Securities Regulation Daily House passes M&A broker bill with guardrails amendment
Thursday, December 7, 2017

House passes M&A broker bill with guardrails amendment

By Mark S. Nelson, J.D.

The House passed a bill that would create a new exemption from registration as a broker-dealer for mergers and acquisition brokers. The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2017 (H.R. 477), sponsored by Rep. Bill Huizenga (R-Mich) passed by a vote of 426-0. The bill now goes to the Senate and, if it becomes law, its provisions would become effective 90 days after enactment.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) told members that he and Ranking Member Maxine Waters (D-Calif) had agreed on a path forward regarding M&A brokers that depended on an amendment to be offered by Rep. Brad Sherman (D-Calif), which would add investor protections to the bill such that it would more closely track an SEC no-action letter. The bill’s sponsor, Rep. Huizenga, backed the Sherman amendment, which was approved by voice vote.

Fixing the bill. The M&A broker bill advanced in fits-and-starts in the House over the course of three Congresses. As Rep. Waters noted, the purpose of the legislation in the 113th Congress was to push the SEC to finish its no-action relief. According to the original backers of the current bill, it is nothing more than a codification of exiting no-action relief issued by the SEC in 2014. That relief was prompted by a letter to the SEC noting the disparate treatment under the Exchange Act and two Supreme Court opinions of similar M&A transactions: a transaction involving securities would require registration as a broker-dealer; by contrast, an asset sale would not require registration.

But the minority view, as expressed most recently in House Report No. 115–431, noted the absence from the current bill text of investor protections regarding conflicts of interest, deal financing, and the ability of brokers to bind parties to an M&A transaction. The House FSC reported the bill two months ago by a vote of 37-23.

Although the bill that passed the House FSC deviated from the terms of the SEC’s no-action letter, it did more closely track language contained in a model rule adopted by the North American Securities Administrators Association; NASAA had urged the House Financial Services Committee to favorably report the bill earlier this year.

As amended, the M&A broker bill now includes all of the investor protections required by the SEC’s no-action letter, adds the definition of "business combination related shell company," clarifies which officers exercise control and raises the control thresholds from 20 percent to 25 percent, and gives the Commission authority to modify EBITDA and gross revenues thresholds. The amended bill now differs substantially from NASAA’s model rule (See comparison chart).

The M&A broker exemption. Exchange Act Section 15(a) makes it unlawful to act as a broker or dealer without being registered with the Commission. Under the Exchange Act, "broker" means someone who is in the business of effecting securities transactions for others; "dealer" means someone whose business is the buying and selling of securities for their own account through a broker or otherwise. H.R. 477 would graft a new exemption onto Exchange Act Section 15(b) to provide for an exemption for M&A brokers from these registration requirements, provided certain criteria are met.

"M&A broker" would mean a broker (and associated persons) who engages 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 ..." The M&A broker must reasonably believe that the person who acquires the securities of an eligible privately held company will control and manage that company or it assets after the transaction, and that the person offered securities of that company will have reasonable access to the company’s most recent fiscal year-end financials (and other information if the financials are audited, reviewed or compiled).

Significantly, H.R 477 and the NASAA model rule appear to differ in their treatment of the M&A broker’s reasonable belief. In H.R. 477, "reasonably believes" is placed such that it appears to apply to both the M&A broker’s belief about the buyer’s control and management of the company upon completion of an M&A transaction and to the availability of the issuer’s financial data to the buyer. By contrast, NASAA’s model rule places "reasonably believes" such that it would appear to apply only to the M&A broker’s belief about the buyer controlling and actively managing the company, and not also to the availability of financial data.

"Eligible privately held company" would mean a privately held company that has no securities registered or required to be registered under Exchange Act Section 12 and that the company’s EBITDA is under $25 million and/or its gross revenues are under $250 million. The Sherman amendment gives the SEC authority to change the dollar amounts. But the bill also provides for an inflation adjustment to the dollar amounts every five years.

Lastly, "control" would be presumed in three situations: (1) a person is a director or is a corporate officer who exercises executive responsibility; (2) the person can vote or sell 20 percent (25 percent under the Sherman amendment) of a class of voting securities; or (3) the person, in the context of a partnership or limited liability company, has a right to receive upon dissolution (or the person contributed) 20 percent (25 percent under the Sherman amendment) or more of the entity’s capital.

When exemption is unavailable. The bill would deny the M&A broker exemption is two sets of circumstances. First, the bill would exclude certain activities, including when: (1) the M&A broker has custody of funds or securities in a transaction regarding the ownership of an eligible privately held company; (2) the M&A broker engages on an issuers’ behalf in a public offering of securities subject to Exchange Act Section 12 or the reporting requirements for broker-dealers; or (3) the M&A broker engages on a party’s behalf in a transaction involving a shell company (the Sherman amendment added an exception for business combination related shell companies).

The second set of circumstances focus on various disqualifications. An M&A broker cannot claim the exemption if its registration as a broker-dealer has been suspended or revoked by the Commission. Similarly, an M&A broker loses the exemption if it is subject to a statutory disqualification under Exchange Act Section 3(a)(39) (e.g., suspended or expelled from a self-regulatory organization or is subject to Commission orders barring or suspending the broker-dealer), or the M&A broker is subject to disqualification under Regulation D (The Dodd-Frank Act required the Commission to revise Regulation D’s disqualification provisions to conform with Regulation A). Lastly, an M&A broker may not assert the exemption if it is subject to certain final orders of a state securities regulator.

MainStory: TopStory BrokerDealers ExchangesMarketRegulation FederalPreemption InvestmentAdvisers MergersAcquisitions RiskManagement SecuritiesOfferings

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