Merger and acquisition firms—often referred to as M&A brokers—are investment bankers who function as intermediaries to facilitate the sale of private businesses by locating sellers for companies looking for acquisitions, or locating buyers for companies wanting to sell. As part of the process, M&A brokers provide analyses and evaluations regarding acquisition candidates and the business channels in which they operate, and are a critical resource for private businesses seeking liquidity. M&A brokers generally receive a fee based on a percentage of the value of a successful transaction—described as a success or transaction fee. At the start of the process the ultimate structure of the transaction on which this fee will be based—asset sale or sale of equity—is often unknown.
This unknown creates a conundrum for M&A firms that traces its origins all the way back to 1985, when the Supreme Court in Landreth Timber v. Landreth, 471 U.S. 681 rejected the sale of business doctrine—the doctrine that the sale of an entire business by transfer of stock or other equity did not involve the sale of securities under federal securities laws. Landreth held that since stock is within the literal definition of a security, the federal securities laws apply in M&A transactions where a change in control of a business is effected by stock transfers. An indirect effect of Landreth was that M&A brokers had to register as broker dealers under Section 15 of the Securities Exchange Act of 1934 to legally receive success fees in stock or other equity transactions because compensation tied to securities transactions can be paid only to registered broker dealers. Such registration also meant that M&A brokers had to become FINRA members, and employees engaged in M&A activities had to obtain securities registered representative licenses. Landreth thus brought down upon the M&A brokerage industry the entire panoply of burdensome broker dealer registration, supervision, and compliance, including regulatory reporting, oversight, and examinations.
However, it has long been recognized that because private M&A brokers do not provide retail brokerage services or maintain customer accounts, they are not engaged in the securities activities that the securities broker dealer registration and compliance regimen in the Exchange Act was primarily designed to regulate. In recognition of this, the Securities and Exchange Commission issued a 2014 no-action letter (known as the “Six Lawyers” letter) stating that the SEC would not recommend enforcement actions against M&A brokers who are not registered under the Exchange Act but who receive success fees in private transactions where ownership is transferred by conveyance of securities. It contains other limitations, but the Six Lawyers letter basically revived the sale of business doctrine and provides an escape from the consequences of Landreth at the federal level.
Now Congress has acted. Included in the omnibus bill for fiscal 2023 is the Small Business, Mergers, Acquisitions and Brokerage Simplification Act, which, effective March 29, 2023, exempts M&A brokers from federal registration. The new law does limit the scope of the exemption to certain private transactions and also contains a size cap: the company being sold must have EBITDA of under $25 Million, or gross revenues of under $250 million.
However, the new law does not preempt state registration of broker dealers. Nor did the Six Lawyers letter. Currently, only about twenty states have registration exemptions for M&A brokers. Therefore, SEC and state-registered M&A brokers will not likely want to de-register until most (if not all) states adopt the federal approach. Firms not registered will continue to have issues under state law if they receive transactions fees in stock-based transactions in states where broker dealer registration would be required.
Frantz Ward maintains a schedule of states where registration is still required, which we update as more states adopt the federal exemption approach.
Related professionals
Related practices