SEC Issues No-Action Relief Regarding M&A Broker Registration (with Comments by Martin Hewitt and Steven Lofchie)

The SEC issued no-action relief under Exchange Act Section 15(a) ("Registration and Regulation of Brokers and Dealers"), specifying that the SEC would not take action against an M&A Broker if the broker were to effect securities transactions in connection with the transfer of ownership of a privately held company without registering as a broker-dealer pursuant to Exchange Act Section 15(b) subject to a substantial number of conditions, including that the purchasing buyer or group of buyers (i) take at least 25% of the interest in the company and (ii) actively operate the company.

The initial request was filed by a number of attorneys, including Cadwalader's consulting attorney, Martin Hewitt, on behalf of M&A Brokers that facilitate mergers, acquisitions, business sales and business combinations between sellers and buyers of privately held companies, without regard to the size of the company. The relief is limited solely to the transactions described in the incoming letter.

Hewitt Comment: The letter only deals with the requirement of registration under the federal securities laws. M&A Brokers should be mindful that there still may be state (so-called "Blue Sky Law") registration requirements in various jurisdictions depending on such facts and circumstances as the nature of the transaction and the nature of the purchasers and/or sellers.

Lofchie Comment: Most of the requirements in the letter are reasonably straightforward. M&A Brokers should be mindful of being prohibited from assisting in the formation of a takeover group, and any completed deal must result in a sale of at least 25% of the sold company. It is not entirely clear what may happen in a circumstance where the intent going into a deal is for the purchaser to acquire 25% of the company but results in the acquisition of a smaller interest. An M&A Broker can guard entirely against this outcome, but at a minimum, an M&A Broker should consider safety measures such as obtaining a representation from the firm's client that it has the intent of acquiring a 25% ownership and that it has, or believes that it has, access to the required capital or financing.One of the interesting aspects of this letter is that it is an unusual example of a regulatory agency sacrificing jurisdiction. The SEC runs the risk of being blamed for transactions gone bad. That said, it is impractical for every broker in the United States who was involved in the sale of a business to register with the SEC and, certainly, most small brokers involved in the sale of local businesses did not. While the SEC never attempted to exert its authority over such business brokers, it is to the SEC's credit that it acknowledged the limits of its ability to regulate. Regulators have limited resources, and they must make choices as to how to spend their regulatory resources. (However, be mindful of Mr. Hewitt's comment above: state regulators still may have applicable registration or other requirements.)

See:SEC No-Action Relief Regarding M&A Brokers and Incoming Letter.