SEC Issues No-Action Letter Relaxing Broker-Dealer Registration Requirements For M&A Brokers

On January 31, 2014, the staff of the Securities and Exchange Commission (the "SEC") issued a no-action letter (the "Letter")1 permitting M&A Brokers (as defined below) to engage in certain activities related to the purchase or sale of privately held companies without complying with the broker-dealer registration requirements of Section 15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Letter broadens the relief provided under prior no-action letters and represents a significant departure from the SEC's long-standing position that required M&A Brokers facilitating securities transactions to comply with the same registration requirements as more traditional broker-dealers.

1. BACKGROUND

   In 1985, the U.S. Supreme Court held that the sale of all outstanding shares of a privately held company constitutes the sale of "securities" for purposes of federal securities laws.2 Because the Exchange Act broadly defines the term "broker" as anyone engaged in the business of effecting securities transactions on behalf of others,3 persons who facilitate the sale of operating businesses ("M&A Brokers") through the sale of a company's stock have long been required to register with the SEC as broker-dealers and become members of FINRA pursuant to Section 15(b) of the Exchange Act. If, on the other hand, the sale of a business is effected through an asset sale rather than a securities transaction, M&A Brokers facilitating the transaction have not been required to register. This is an anomalous result, both because the role of an M&A Broker bears little resemblance to the role of a traditional broker-dealer, and because the transaction structure is typically determined based on accounting or tax considerations without regard to the role of the M&A Broker or the applicability of federal securities laws. In a 2005 report, the American Bar Association noted that the traditional broker-dealer registration model is ill-suited to M&A Brokers, who do not hold customer funds and merely facilitate transactions among parties who actively negotiate, typically with the assistance of counsel and other advisers.4 Previous SEC no-action letters addressing the issue afforded only limited relief by imposing transaction size limits, prohibiting M&A Brokers from participating in negotiations on behalf of clients, and leaving unclear whether an M&A Broker may receive transaction-based compensation without registering.5

2. THE NO-ACTION LETTER

   The Letter, issued...