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From Securities Regulation Daily, February 7, 2014

Staff grants registration relief to brokers that facilitate M&A transactions

By John Filar Atwood

The staff of the SEC’s Division of Trading and Markets has granted relief from the broker-dealer registration requirements of 1934 Act Section 15(a) to brokers who facilitate mergers, acquisitions, business sales and business combinations (M&A brokers). Specifically, the staff will not seek an enforcement action if an M&A broker effects securities transactions in connection with the transfer of ownership of a privately-held company under specified terms and conditions without registering as a broker-dealer.

Six lawyers. The relief was granted in response to a letter submitted by six attorneys who have represented clients in connection with mergers and acquisitions and similar business brokerage transactions. They said that the treatment of persons who help to facilitate the sale of operating businesses has been a long-standing issue in the area of broker-dealer regulation.

They stated that a person in the business of effecting the sale of operating businesses through the sale of securities generally could be viewed as falling within the meaning of the term “broker” and, therefore, would be required to register as a broker-dealer. They noted, however, that if the transaction were structured as an asset sale and did not involve the sale of securities, a person could engage in the same types of brokering activities without registering as a broker-dealer.

The six lawyers argued that this does not make sense because transaction structure is generally determined based on accounting or tax considerations, rather than on the applicability of the federal securities laws to the transaction or the broker. They also pointed out that M&A transactions between sellers and buyers of privately owned companies are qualitatively different from traditional retail or institutional brokerage transactions. In particular, they noted that the active role of the buyer and seller in M&A transactions distinguishes them from the purchase and sale of securities by retail and other investors for passive investment purposes.

The lawyers believe that the active roles and business objectives of each seller and buyer, together with the nature of the underlying transactions and the availability of remedies, provide significant protections for the parties involved. They requested a no-action position that would allow M&A brokers to facilitate transactions between sellers and buyers of privately-held companies, without regard to the size of the privately-held companies, and would allow M&A brokers to advertise a privately-held company for sale with information such as the description of the business, general location, and price range.

SEC staff’s view. In agreeing to provide the relief, the staff took particular note of several representations, including that M&A brokers will not have the ability to bind a party to an M&A transaction, and that an M&A broker will not directly, or indirectly through any of its affiliates, provide financing for an M&A transaction. The staff also noted that under no circumstances will an M&A broker have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A transaction or other securities transaction for the account of others.

The staff considered the fact that no M&A transaction will involve a public offering, and that no party to any M&A transaction will be a shell company, other than a business combination related shell company. The staff noted that to the extent an M&A broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.

The staff also considered the six lawyers’ claims that an M&A broker will facilitate an M&A transaction with a group of buyers only if the group is formed without the assistance of the M&A broker, and that the buyer, or group of buyers, in any M&A transaction will, upon completion of the transaction, control and actively operate the company or the business conducted with the assets of the business. The staff noted that no M&A transaction will result in the transfer of interests to a passive buyer or group of passive buyers. In addition, any securities received by the buyer or M&A broker in an M&A transaction will be restricted securities under 1933 Act Rule 144(a)(3) because the securities would have been issued in a transaction not involving a public offering.

Attorneys: Faith Colish and Ethan Silver (Carter Ledyard & Milburn LLP); Eden L. Rohrer, Linda Lerner and Stacy E. Nathanson (Crowell & Moring, LLP); Martin A. Hewitt. David W. Blass for the Securities and Exchange Commission.

MainStory: TopStory MergersAcquisitions BrokerDealers

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