We are updating our March 6, 2023 QuickStudy that discussed the new statutory exemption under section 15(b)(13) of the Securities Exchange Act of 1934 from broker registration that allows unregistered M&A advisers to provide M&A advice and services in certain smaller transactions. As anticipated in our QuickStudy, on March 29, the SEC announced that it revoked the 2014 no-action letter that allowed similar activities by unregistered M&A advisers without the limitations under the statutory exemption. As a result, for an M&A adviser to be exempt from broker registration, the companies whose assets or securities are being transferred must either have EBITDA less than $25 million or gross revenue less than $25 million in the prior fiscal year. This means that M&A brokers who have been relying on the no-action letter must further limit their activities to fit within the narrower statutory exemption, unless they register as brokers. The potential consequences of failing to register as required are steep and may include criminal liability or rescission claims for the broker (and possibly even its client).
US M&A Brokers
Registered US broker-dealers may want to consider segregating their exempt M&A broker activities into a separate entity. By doing so, they can reduce the regulatory burdens and costs related to those exempt activities. The exempt activities would not be subject to investigations and inspections by the SEC and FINRA. In addition, the broker could use personnel without current brokers’ licenses and would avoid FINRA fees on the exempt portion of its business.
Brokers in Other Countries (not registered in the US)
Brokers in other countries that were not comfortable relying on the no-action letter to provide private company M&A advice within the US may now be comfortable relying on the statutory exemption. Instead of involving a registered US M&A broker in those deals, non-US brokers can avoid paying a portion of its advisory fee to a US-registered broker. In addition, non-US brokers would be able to conduct exempt M&A transactions without needing a registered-US broker to chaperone every transaction meeting. A non-US broker could advise on exempt transactions without creating a US separate subsidiary, though it may want to separate its US exempt business from its other business for similar regulatory and cost reasons depending on the regulatory regime in its country.
State Law Requirements
The new statutory exemption provides certainty at the federal level, but does not exempt M&A advisers from state broker registration requirements. Many states have exemptions that parallel the federal exemption, often based on the NASAA Model M&A broker rule. Other exemptions, such as for transactions with “institutional” parties, are also available in many states.
Policies and Procedures
Brokers taking advantage of the new statutory exemption will want to establish appropriate controls, policies and procedures to ensure that the private company US M&A advice they provide is exempt from the US broker registration requirements.
Locke Lord attorneys have significant experience advising broker-dealers and M&A participants on these matters. We will continue to monitor developments and expect to provide future client updates when useful. In the interim, please reach out to your regular Locke Lord contact or any of the authors with any questions.
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