By: Bailey McCann
In the first part of this series we covered a recent No-Action Letter issued by the SEC, which relaxed some of the rules around transaction size and fees that can be collected on a transaction. There is also a coordinated effort to make this relief binding by changing the federal laws around M&A brokers.
The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act (S. 1923 and H.R. 2274) would effectively simplify and cut costs around federal securities regulation of business brokerage services in privately negotiated business mergers, acquisitions, and sales of small and mid-sized businesses. Brokers would see relief on registration requirements and would also have clearer guidelines on how and when they can charge fees for service.
The current law offers a one-size-fits-all approach and in practice this means that the big transactions, handled by Wall Street’s brand name brokers, are the only ones that really meet all of the criteria. For small businesses and their M&A advisors rules are less clear. Transaction sizes are smaller, services are different and little guidance is available on what to do when your deal falls into this bucket. Buyers and sellers also feel an additional burden with steep transaction fees resulting from compliance requirements that make them act like the biggest firms in order to close a small deal.
“I think with the No-Action Letter, and conversations the SEC has had at its annual Small Business Forum, they understand that some relief is necessary but letters are not legally binding so that creates a layer of uncertainty unless you change the law,” explains Shane Hansen, Partner at Warner Norcross & Judd. Hansen has been working on what is now federal legislation since the early 2000s. “We first tried to go through the rulemaking process. And you can see that the letter borrows sections directly from the legislation, there are still some differences given legislative realities but we’re looking at functionally the same thing.”
Those legislative realities amount to slight differences in the transaction size allowances. But Hansen notes that having the No-Action Letter out there gives the bill added support because it shows that the law is already in-line with the SEC’s enforcement position.
Looking over the history of the bill’s path through Congress is almost like watching National Geographic footage of an extinct species in the wild. It has bipartisan sponsors in both chambers and saw a unanimous vote for passage in the House. The bill is working its way through the Senate, which is slower but sponsors include heavyweights like Manchin, Chambliss, and Coburn. “We’ve seen a big slowdown getting the bill through the Senate, but what other bill has passed the House with a unanimous vote in recent memory?” Hansen says. “We’re hopeful that means something in the Senate and that the bill will move forward.”
Coordinating efforts are also underway at the state government level. “We understand that changing the federal law isn’t the only part to this. Every state is different in terms of how it handles M&A brokerage, transactions, and registration. We’re also trying to implement uniform rules for states. We’ve already seen some positive efforts, I think state governments understand the issues here and want to find a way through, but it’s a learning process,” he adds.
FINRA for its part, has opened a public comment period on a similar rulemaking proposal focused on corporate finance brokers, which we mentioned in Part 1. If the FINRA proposal is successful a new category of brokers would be created known as “Limited Corporate Financing Brokers.” Registration would be required, but compliance milestones would be sized appropriately for what M&A Brokers and Corporate Finance Brokers actually do. The relief would be aimed at firms that focus solely on these areas – including boutique investment banks, and wouldn’t necessarily apply to say the M&A arm of a huge brokerage firm. If adopted, it would also permit investment banking boutiques to represent and advise both public and privately held companies and funds. The comment period is open until April 28.
According to Hansen, the rule changes are part of a broader shift at SEC. “I think since the JOBS Act mandated that the SEC start taking a look at some of these things like crowdfunding, and other niche operations you’ve seen real movement toward providing guidance. We didn’t see that necessarily before when you had these issues come up at forums year after year.” Hansen estimates that $10 trillion in privately held businesses will be sold or closed as baby boomers retire, that kind of figure and the role of business brokers in those transactions should get the attention of the SEC even if they’re still up in the air about crowdfunding.
“It’s certainly a process that we will be involved in for some time to come,” Hansen says. “These successes give us the opportunity to keep building.”
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.