held Companies above these limits were exempted from broker-dealer registration with the SEC, assuming they still complied with all other requirements. However, the EBITDA and gross revenue limits for an Eligible Privately Held Company under the Federal Exemption will likely significantly restrict the number of opportunities for M&A Brokers. As private company trends show increased gross revenues and EBITDA figures for small entities, the number of eligible companies is likely to shrink, thereby limiting growth opportunities and investor exit options for private companies that previously relied on M&A Brokers.

Finally, the Federal Exemption aligns with the No-Action Letter in the lack of preemption of state broker-dealer registration requirements. Under both the No-Action Letter and the Federal Exemption, an M&A Broker exempt from federal broker-dealer registration under the Federal Exemption is not exempt from any applicable state broker-dealer registration laws, including state “blue sky” laws.

Looking Forward

The Proposed Model Rule updates the NASAA’s initial model rule for M&A Brokers released in 2015 (the “2015 Model Rule”) in order to match the language of the Federal Exemption. The 2015 Model Rule was intended to establish a framework for U.S. Congress (“Congress”) or the states seeking to enact exemptions for M&A Brokers. As of today, at least 20 states have passed a form of the 2015 Model Rule or similar legislation, providing some relief to M&A Brokers at the state level. However, without a federal preemption, M&A Brokers are still subject to registration in states without an exemption and may be subject to future registration in states that may amend or repeal their current exemption(s). The Proposed Model Rule continues to serve the purpose of giving states a blueprint for enacting their own M&A Broker exemptions.

Once the Proposed Model Rule is finalized, more states may be encouraged by the NASAA to adopt this framework and provide a state-level exemption. M&A Brokers should also be aware of states that adopted the 2015 Model Rule and may update their legislation to reconcile their state-level exemption with the Proposed Model Rule and the Federal Exemption. Due to the Federal Exemption neglecting to preempt state broker-dealer requirements, state-level exemption requirements may vary from state to state, resulting in an M&A Broker qualifying under the Federal Exemption but not under their applicable state regulations.

To facilitate further discussion and to receive feedback regarding the Proposed Model Rule, the NASAA provided a comment period which ended February 3, 2024. In response, the Business Intermediary Education Fund (“BIEF”) issued a comment letter on behalf of their members, in full support of the proposed amendments[5]. In its comment letter, the BIEF highlighted the Proposed Model Rule’s alignment with the Federal Exemption and its integration of federal and state M&A Broker regulations.

As of now, it is unclear whether a finalization of the Proposed Model Rule will encourage more states to enact similar legislation or encourage Congress to amend the Federal Exemption to include a state-level exemption. Sadis and Goldberg LLP will continue to follow this matter closely and will provide any updates that may impact M&A Brokers and their affiliates.

If you have any questions about this article, please contact Paul J. Marino, head of Mergers & Acquisitions at Sadis & Goldberg at (212) 573-8158 or pmarino@sadis.com and Jonathan Bernstein at (212) 573-8030 or jbernstein@sadis.com.

[1] https://www.nasaa.org/wp-content/uploads/2024/01/Final-Req-for-Comment_M-A_Brokers_2023-01-04.pdf

[2] https://www.congress.gov/bill/117th-congress/house-bill/2617/text

[3] https://www.sec.gov/files/ma-broker-withdrawal-03292023.pdf

[4] https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf

[5] https://www.nasaa.org/wp-content/uploads/2024/01/BIEF-Joint-Association-Support-Letter-NASAA-Model-MAB-Rule-Update-2024-02-26-Final.pdf