A new federal law goes into effect March 29, 2023 that conditionally exempts from broker-dealer registration persons who solely intermediate small, private company M&A deals.

Persons who intermediate larger private company M&A transactions will not be eligible for the new exemption and will need to continue to rely on the SEC’s 2014 no-action letter. The new Federal legislation also does not preempt the states, so M&A intermediaries will need to continue to be mindful of state registration requirements.

Background

Most brokers are required to register with the SEC and join a “self-regulatory organization” such as FINRA. Section 3(a)(4)(A) of the Securities Exchange Act generally defines a “broker” broadly as any person engaged in the business of effecting transactions in securities for the account of others. Ordinarily, it’s fairly easy to determine whether someone is a broker. A person who executes transactions for others on a securities exchange is clearly a broker. Less clear is whether a person who intermediates only private M&A transactions, often structured as acquisitions of stock or as mergers in which securities get converted, is also a broker and required to register.

When you look at the general rationale for regulating broker dealers, it’s tough to justify applying such regulation on private company M&A brokers. Broker-dealer regulation is generally designed to prevent abuses involving high pressure selling tactics and custody of funds, two features that typically don’t apply to private company M&A deals. In a typical M&A transaction, unlike a stock trade, the acquiror usually engages in its own exhaustive due diligence of the target, and the intermediary does not typically custody funds. Nevertheless, the U.S. Supreme Court in 1985 opined that an M&A transaction involving a target’s stock is deemed to be a securities transaction. Consequently, many M&A advisors began registering with the SEC as broker dealers following the 1985 opinion.