Diversity & Inclusion
On January 31, 2014, the Division of Trading and Markets (the “Division”) of the Securities and Exchange Commission (the “SEC”) issued a no-action letter (as revised on February 4, 2014, the “No-Action Letter”)1 that permits an M&A Broker (as defined below) to engage in certain activities in connection with the purchase or sale of privately-held companies without registering as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).
Prior to the No-Action Letter, although a person who had not registered as a broker-dealer could engage in activities in connection with the sale of a business structured as an asset sale, unregistered persons generally were not permitted to effect the sale of a business structured as a securities sale. As a result, unregistered persons generally were not permitted to engage in activities such as negotiating on behalf of buyers and sellers, participating in the sale of a privately-held company or providing advice relating to the issuance or value of securities in connection with the sale of such a company. Although subject to many conditions and limitations, the No-Action Letter has significantly expanded the limited relief that the SEC previously had given in connection with such sales.
The relief provided by the No-Action Letter is limited to securities transactions effected by an M&A Broker in connection with the transfer of ownership of a “privately-held company,” which is defined in the No-Action Letter as a company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Exchange Act, or with respect to which the company files, or is required to file, periodic information, documents or reports under Section 15(d) of the Exchange Act. Any privately-held company accorded this relief must be an operating company that is a going concern and not a “shell” company.2
An “M&A Broker” is defined in the No-Action Letter as a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.
The No-Action Letter provides relief permitting M&A Brokers to:
The relief provided by the No-Action Letter was based on the facts and representations included in the letter requesting relief. Based on the representations highlighted by the SEC in providing such relief, M&A Brokers will need to satisfy the following conditions:
The No-Action Letter provides a long-awaited expansion of the prior relief relating to M&A Brokers following discussions and proposals going back many years.5 There may be further developments on the subject of broker-dealer requirements. It is notable that the No-Action Letter does not directly address the scenario highlighted last year by David Blass, Chief Counsel of the Division, concerning potential broker-dealer registration issues where private fund advisers or their affiliates or personnel receive transaction-based compensation relating to fund portfolio companies.6 Furthermore, Congress recently has been considering bills relating to M&A Brokers,7 although it is currently unclear if, or in what form, any such legislation may be adopted. The relief afforded by the No-Action Letter is limited to the registration requirements of Section 15(a) of the Exchange Act and does not extend to the applicability of any other federal or state laws relating to broker-dealer or other requirements.
1 Copies of the No-Action Letter and the request letter to which it responded are available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf.
2 The No-Action Letter defines a “shell” company as a company that (1) has no or nominal operations and (2) has: (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. In this context, a “going concern” need not be profitable, and could even be emerging from bankruptcy, so long as it actually has been conducting business, including soliciting or effecting business transactions or engaging in research and development activities.
3 In contrast, the prior relief and the legislation referenced in footnote 7 below contained limits on the size of the privately-held companies to which the relief or exemption from broker-dealer registration applied.
4 The No-Action Letter defines a “business combination related shell company” as a shell company (as defined in Rule 405 of the Securities Act) that is (1) formed by an entity that is not a shell company solely for the purpose of changing the corporate domicile of that entity solely within the United States; or (2) formed by an entity that is not a shell company solely for the purpose of completing a business combination transaction (as defined in Securities Act Rule 165(f)) among one or more entities other than the shell company, none of which is a shell company.
5 See Am. Bar Assoc., Report and Recommendations of the Task Force on Private Placement Brokers (2005), available at: http://www.sec.gov/info/smallbus/2009gbforum/abareport062005.pdf.
6 Please refer to our client mailing “SEC Staff Warns That Advisers May Be Required to Register as Broker-Dealers” (Apr. 22, 2013), available at: http://www.skadden.com/insights/sec-staff-warns-advisers-may-be-required-register-broker-dealers.
7 See S. 1923, 113th Cong. (2014), and H.R. 2274, 113th Cong. (2014), which was passed by the House of Representatives on January 14, 2014, and is currently pending in the Senate.
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