The Securities and Exchange Commission Division of Trading and Markets (Division) issued no-action relief on January 31, in response to a request from attorneys on behalf of firms effecting securities transactions in connection with the transfer and control of a company to a buyer that will actively operate the company or its business (each, an M&A Broker). The no-action relief specifies that the Division would not recommend enforcement action to the SEC if an M&A Broker engages in certain activities in connection with the purchase or sale of privately held companies without registering as a broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). A “privately held company” for purposes of the no-action letter is generally an operating company that does not have any class of securities registered, or required to be registered, with the SEC.  Previously, the SEC and relevant court proceedings held that a person in the business of effecting the sale of operating businesses through the sale of securities was acting as a “broker,” as such term is defined under Section 3(a)(4) of the Exchange Act. Accordingly, absent an exemption, such person would be required to register as a broker-dealer under Section 15(b) of the Exchange Act. The request letter distinguishes mergers, acquisitions, business sales and business combinations from traditional capital-raising securities transactions because, among other reasons, the buyer takes an active role in operating a company that is the subject of a merger or acquisition involving a change of control, as opposed to the passive investment objectives of an investor in an equity-raising transaction. The SEC’s issuance of no-action relief to M&A Brokers that meet certain conditions (see below) represents a major shift in the SEC’s position and a substantial change to the regulatory framework for M&A Brokers.   

The SEC set a number of conditions in issuing the no-action relief, including, among other things, that (i) the buyer will control (e.g., own 25 percent or more of the company) and actively operate the company after the transaction, (ii) the M&A Broker will not provide financing and may not bind a party to the transaction, (iii) the M&A Broker may not assist in forming the group of buyers, (iv) the M&A Broker may not have custody of the funds or securities issued or exchanged in connection with the transaction and (v) the transaction will not involve a public offering.   

The no-action letter only exempts M&A Brokers that meet the conditions of the letter from the registration requirement under the Exchange Act, but does not discuss any state registration requirements that may apply.  

Click here to read the SEC’s January 31, 2014 No-Action Letter.