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SEC Guidance to M&A Brokers for Avoiding Broker Dealer Registration—with Major Limitations

by | Apr 29, 2021 | Mergers & Acquisitions

M&A Brokers discussing a new deal

In January 2014, the U.S. Securities & Exchange Commission issued a no-action letter that effectively exempted certain intermediaries from registering as broker-dealers when they are assisting in the sale of private companies.

While the SEC’s 2014 letter offered a measure of relief, it also included a laundry list of provisions limiting the scope of how and when the registration exemption could be deployed. As a result, investment bankers and business brokers hoping to avoid an enforcement action by the SEC should exercise caution when considering whether an exemption applies to them.

In the letter, the SEC’s Division of Trading and Markets said intermediaries involved in an M&A transaction for a privately held company may advertise the sale with information such as a description of the business, its general location, and price range.

M&A brokers, according to the letter, is specifically defined as an entity or individual engaging 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.”


The broker definition, therefore, limits the registration exemption to sales involving private companies and to those where the buyer will take an active role in the enterprise. In its letter, the SEC also spelled out 10 specific limitations:

  1. M&A brokers may not bind a party to an M&A Transaction.
  2. An M&A broker may not provide financing for the transaction. It may assist purchasers in obtaining financing from unaffiliated third parties, and in doing so, must comply with all applicable legal requirements and disclose any compensation in writing.
  3. The M&A broker may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A transaction or other securities transactions for the account of others.
  4. Transactions cannot involve a public offering. Any offering or sale of securities must be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933, and no party to any a transaction can be a shell company, other than a business combination-related shell company.
  5. When M&A brokers represents both buyers and sellers, it must provide clear, written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  6. An M&A broker must facilitate an M&A transaction with a group of buyers only if the group is formed without the assistance of the broker.
  7. As noted previously, a buyer, or group of buyers, must upon completion of a transaction, control and actively operate the company or the business.
  8. An M&A transaction may not result in the transfer of interests to one or a group of passive buyers.
  9. Any securities received by the buyer or M&A broker in an M&A transaction are restricted securities within the meaning of Rule 144(a)(3) under the Securities Act of 1933.
  10. The M&A broker (and, if the M&A broker is an entity, any officer, director or employee of the broker) must not be barred from association with a broker-dealer by the SEC, any state or any self-regulatory organization or suspended from association with a broker-dealer.


The letter also stated that it was concerned only with “registration requirements of Section 15(a) of the Exchange Act. Other provisions of the federal securities laws, including but not limited to the anti-fraud provisions, continue to apply.” In addition, the letter does not exempt intermediaries from applicable state laws.

Though the exemption is limited, most legal commentators have noted that it represents a significant step forward by the SEC in recognizing that some transactions—particularly those involving smaller and medium-sized businesses—may benefit if intermediaries could assist without the costly process of registering. Those costs are usually passed on to the companies attempting to execute a deal, thus creating an additional hurdle for them as they seek to combine. (In a similar move, the SEC recently proposed providing an exemption from broker-dealer registration requirements for “finders,” persons or entities that connect buyers and sellers.)

While the 2014 no-action letter may provide a measure of comfort to private companies and intermediaries concerned about liability, its provisions are narrow and specific. Intermediaries should proceed carefully and rely upon advice of trusted counsel if they are considering assisting the sale of a company without registering.

To learn more about potential exemptions contact us for a consultation.