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New Exemption for Small Business M&A Brokers

Irina Garcia Iglesias - February 21, 2023

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On December 29, 2022, President Biden signed into law the Consolidated Appropriations Act of 2023 (H.R. 2617) (the “Act”) that includes an exemption from registration with the Securities and Exchange Commission (the “SEC”) for small business mergers and acquisitions brokers (“M&A brokers”), which is designed to benefit broker-dealers handling smaller deals in local communities and to reduce initial and ongoing costs. The new M&A Broker Exemption is the codification of the SEC M&A Brokers No-Action Letter dated 31 January 2014, and amended 4 February 2014 (the “M&A Broker NAL”). The Act amends Section 15(b) of the Securities Exchange Act of 1934 that requires brokers to register with the SEC and adds subsection 13 “Registration Exemption for Merger and Acquisition Brokers (the “M&A Broker Exemption”); the exemption will be effective on March 29, 2023. Under Section 15(b)(13), an M&A broker is exempt from registration unless it (i) holds or has custody of the funds or securities to be exchanged by the privately held company, (ii) engages in a public offering, (iii) engages in a transaction involving a shell company, (iv) provides financing related to the transfer of an eligible privately held company’s ownership, (v) assists any party to obtain financing from an unaffiliated third party without disclosing any compensation in writing, (vi) represents both the buyer and the seller in the same transaction without clear written disclosure and consent from each party, (vii) facilitates a transaction with a group of buyers formed to acquire the eligible privately held company with the brokers’ assistance, (viii) engages in a transfer of an eligible privately held company’s ownership to a passive buyer, (ix) binds a party to a transfer of ownership of an eligible privately held company. For Purpose of the New M&A Broker Exemption “M&A broker” means a broker, and any person associated with a broker, engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, if the broker believes that after the transaction, the acquiring party (i) will control the company (25% or more of voting shares), (ii) will be active in the management of the company. “Eligible privately held company” means a privately held company that (i) does not have registered securities, or securities required to be registered, or is required to file periodic information, (ii) in the previous fiscal year the company’s EBITDA is less than $25 million or its gross revenues is less than $250 million. Considerations

  • The new Section 15(b)(13) does not clarify the use of unregistered “finders” in these transactions. In October 2020, the SEC proposed an exemption from broker-dealer registration for finders to permit natural persons to engage in certain limited capital-raising activities involving accredited investors. However, this proposal was not adopted, which means most finders will still need to register as broker-dealers when participating as intermediaries in these transactions. Otherwise, they will not be permitted to facilitate securities offerings.

  • It is unclear whether (or when) the SEC will withdraw the M&A Broker NAL to avoid confusion and create a more homogeneous legal framework. In this case, the M&A Broker NAL does not include a limitation on the size of eligible privately held companies

If you or your team are in need of more legal clarification, contact the FinTech Law team. Our experienced legal team can help you get the legal support you need.

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