The SEC’s longstanding position has been that a broker in a private M&A deal that was structured as a stock sale needed to be registered as a broker-dealer. This requirement did not apply in the context of a sale structured as a sale of assets, since there wasn’t any sale of securities involved, but the eventual structure of a sale is not always known at the beginning of the transaction. And, in any event, brokers have needed to be registered to be able to handle all acquisitions, however structured.
However, the SEC has now changed its position in a recent no-action letter. Under the facts as presented in the letter, a broker in a private company acquisition structured as a stock sale would not need to be registered as a broker-dealer. Reliance on this letter is subject to the usual caveats about no-action letters, including that the SEC relied on a list of 10 factual representations present in this case, which if different may have led to a different result. For example, the exemption would not be available in the sale of a public company or if the broker was involved in putting together a consortium of buyers. Also, the SEC’s position does not affect any applicable state broker-dealer regulation that may apply.
The SEC’s new view on this is a welcome acknowledgement that the application of broker-dealer regulation to M&A, while appropriate in a technical sense because securities are being sold, often does not square with the basic purposes of broker-dealer regulation. These rules were put into place to protect unsophisticated investors from being pressured into unsuitable investments by unscrupulous brokers. In the M&A context, however, the parties are both likely to be knowledgeable about the business and actively involved in negotiation and are therefore not in need of such protection. The likely result of this development is that many brokers that specialize in private company M&A will no longer find it necessary to continue to be registered as a broker-dealer.