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Private Equity Strategies

SEC allows some M&A brokers to operate without SEC registration (Part 1)

Thursday, March 27, 2014

There may be a glimmer of hope for investment firms when it comes to new financial regulations. In February, the SEC released a significant no-action letter for M&A brokers, and indeed the investment management industry. The letter effectively permits an M&A Broker who complies with all applicable conditions to receive transaction-based compensation for facilitating mergers, acquisitions, business sales, and business combinations between sellers and buyers of privately-held companies without registering as a broker with the SEC, regardless of the size of the transaction.

The change is notable, as many of these activities were previously covered under a more restrictive, "country business" rule which limited both the activities of an M&A broker as well as the size of the transactions. "This is new because the SEC was unequivocal that being involved in a transaction in this way would make you a broker and require for you to register," explains Faith Colish, Counsel with Carter Ledyard & Milburn LLP, to Opalesque. Carter Ledyard was one of the leading firms involved in the no-action letter. "Previously, there were some allowances under the Country Business no-action letter, but this new M&A Broker letter goes much further."

"This has broadened Country Business which was a no-action letter issued by the SEC in late 2006. Country Business is extremely restrictive. The intermediary is permitted to engage only in limited activities and the companies that are the subject of the transactions the intermediary can participate in are also limited in size, as defined by the SBA. The new no-action letter gives the M&A broker fewer restrictions on the types of services it can perform and also does not limit the size of the company that is the subject of the transaction," adds Ethan L. Silver, Partner, Carter Ledyard.

Also significant, is that the letter appears to be the first in a series of moves happening within financial regulators to deal with brokers oriented toward specific types of transactions (M&A, corporate finance, etc) and make regulation more responsive to those activities. FINRA recently examined a proposal that looks at corporate finance brokers, and there are credible rumors that the SEC is considering guidance on capital raising for hedge funds this year.

"The JOBS Act has enabled regulators to think outside the box and realize that there are categories of brokers, like M&A, crowdfunding, and angel investors that need a slightly different regulation. This could lead to a better type of regulation for private placement finders - a subset of which is the M&A intermediary," says Colish.

That said, the letter does contain some limitations. Specifically, M&A transactions must involve a privately-held company. This company must also be an operating company that is a going concern and not a shell company. Once completed, the buyers in the transaction must have control and actively operate the company or the business conducted with the assets of the acquired company. In addition, while the M&A broker can arrange financing, that does not mean they can provide that financing.

It is also important to note that the letter only extends so far as a transaction-by-transaction level, as long as a broker meets all of the conditions of the letter then the exemption will exist for that transaction. The specificity of the scope could have implications for firms whether they are already registered with the SEC or not. Still, Colish says "the letter could provide a pattern for other limited-purpose brokers to advance their goals with regulators." In part two we'll take a closer look at a bill currently working its way through the US congress that may be further supported by the existence of this no-action letter.

This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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