New M&A Broker Exemption: To Be or Not To Be, That Is the Question

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On March 29, 2023, a new exemption from SEC registration for brokers providing services in mergers and acquisitions (“M&A”) transactions officially went into effect. The exemption, outlined in Section 501 of the Consolidated Appropriations Act of 2023, is welcome news to the many M&A practitioners whose practices had previously been reliant solely on the SEC No-Action letter dated January 31, 2014 [1] and its interpretation of required M&A broker registration under Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).

Section 15(a) of the Exchange Act requires that any person engaged in the business of effecting securities transactions for the account of others must register with the SEC. Failure to register could result in significant civil fines and disgorgement of fees paid to unregistered brokers. However, since the 2014 No-Action Letter, the SEC has tacitly acknowledged that brokers involved in many M&A transactions do not, and should not, fall within the intended purpose of these registration requirements.

The exemption, codified as Section 15(b)(13) of the Exchange Act, largely incorporates the language used in the 2014 No-Action letter, with some differences described in more detail below. While it is limited in some ways, the exemption provides the first level of official statutory guidance and clarity to the many intermediaries who assist in certain M&A transactions about whether the Section 15(a) registration requirements will apply to their activities.

However, the exemption does not resolve any state-specific registration questions for brokers.  After the issuance of the 2014 No-Action letter, in 2015, the North American Securities Administrators Association (“NASAA”) tracked these concepts by adopting its model rule as a recommendation for states across the country (the “Model Rule”). As discussed in more detail below, the new exemption does not entirely follow either the 2014 No-Action letter or the Model Rule. As a result, M&A professionals will still need to determine whether their activities will require registration in the states in which they are operating.

Who Is An M&A Broker?

The exemption defines an M&A broker as a broker, and any person associated with a broker, engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company. The M&A broker can assist either the buyer or the seller in such transaction.

In order to qualify for the exemption, the M&A broker must reasonably believe that upon the closing of the transaction any person acquiring securities or assets of the eligible privately held company, acting alone or in concert with others, will both control the eligible privately held company or the business conducted with the assets of the eligible privately held company and be directly or indirectly active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company.

The exemption includes a presumption of control if the buyer(s) have the right to vote, sell, or direct 25% or more of a class of voting securities (or in the case of a partnership or LLC) have contributed or has the right to receive 25% or more of the capital distributed upon dissolution.

Eligible Privately Held Company

As previously stated, the exemption is limited to brokers providing services in transactions involving an eligible privately held company. Specifically, the exemption requires that the eligible private company (i) cannot have any securities registered (or any securities required to be registered) under Section 12 of the Exchange Act; and (ii) the eligible private company must have EBITDA less than $25 million and/or gross revenues of less than $250 million in the fiscal year prior to the engagement of the M&A broker.

These limitations were not included in the 2014 No-Action letter and, along with the control requirements, impose a level of client diligence onto M&A professionals wishing to rely on the new exemption.

State Registration Not Addressed

Since the Model Rule was adopted by the NASAA, only 22 states have adopted some version of a similar registration exemption. [2] These state level exemptions include a combination of statutes, administrative rulings and state level no-action letters. Most states have exemptions from registration of the securities involved in the transaction and some states have other exemptions from broker registration. However, these exemptions are not necessarily similar to the Model Rule or the new Section 15(b)(13).

New Jersey for example has a de minimis exemption for brokers who have limited transactions in the jurisdiction (N.J.S.A. 49:49-3-56 (2013). New York has exemptions from broker registration based on the specific nature of the transaction and the securities involved (NY GBS §359-f).

With limited consistency in the registration laws across the country, M&A professionals should review their proposed activities on a case-by-case basis to ensure that they remain in compliance with the full universe of regulatory bodies.

Additional Limitations

While M&A practitioners likely consider this new exemption to be a welcome addition to the Exchange Act, it is important to note that the new Section 15(b)(13) does not fully resolve broker registration obligations for M&A professionals or eliminate potential civil fines or disgorgement for those found to be in violation of Section 15(a) if they do not clearly meet the exemption requirements.

As with all new regulations, there will surely be guidance propounded by the SEC to clarify the somewhat loose language around control, direct/indirect management and the standard of diligence required by M&A brokers about their clients’ financial circumstances. There are additional limitations in the language of the exemption that M&A professionals should carefully review as well.


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[2] Alaska, Arkansas, California, Colorado, Florida, Georgia, Illinois, Iowa, Maryland, Michigan, Mississippi, Montana, Nebraska, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah and Vermont have various levels of exemptions similar to the new federal exemption.