Congress eases securities registration requirement for M&A brokers

The exemption provides relief – two decades in the making – from the U.S. Supreme Court’s 1985 Landreth Timber decision, which gave rise to the need for merger and acquisition advisors or business brokers and others, regardless of the size or substance of a business sale, to weigh the costs, benefits, and risks of not becoming registered with a broker dealer if (a) the sale might be transacted as a partial or complete stock transaction or (b) might include terms which could also be argued to be securities.

Under very specific circumstances, the exemption relieves many transactional activities that previously might have required accepting substantial bureaucratic, time, expense and regulatory burdens of registration or accepting professional risks for not doing so. The Registration Exemption for Merger and Acquisition Brokers is by no means a blanket exemption from compliance with securities law. Rather it is an exemption from requirements to register under a limited set of conditions. If the conditions of the exceptions are not met, then the exemption cannot be relied upon.

M&A brokers and others who work on business sales must have a thorough understanding of the new law, which goes into effect at the end of March 2023. For business sale or acquisition services extending beyond terms of the new exemption, brokers will need to continue to carefully weigh the need to be registered.

Some examples of activities that are not allowed without registration under the exemption for merger and acquisitions brokers are:

• capital raising,
• providing financing in a transaction,
• dealing in shell companies under certain circumstances,
• assisting in the formation of the buyer group, and
• taking custody of funds or securities.

While the new exemption is generous in the activities that are now allowed without registering under federal securities law, advisors and brokers must also be aware of how state securities schemes comport with the new law or prior federal law. About twenty states already have taken steps to align to some degree with the new exemptions, but many others may still have requirements that are based on the old law. Practitioners must know the appropriate state requirements before relying on the exemption. In states that have not caught up, local professionals in business sales should consider activities to help their states effect changes to align with the new Section 501 requirements.

• selling the stock of a business was not necessarily considered a securities sale, and

• a sale of management and control of a business could mean that the transfer of a majority of stock of a closely held corporation would not be a securities transaction.

In reaching its decision, the court relied on the basic definition of “security” in the securities law:

The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement . . .

What attributes are commonly parts of business sale structures that might have arguably triggered registration requirements before the new exemption for merger and acquisition brokers becomes effective? Examples include:

• owner-carried notes,
• assisting in obtaining acquisition funding
• earnouts,
• recapitalizations,
• retained equity/rollover, or
• sale of stock – part or all.

The Landreth Timber ruling gave rise to ambiguities as to the need for M&A advisors or business brokers to be registered with broker dealers if the sale might be transacted as a partial or complete stock transaction or might include terms which could also be argued to be securities and, hence, might require an advisor or broker to be registered under an SEC/FINRA broker dealer.

Failure to register arguably could lead to a transaction having post-closing risks for years, including possibilities of rescission of the transaction with major financial repercussions for the broker or the seller. This was especially complicated for sale engagements that were undertaken as a sale of assets and the going concern, but eventually morphed into a sale that included securities type terms.

Support also came through state actions and securities administrators including the North American Securities Administrators Association (NASAA) which provided a model exemption recommendation for states. The SEC was also supportive through its small business regulatory forums and no-action letters issued to numerous attorneys early in the process.

The U.S. House of Representatives passed similar versions many times, either overwhelmingly or unanimously, with strong bipartisan support before the Senate bothered to give it meaningful consideration. Senator John Kennedy of Louisiana was key in moving the legislation forward from the House Resolution into the recent 2023 Consolidated Appropriation Act.

It has been said this is a “rice bowl” issue in the relatively small M&A broker profession. Truly, this success has had many fathers, and special thanks to founding partners in IBG Business – including  John Zayac, Jim Afinowich and Gary Papay – for their substantial contributions and long-term support.