The Securities and Exchange Commission (the “SEC”) recently clarified the applicability of broker-dealer registration requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for individuals and entities that help facilitate mergers or acquisitions among private companies. For those that qualify, this new guidance may provide welcome relief from the specter of potentially burdensome broker-dealer registration and compliance requirements.


The Exchange Act generally prohibits any broker or dealer from facilitating transactions in securities without first registering with the SEC. Unfortunately, registration can be an expensive and time consuming process, requiring brokers and dealers to provide detailed disclosures to the SEC, register with FINRA, and submit themselves to heightened regulatory requirements. Accordingly, for intermediaries engaged in the business of helping clients identify, finance, negotiate or execute transactions involving corporate mergers or acquisitions, the applicability of the Exchange Act’s broker-dealer registration requirements has traditionally been a matter of concern. The SEC’s position prior to January 31, 2014 was that registration was required for individuals or entities providing advice or other services in connection with corporate acquisitions involving the sale of securities and who were compensated based on the size or other aspects of the transaction.

Recent SEC No Action Letter

On January 31, 2014, in response to a request for relief submitted by a group of M&A attorneys, the Division of Trading and Markets of the SEC issued a “no action letter” (the “Letter”)1 regarding the broker-dealer registration requirements for individuals or entities operating as “M&A Brokers.” No action letters are guidance documents issued by the SEC’s Staff, confirming that the Staff will not recommend enforcement action relating to a proposal set forth in the request for such guidance. Although no action letters are not necessarily approved by or binding on the SEC Commissioners, these guidance documents provide insights into SEC enforcement priorities and interpretations.

The Letter clarifies that the SEC will not seek enforcement action against unregistered individuals or entities fitting within the definition of “M&A Brokers” and abiding by certain other limits. For M&A Brokers complying with these restrictions, the Letter contemplates that such a broker could advertise a privately-held company for sale (with information such as the description of the business, general location and price range), participate in negotiations and also advise the transaction parties on related matters. These new guidelines are applicable to M&A Brokers of any size and irrespective of whether the broker’s compensation is transaction-based.

In order for the relief from broker-dealer registration to apply, the following conditions must be met:

The broker must be an “M&A Broker.” As defined in the Letter, an “M&A Broker” is one who is “engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.”2

The M&A Broker may not have the ability to bind a party to the merger, acquisition, business sale or business combination (collectively, “M&A Transactions”).

The M&A Broker may not directly, or indirectly through an affiliate, provide financing for the M&A Transaction and must comply with all applicable legal requirements (including Regulation T) if it assists purchasers in obtaining financing from unaffiliated third parties, and it must disclose in writing any compensation to the client.

The M&A Broker may not have custody, control or possession of or otherwise handle funds or securities issued or exchanged in connection with the M&A Transaction (or other securities transaction for the account of others).

The M&A Broker must provide clear written disclosure to (and obtain written consent from) the parties if it represents both buyers and sellers in the M&A Transaction.

The M&A Broker may not assist in the formation of a group of buyers to participate in the M&A Transaction.

The M&A Broker may not have been barred from association with a broker-dealer by the SEC, any state or FINRA, and may not be suspended from association with a broker-dealer (nor, if the M&A Broker is an entity, may any of its officers, directors or employees have been so barred or suspended from such association).

The M&A Transaction being facilitated by the M&A Broker may not involve a public offering of securities, and any offering or sale of securities must be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”).

The buyer (or group of buyers) must, upon completion of the transaction, control and actively operate the company or the business conducted with the assets of the company.3

Finally, the M&A Transaction may not result in the transfer of interests to a passive buyer or group of passive buyers.

Although these conditions are numerous, this new guidance from the SEC provides a wealth of clarity for individuals and entities meeting the definition of “M&A Broker.” However, any such individual or entity engaging in such activities should be reminded that any securities received by the buyer or M&A Broker in the transaction will be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act and, therefore, may only be resold in compliance with applicable registration exemptions. Further, the M&A Broker remains subject to the antifraud and other provisions of the federal securities laws.

Action Items; Contact

In light of this new guidance, intermediaries and the parties to M&A transactions should have greater certainty and comfort regarding the exact functions that can be provided by M&A Brokers. However, interested parties should also stay tuned for potential legislative developments. Bills have been introduced in both the United States House of Representatives (H.R. 2274) and Senate (S. 1923) that might implicate broker-dealer registration requirements under the Exchange Act.

If you have any questions regarding the Letter, please contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys.

Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services.

IRS CIircular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

1The no action letter is available at: (January 31, 2014; amended February 4, 2014).

2A “privately-held company” is “a company that does not have any class of securities registered, or required to be registered, with the [SEC] under Section 12 of the Exchange Act, or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15(d) of the Exchange Act.” In addition, the privately held company must be an operating company that is a going concern and not a “shell company.”

3The SEC will presume that such control exists if, upon completion of the transaction, the buyer or group of buyers has the right to vote 25% or more of the voting securities, the power to sell or direct the sale of 25% or more of the voting securities, or, in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.