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...