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  • Writer's picturePaul Peter Nicolai

New Exemption from Securities Broker Registration for M&A Brokers

Updated: Oct 11, 2023

There is a new exemption that allows M&A brokers to avoid registering as securities brokers. President Biden signed the Consolidated Appropriations Act of 2023, which included a policy rider for qualifying mergers and acquisitions brokers (M&A brokers).

Currently, M&A brokers must rely on a no-action letter published by the SEC to engage in effecting M&A securities transactions of privately held companies without registering as a broker with the SEC. Under the new M&A Broker Exemption, M&A brokers will benefit from a federal exemption from SEC registration.

Effective as of the end of March 2023, the M&A Broker Exemption defines an “M&A broker” as a broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, regardless of whether the broker acts on behalf of a seller or buyer, 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 the eligible privately held company or the business conducted with the assets of the eligible privately held company; 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, including without limitation, for example, by electing executive officers; approving the annual budget; or serving as an executive or other executive manager; and

  • if any person is offered securities of an issuer in exchange for securities or assets of the eligible privately held company before the transaction is consummated, the person will receive or have reasonable access to the issuer’s most recent fiscal year-end financial statements, any related statements from the independent accountant if the financials are audited, a balance sheet dated no more than 120 days before the offer date, and information about the business, its management, and any material loss contingencies.

An eligible privately held company is a company that has, in the fiscal year ending immediately before the fiscal year in which the services of the M&A broker are initially engaged for the transaction:

  • no class of securities registered or required to be registered under Exchange Act Section 12 and

  • EBITDA less than $25 million or gross revenues less than $250 million.

The M&A Broker Exemption also provides for an inflation adjustment five years after the date of enactment and every five years after that.

Control means the power to direct a company’s management or policies directly or indirectly, whether through ownership of securities, by contract, or otherwise. There is a presumption of control if, upon completion of a transaction, the buyer or group of buyers has the right to vote, sell, or direct 25% or more of a class of voting securities or, in the case of a partnership or LLC, has contributed or has the right to receive upon dissolution 25% or more of the capital.

Excluded Activities and Disqualification

The M&A Broker Exemption includes a list of activities that fall outside the exemption and continue to require broker registration. Such activities include

  • If the broker maintains custody of or transmits funds or securities to be exchanged by parties to the transaction,

  • Engages in a public offering or transaction involving a shell company (other than a business combination shell company, as defined in the M&A Broker Exemption),

  • Provides financing,

  • Represents both buyer and seller without obtaining consent or forms a group of buyers,

  • Engages in a transaction involving passive buyers,

  • Binds a party to a transaction.

Furthermore, an M&A broker cannot assist any party to the transaction in obtaining financing from an unaffiliated third party without complying with Regulation T or other applicable laws and disclosing any compensation in writing to the party.

Any person barred or suspended from associating with a broker-dealer under federal or state law or by a self-regulatory organization may not rely on the exemption.

The new M&A Broker Exemption is effectively a codification of the January 31, 2014, SEC M&A Brokers No-Action Letter (NAL) with some differences, notably, a limitation on the size of eligible privately held companies.

The size limitation imposed by the M&A Broker Exemption is consistent with the 2015 NASAA Model Rule. However, the M&A Broker Exemption differs from the Model Rule in several respects, including that the control threshold in the Model Rule is 20% compared to 25% in the M&A Broker Exemption.

Moreover, while the M&A Broker Exemption provides a federal exemption from registration for M&A brokers, they still must consider the state broker registration laws. About 20 states have or are considering a conditional M&A broker registration exemption or other exemptive relief.

NASAA may now seek to align the Model Rule with the M&A Broker Exemption.

In addition, it is unclear whether the SEC will withdraw the M&A Broker NAL. There are some critical differences between the M&A Broker Exemption and the M&A Broker NAL; most notably, as referenced above, the M&A Broker NAL does not include a limitation on the size of an eligible privately held company. Absent withdrawal of the M & A Broker NAL, an M & A broker might rely on the M & A Broker NAL for a transaction involving a larger company.

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