Practical Insights for Business Brokers & Other Intermediaries Representing Sellers of
Companies in M&A, particularly sale of stock transactions, following SEC January 2014 NoAction Letter
June 1, 2014, by Arthur E. Mertes, Esq.
What: The SEC No-Action Letter regarding M&A Brokers was promulgated January 31, 2014 and
revised February 4, 2014.
Primary benefit: Reduced costs for M&A Advisors, Intermediaries, and certain Brokers by
excusing them from required broker-dealer licensing and registration requirements under
Section 15(b) of the Securities Exchange Act of 1934 in M&A deals even in a sale of stock
transaction.
Rationale: reduced licensing and expense burden  more broker-intermediaries  greater
number of M&A sales  new owners that invest and expand = = = job creation
Key Takeaways:
1. Key deal types affected by the Letter are M&A transactions involving purchase, sale,
exchange, issuance, repurchase, redemption or business combination involving
securities or assets of privately-held TargetCo.
2. Broker licensure burden is now much lower for middle market deals involving the sale
and purchase of privately held companies. State Licensure unaffected. Guidance is also
provided to brokers/intermediaries for deals that still require intermediary licensure.
3. Structure engagements carefully when deals involve unlicensed intermediaries or
brokers.
4. The Letter does not regulate the size of affected deals. Pending legislation would enact
deal-size limitations.
Questions and Answers
The conditions specified in the Letter are better understood through questions and examples.
Updates in legislation and further SEC action could change rules and results. You should see the
full text of the Letter and consult with an experienced M&A / securities attorney in relation to
any particular circumstance. {Use of term M&A Broker below, means a broker/intermediary
(person or entity) that will receive compensation for services in an M&A transaction that may
involve sale of stock, but that person or entity is not a SEC licensed broker-dealer.}
1. What is a clear-cut case for deals where SEC broker-dealer licensure isn’t required?
a. M&A Broker represents a party (buyer or seller) in the sale or purchase of a
privately-held company to be bought, controlled, and operated by the buyer.
The M&A Broker doesn’t control deal funds or maintain authority to bind client.
i. E.g. M&A Broker works with an active buyer to purchase and operate a
packaging company through an MBBI listing.
ii. E.g. M&A Broker introduces a client selling her business to another
broker representing a qualifying buyer. The deal closes.
2. What are more difficult deal situations where, nonetheless, SEC broker-dealer licensure
is not required?
a. Dual Representation Scenario - M&A Broker represents both sides of an
otherwise compliant transaction but has obtained the written consent of both
sides prior to engaging in the deal.
b. Buyer Group Scenario - M&A Broker represents a seller in a transaction where a
group of buyers was formed by a licensed broker-dealer.
c. Less than 100% Scenario - M&A Broker facilitates transaction where his buyer
purchases 30% of stock in TargetCo. This % satisfies the “control and actively
operate” requirement of 25% or more.
3. What deal situations clearly violate SEC licensure requirements?
a. Active Deal Participant Scenario - M&A Broker puts together a group of buyers
and includes himself in the group, maintaining the authority to obligate the
group and managing the funds at the buying group’s disposal.
b. Public Offering Scenario - M&A Broker organizes an otherwise compliant
transaction, but complies with client’s wish to make it a public offering instead.
Sales involving public offerings of securities or unrestricted securities will run
afoul.
c. Passive Buyer Scenario - M&A Broker introduces client seller to another broker
representing a passive group of buyers who will not actively operate the
business being purchased. “A buyer could actively operate the company through
the power to elect executive officers and approve the annual budget or by
service as an executive or other executive manager, among other things.”
d. Bad-Boy Scenario - M&A Broker attempts to facilitate an otherwise SECcompliant deal after he or she has been suspended from a licensed broker-
dealer association. Previous bar or suspension from association with a licensed
broker-dealer is a non-starter re eligibility.
4. At what points does M&A Broker step over the line in the deal? If he/she:
a. Assumes authority to bind client.
b. Forms the group of buyers participating in the sale and purchase. Representing
an already established group of buyers is acceptable.
c. Represents both sides of a business purchase and sale without prior written
consent from both sides of the transaction.
5. What should M&A Broker avoid re deal funds?
a. Do not maintain control over or possession of client funds or securities at any
point.
b. Do not provide financing for the purchase. Referral to an unaffiliated third-party
financing entity is acceptable.
6. Does the Letter affect State licensing and registration requirements?
a. Each State has its own regulations regarding licensure and registration of brokerdealers.
b. These regulations are unaffected and in full force after the SEC No-Action letter.
c. State licensure or registration may still be required in advance of your deal work.
7. How does this affect me if I’m licensed as a broker-dealer?
a. Depending on your workload, you may no longer be required to pay for the
expensive registration and renewal fees. It’s important to consider the outer
bounds of your expected deals before letting your registration lapse.
b. You may now be working across from unregistered brokers representing parties
on the other side of your transactions. Aspects of deals involving unlicensed
brokers may be limited by the conditions of the SEC letter.
8. What should the M&A Broker clarify in its client engagement agreement?
a. Won’t work on sale involving public offering of securities.
b. Your sell-side representation is for a sale to a buyer that will be actively involved
in the business by ownership and control post-closing.
c. You won’t represent the other side of a transaction without the client’s prior
written consent.
d. Disclosure of status as a registered or unregistered broker-dealer is not required
by the SEC’s No-Action letter.
9. What was the importance of the SEC February 4, 2014 revision of the Letter? It clarified
the definition of a shell company which is a “business combination related shell
company” that can be part of the transaction. Otherwise, shell companies cannot be
part of the transaction.
Arthur Mertes, Esq., a managing Partner of Synergy Law Group, L.L.C., has 20 years’ experience in the
private practice of law. His practice includes work for middle market growth companies, emerging
companies and investors in complex transactions, mergers and acquisitions, equity-based and traditional
financings, intellectual property, technology licensing, corporate and employment matters. He regularly
acts as an outside general counsel resource for his clients. Art can be reached at
amertes@synergylawgroup.com or 312-454-0311.