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SEC releases no action letter for mergers and acquisitions brokers

The U.S. Securities and Exchange Commission recently issued a no action letter regarding whether certain mergers and acquisitions intermediaries must register as broker-dealers. The letter offers a significantly different take on who may serve as an intermediary in mergers and acquisitions transactions that involve private companies.

Previously, the SEC took the position that any intermediary who advised clients about issuing securities, the valuation of securities or who received compensation based on certain transactions was required to register as a broker-dealer. If an intermediary was not registered, he was not allowed under SEC rules to negotiate for his clients regarding the sale, acquisition or combination of businesses. The guidance, however, was not absolute: later guidance allowed for unregistered intermediaries to act as business brokers for certain small businesses, provided that they offered no advice about securities, did not represent both the buyer and seller and had a limited role in negotiating sale terms.

The SEC’s most recent no action letter defines a mergers and acquisitions broker as someone who helps buyers to acquire an interest or control in a privately held business through securities transactions. Unlike in previous years, however, it is not necessary for the target of an acquisition action to be a small business. Rather, it is only necessary that it be a privately held business that is not required under Section 15(d) of the Securities Exchange Act to issue periodic reports and does not have registered securities. So long as the requirements are met, a mergers and acquisitions broker will be allowed to assist in the sale and purchase of privately held companies and will be able to advertize that privately held companies are for sale.

Interestingly, the recent no action letter was silent with respect to mergers and acquisitions broker compensation, even though this question was what led to the publication of the letter in the first place. Specifically, individuals had requested guidance regarding whether a mergers and acquisitions broker could receive compensation based on the transaction, provided it was agreed to by both parties. Some have suggested that the SEC plans to issue another letter soon that addresses this specific issue.

Of course, it is important to note that these no action letters are simply guidance provided by SEC staff. They represent neither changes to the law nor changes to applicable regulations.

For more information about mergers and acquisitions, forming a business or any other corporate law matter, contact an experienced business law attorney.