On December 29, 2022, President Biden signed into law H.R. 2617, which included among the routine federal funding provisions a new statutory exemption for certain brokers involved in mergers and acquisitions of private companies (each, an “M&A Broker”). Currently, M&A Brokers rely on the Securities and Exchange Commission (the “SEC”) No-Action letter, dated January 31, 2014 (the “SEC Letter”), which provides an exemption for M&A Brokers from registration under the Securities Exchange Act of 1934 (the “Exchange Act”). With the passage of H.R. 2617, Congress has created a new statutory exemption for M&A Brokers through an amendment to the Exchange Act (the “Federal Exemption”) that will go into effect in late March 2023. The new law will become Section 15(b)(13) of the Exchange Act.
Generally, Section 15(a)(1) of the Exchange Act requires all brokers in the United States to register with the SEC unless an exemption applies in accordance with the Exchange Act. A “broker” is any person engaged in the business of effecting transactions in securities for the account of others. Brokers can include individuals or business entities engaging in or advising clients on mergers and acquisitions if such service involves the sale or exchange of securities and the broker receives compensation based on the transaction. The costs and complexities of registering as a broker have led some intermediaries to restrict their activities to asset transactions not involving securities. The SEC Letter enumerated certain circumstances under which an M&A Broker could facilitate a securities transaction without being subject to the registration requirement.
The Federal Exemption is limited to transactions resulting in a change of control of “eligible privately held companies”, defined as private companies that in the previous year had (a) earnings before interest, taxes, depreciation and amortization (EBITDA) of less than $25 million; or (b) gross revenues of less than $250 million. Ownership of at least 25% of the acquired company’s voting securities will be presumed to constitute control.
Under the Federal Exemption, an M&A Broker will not be exempted from the registration requirement if such M&A Broker:
- Directly or indirectly, in connection with the transfer of ownership of an eligible privately held company, receives, holds, transmits, or has custody of the funds or securities to be exchanged by the parties to the transaction;
- Engages on behalf of an issuer in a public offering;
- Directly, or indirectly through any of its affiliates, provides financing related to the transfer of ownership of an eligible privately held company;
- Assists any party to obtain financing from an unaffiliated third party without (I) complying with all other applicable laws in connection with such assistance, including, if applicable, Regulation T (12 C.F.R. 220 et seq.); and (II) disclosing any compensation in writing to the party;
- Represents both the buyer and the seller in the same transaction without providing clear written disclosure as to the parties the broker represents and obtaining written consent from both parties to the joint representation;
- Facilitates a transaction with a group of buyers formed with the assistance of the M&A Broker to acquire the eligible privately held company;
- Engages in a transaction involving the transfer of ownership of an eligible privately held company to a passive buyer or group of passive buyers; or
- Binds a party to a transfer of ownership of an eligible privately held company.
The M&A Broker cannot rely on the Federal Exemption if the M&A Broker or its affiliates have been barred or suspended from association with a broker or dealer by the SEC or any state or self-regulatory organization. Moreover, M&A Brokers must continue to comply with applicable state laws and regulations, which may not be consistent with the Federal Exemption.
Luis F. Ruiz