New Federal M&A Broker Exemption

By: Bryan K. Prosek, John R. Chadd

Published: February 28, 2023

On December 29, 2022, President Biden signed the Consolidated Appropriations Act of 2023 (H.R. 2617) into law, providing a federal statutory exemption from securities law broker registration for merger and acquisition (M&A) brokers effective March 29, 2023. Previously, M&A brokers relied on the SEC M&A Brokers No-Action Letter published by the U.S. Securities and Exchange Commission (SEC) on January 31, 2014, and amended on February 4, 2014, for clarity regarding broker registration. The new exemption closely follows the No-Action Letter, with some differences, including a limitation on the size of eligible privately held companies.

An M&A broker is defined as a “person 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 eligible privately held company.” There are additional requirements, summarized as follows:

An eligible privately held company is defined as a company that, in the fiscal year ending immediately before the fiscal year in which the services of the M&A broker are initially engaged with respect to the transaction, has (i) no class of securities registered or required to be registered under the Securities and Exchange Act of 1934, Section 12, and (ii) EBITDA of less than $25 million and/or gross revenue less than $250 million.

Excluded Activities and Disqualification

In order to meet the exemption, an M&A broker must not do any of the following: 
  1. Directly or indirectly, in connection with the transfer of ownership of an eligible privately held company, receive, hold, transmit, or have custody of the funds or securities to be exchanged by the parties to the transaction. 
  2. Engage on behalf of an issuer in a public offering of any class of securities that is registered, or is required to be registered, with the SEC under Exchange Act Section 12 or with respect to which the issuer files, or is required to file, periodic information, documents, and reports under Exchange Act Section 15(d). 
  3. Engage on behalf of any party in a transaction involving a shell company other than a business combination related shell company. 
  4. Directly, or indirectly through any of its affiliates, provide financing related to the transfer of ownership of an eligible privately held company. 
  5. Assist any party with obtaining financing from an unaffiliated third party without: (a) complying with all other applicable laws in connection with such assistance, including, if applicable, Regulation T (12 C.F.R. 220 et seq.), and (b) disclosing in writing any compensation to the party. 
  6. Represent both the buyer and the seller in the same transaction without providing clear written disclosure as to the parties the broker represents and obtaining from both parties written consent to the joint representation.
  7. Facilitate a transaction with a group of buyers formed with the assistance of the M&A broker to acquire the eligible privately held company. 
  8. Engage in a transaction involving the transfer of ownership of an eligible privately held company to a passive buyer or group of passive buyers. 
  9. Bind a party to a transfer of ownership of an eligible privately held company.
  10. Be barred from association with a broker or dealer by the SEC, any state, or any self-regulatory organization, or be suspended from association with a broker or dealer.

While the exemption provides a federal exemption from SEC registration for M&A brokers, the activity of securities brokers is still also regulated by the individual states, some of which may also have an exemption in place.

For assistance or questions about this legal insight, please contact the authors or any member of the Steptoe & Johnson Corporate/Mergers & Acquisitions Team.

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