United States: A Holiday Gift for M&A Brokers: Congress Passes New Exemption from Securities Broker Registration
By: Eden L. Rohrer and Jessica D. Cohn
On December 23, 2022, the House of Representatives passed H.R. 2617, the “Consolidated Appropriations Act of 2023,” following Senate passage on December 22. President Biden is expected to sign the legislation before December 30. Among the routine federal funding provisions, the bill includes a holiday surprise “policy rider” on qualifying mergers and acquisitions brokers (“M&A brokers”) in Division AA, Title V, Small Business Mergers, Acquisitions, Sales and Brokerage Simplification (“Title V”), effective 90 days after enactment. (H.R. 2617, 117th Cong. Div. AA, Title V, § 501 (2022)).
Title V provides an exemption from securities broker registration for certain M&A brokers by amending Section 15(b) of the Securities Exchange Act of 1934 to add new subsection (13). Subsection (13) defines an “M&A broker” as a broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, regardless of whether the broker acts on behalf of a seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company. To be eligible for the exemption, the broker must reasonably believe, among other requirements, that upon consummation of the transaction, any person(s) acquiring securities or assets of the company (a) will control the company; and (b) directly or indirectly, will be active in the management of the company.
An “eligible privately held company” has: (i) no class of securities registered or required to be registered under Exchange Act Section 12; and (ii) EBITDA less than $25 million and/or gross revenues less than $250 million.
The treatment of M&A brokers has a long and tortured history. The new subsection (13) is essentially the codification of the SEC M&A Brokers No-Action Letter (January 31, 2014, amended February 4, 2014) with some differences, notably a limitation on the size of eligible companies. The size limitation imposed by subsection (13) is consistent with the North American Securities Administrators Association (NASAA) Model Rule that was adopted on September 29, 2015. Several bills had been previously introduced that would have made similar or other amendments addressing the treatment of M&A brokers. Although they had not gotten enough traction to pass both houses of Congress on a standalone basis, proponents were able to have the provision included in the annual must-pass federal funding measure.
Another step forward for M&A brokers!