The Brokerage Simplification Act
On December 29, 2022, President Biden signed into law: H.R. 2617, the “Consolidated Appropriations Act, 2023,” FY2023.This staggering $1.7 billion omnibus spending bill includes H. R. 935: “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2021.” With strong bipartisan support, the bill, which will be enacted on March 29, 2023, also received widespread enthusiasm in the M&A Broker community and North American Securities Administrators Association (NASAA). The law provides broad exemptions and guidance following a significant effort to codify regulatory relief addressed by the no-action letter issued by SEC staff in January of 2014 and later adopted as a NASAA model rule in 2015.
For a majority of M&A Brokers, the conditions and prohibitions in this statute are consistent with their current best professional practices. This statutory exemption affords M&A brokers greater clarity concerning registration as a SEC-registered securities broker-dealer in order to provide assistance with and receive compensation for the purchase, sale, or combination of a privately held company. According to Scott Mashuda, Founding Partner of REAG and current Chairman of M&A Source, “This is a significant and positive development for our industry. It clearly defines the size of our clients as well as the service we can provide to them. This allows M&A Brokers to act in the best of interests of their clients and know that they will be paid for our efforts.”
Registration Exemption for M&A Brokers
By defining the role of M&A Brokers and exempting private transactions from one-size-fits-all legislation, this adds a clarifying distinction for public companies and markets with passive investors from lower middle market M&A activity that focuses on privately held companies.
The 4155 page omnibus bill containing H. R. 935 and introduced by Sen. John Kennedy (R-La.) – known as the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act – allows M&A Brokers to “organize sales and purchases of ownership and control of private companies without registering as “broker-dealers” with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
This law effectively amends the Securities Exchange Act of 1934 to exempt registration of brokers performing services in connection with the transfer of ownership of smaller, privately held companies with $25 million or less of EBITDA and revenues of less than $250 million.
For private companies, the NASAA Model State Rule, now closely follows this new federal law and applies to organizations that
- Do not have a class of registered securities with the SEC
- Do not have securities that are publicly traded to produce passive income
- Is a privately owned company
However, the federal exemption from SEC registration does not override similar state-level securities licensing. Approximately two dozen states already have laws on the books that harmonize with the federal law and it is likely that other states will follow suit.
M&A Brokers Defined in H.R. 935
In this document “M&A Broker” is defined as
Any person associated with a broker, engaged in the business of effecting securities transactions solely in the connection with the transfer of ownership of an eligible privately held company, regardless of whether the broker acts on behalf of a seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company, regardless of whether the broker acts on behalf of a seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company, if the broker reasonably believes that:
(i) upon consummation of the transaction, any person acquiring securities or assets of the eligible privately held company, acting alone or in concert (aa) will control the eligible privately held company or the business conducted with the assets of the eligible privately held company; and (bb) directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company, including without limitation, for example, by electing executive officers; approving the annual budget; or serving as an executive or other executive manager; and
(ii) in the event that any person is offered securities of an issuer in exchange for securities or assets of the eligible privately held company, before the transaction is consummated, the person will receive or have reasonable access to the issuer’s most recent fiscal year-end financial statements, any related statements from the independent accountant if the financials are audited, a balance sheet dated no more than 120 days before the offer date, and information about the business, its management, and any material loss contingencies of the issuer.
Conditions, Qualifications & Disqualifications
Conditions: Brokerage Simplification Act
The M&A broker may not:
- Receive, hold, transmit, or have custody of the funds or securities to be exchanged by the parties to the transaction
- Engage on behalf of an issuer in a public offering of any class of SEC-registered securities
- Involve a shell company other than one formed solely for the purpose of affecting the business combination in that transaction
- Provide financing related to the transfer of the company’s ownership
- Facilitate the transaction with a group of buyers formed with the assistance of the M&A broker
- Transfer ownership to a passive buyer or group of buyers
- Bind a party to a transfer of ownership of the company
Qualifications: Brokerage Simplification Act
If the aforementioned conditions are satisfied, the M&A Broker may:
- Assist a party to obtain financing from an unaffiliated third party if (i) any lending-related compensation is disclosed to the party in writing and the financing complies with all the other applicable laws in connection with such assistance
- Represent both the buyer and the seller in the same transaction by providing clear written disclosure as to the parties the broker represents and obtaining written consent from those parties to the joint representation
Disqualifications: Brokerage Simplification Act
The M&A Broker exemption is not applicable to capital-raising from passive investors and is not available if the M&A Broker:
- Has been barred from association with a broker or dealer by the SEC, any state, or any self-regulatory organization
- Is suspended from association with a broker or dealer
As thought-leaders in the M&A community, it is incumbent on the REAG team to address the significant issues defining our industry. It is important to note that this article is NOT intended to serve as financial or legal advice; it is intended to highlight recent events to serve as an introduction to the Brokerage Simplification Act.
REAG is prepared to help business owners and founders better understand how to grow, enhance or transfer their businesses. If you have questions about this new statute or are ready for the next chapter of your entrepreneurial journey, reach out and let’s begin together.