FINRA/SEC M&A Broker Licensing Rule Change

March 13, 2014

Recently, Section 15(a) of the Securities Exchange Act of 1934 has become a hot topic in the Mergers & Acquisitions industry as “M&A Brokers” that engage in the sale or purchase of a privately-held company no longer need to be registered as a broker dealer with FINRA if they meet certain conditions.

Quick disclaimer – this blog post is not legal advice and is only our interpretation of the rules change.  

For those who have not yet read the SEC/FINRA’s revised ruling letter on the issue of M&A broker licensing, you can find the original letter HERE.  What does it all mean? Let’s have a crack at it below:

The SEC states that non-registered “M&A Brokers” (The Brokers) can participate in transactions that meet the criteria listed below:

• The Brokers can only participate in the transfer of assets of 100% equity of a privately-held company

• The Brokers only bring buyers and sellers together and provide no further advice

• The Brokers will not handle any securities involved in an M&A transactions

• The Brokers will not assist in obtaining financing from unaffiliated third parties

• The Brokers will not advise on the structure of the deal nor involve in a public offering

• The compensation of The Brokers is predetermined prior to a transaction

• The Brokers will facilitate in an M&A Transaction only if no M&A Broker provide assistance to the buyer

• The Brokers is not suspended from associate with a broker-dealer nor barred from association with a broker-dealer by the Commission

• The Brokers will only provide administrative support, preparation of financial statements, valuations and transmission of documents to sellers

• The Brokers will not assist in transactions that involve passive buyer(s)

Such changes provide a huge opportunity to small firms in the M&A industry as non-registered brokers can now legally engage in transactions involving private companies. Since obtaining a license is a lengthy and costly process, this recent change helps small firms generate more business as transactions in the boutique market generally meet the above criteria supporting the use of non-registered brokers in transactions. 

Naturally, this isn’t grounds to unregister if you do anything other than the very niche activities identified above, however this does signal a significant change for those who want to play by the rules that allow them to operate unlisenced with less concern.