Congress Enacts Statute Exempting “M&A Brokers” From Registration as Brokers or Dealers

by Nancy A. D. Hancock and Karen P. Wackerman

Effective March 29, 2023, certain small business brokers will be exempted from registering with the Securities and Exchange Commission (the SEC). The new law was signed into effect on December 29, 2022, as part of the Consolidated Appropriations Act of 2023, P.L. 117-328.[1] The statute provides that an “M&A broker” is exempt from registration as a broker under Section 15 of the Securities Exchange Act of 1934[2].

This statute comes as a welcome relief to many small business brokers, who have since 2014 been relying on the SEC’s guidance (without the protection of a statute) contained in a no-action letter that provided that the SEC would not recommend enforcement of broker-dealer registration requirements against business brokers engaging in the business of finding buyers or sellers of private companies through transactions that involve the purchase and sale of securities[3] (the “No-Action Letter”).

In the No-Action Letter, the SEC Division of Trading and Markets stated it would not recommend to the SEC that it bring enforcement action against the specific activities by an M&A broker in connection with the transfer of ownership in a privately-held company that were listed in the no-action letter request.

The recently enacted federal statute contains an exemption from registration for activities that do not exactly match the activities listed in the SEC No-Action Letter. And, as of the date of this article, the SEC has not yet withdrawn the No-Action Letter or confirmed whether the new federal statute is intended to serve as a “safe harbor”—a permitted, but not exclusive, exemption.  

In addition, those relying on the new federal law should remember that it does not offer protection from state securities laws or state laws requiring the registration of business brokers, and as always, that compliance with the details is critical.

Potential Safe Harbor?

As discussed in greater detail below, the statute defines what an M&A broker is by describing the limitations on the services that the broker can conduct for the privately held companies the M&A broker represents. The definition of an M&A broker also describes the information that the M&A broker must reasonably believe has been disclosed in the transaction. The statute contains an extensive list of activities that an M&A broker may not engage in, or the exemption from registration will not be available. The statute also disqualifies some brokers from being eligible to be M&A brokers based on their disciplinary actions from the SEC, state securities regulatory authorities or self-regulatory organizations or their suspension from association with a broker-dealer[4].

The statute also limits the kinds of transaction that an M&A broker may engage in to those resulting in a “change in control” (defined) of an “eligible privately held company” (also defined).

Qualification as an “M&A broker”

The new law defines an “M&A broker” as a broker or associated person that “is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company,” so long as the broker reasonably believes that the purchaser will own and control the company[5] and directly or indirectly be active in its management[6] and that, if a person is being offered securities in exchange for the assets or securities of an eligible privately held company, that person will receive or have reasonable access to certain information regarding the issuer of those securities before becoming legally bound to consummate the transaction.[7]

Qualification as an eligible privately held company

The company being acquired must not have a class of securities registered or required to be registered with the SEC or be a reporting company in the year before the company initially engages the M&A broker with respect to the securities transaction. The statute also imposes a cap on the size of the company being acquired. Either the company’s EBITDA must have been less than $25 million, or its gross revenues must have been less than $250 million, in the fiscal year ending immediately before the year the company initially engages the M&A broker with respect to the securities transaction[8]. The statute expressly authorizes the SEC to modify the dollar figures by rule.

Activities excluding an M&A broker from exemption

A broker who engages in any of the following activities is not exempt from registration:

            (a)        receives, holds, transmits or has custody of the funds or securities to be exchanged in the transaction;

            (b)        engages in a public offering on behalf of an issuer;

            (c)        engages on behalf of a party in a transaction involving a shell company, other than a business combination related shell company[9];

            (d)       directly or indirectly provides financing related to the transaction;

            (e)        assists any party to obtain financing unless the broker complies with all applicable law and discloses any compensation in writing to the party;

            (f)        represents both the buyer and seller, unless the broker provides written disclosure of this fact to both parties and obtains their written consent;

            (g)        facilitates a transaction with a group of buyers formed with the assistance of the broker;

            (h)        engages in a transaction involving a sale to a passive buyer or group of passive buyers; or

            (i)           binds a party to a transfer of ownership of an eligible privately held company.[10]

Effect of statute on other exemptions from registration

Since January 31, 2014, many M&A brokers have been governing their activities to comply with the terms of a no-action letter issued by the SEC to a group of lawyers who proposed that certain activities by an M&A broker should not require registration with the SEC No-Action Letter. In the No-Action letter, the SEC concluded that “without necessarily agreeing with your analysis” the SEC would not recommend enforcement action under Section 15(a) of the Exchange Act (the statute requiring registration as a broker-dealer), if an M&A broker were to effect the securities transactions described in the letter in connection with the transfer of ownership of a privately-held company under the terms and conditions described in the letter without registering as a broker-dealer pursuant to Section 15(b) of the Exchange Act. The SEC’s response also contained its customary advisory: “Different facts and circumstances may cause us to reach a different conclusion. The relief in this letter is limited solely to the transactions described in your letter.”

The new statute offers more certainty to small M&A business brokers; however, as of the date of this article, the status of the No-Action Letter has not been clarified. The facts and circumstances described in the No-Action Letter are not identical to the requirements for exemption contained in the new statute.

Noteworthy differences include the following:

  1. The No-Action Letter did not include any restriction on the size of the business being sold, while the statute does. As a result, the exemption applies to fewer transactions than would potentially be covered by the No-Action Letter.
  2. The No-Action Letter required that the buyer or group of buyers will, after the closing of the transaction, “actively operate” the company. The phrase “actively operate” was not defined. The statute instead requires that the buyer directly or indirectly be active in the company’s management and spells out what that requirement would include.
  3. The No-Action Letter contained a more expansive exclusion from the definition of what constitutes a “shell” company, providing that such a company could be unprofitable or even be emerging from bankruptcy but would not be considered a shell company if it has actually been conducting business.

The statute does not restrict the form of compensation an M&A broker may receive. Similarly, the authors of the No-Action Letter request asked the SEC to confirm that the M&A broker would be permitted to receive transaction-based or other compensation, as agreed by the parties, in connection with an M&A transaction as defined in the No-Action Letter. Therefore, first under the No-Action Letter and now under the statute, the SEC has tacitly affirmed the permissibility of transaction-based compensation for M&A brokers without threatening the M&A broker’s exemption if it is otherwise available.

We look forward to sharing updates on the developments under the new statute when it becomes effective.


[1] Consolidated Appropriations Act of 2023, P.L. 117-328, Division AA, Title V, “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification,” adding a new subsection 13 to 15 U.S.C. §78o(b).

[2] 15 U.S.C. 78o(b).

[3] SEC No-Action Letter dated January 31, 2014, revised February 4, 2014, from the SEC to Colish, Hewitt, Rohrer, Lerner, Silver and Nathanson.

[4] 15 U.S.C. 78o(b)(13)(C).

[5] “Control” exists if the buyer or group of buyers has the right to vote or to sell or direct the sale of at least 25% of a class of voting securities of the company or, in the case of a partnership or limited liability company, the right to receive upon dissolution, or has contributed, at least 25% of the capital. 15 U.S.C. 78o(b)(13)(E)(ii).

[6] To be active in the management of the acquired company, the purchaser must, without limitation, (i) elect executive officers, (ii) approve the company’s annual budget, (iii) serve as an executive or other executive manager, or (iv) “carry out such other activities as the [Securities and Exchange] Commission may, by rule, determine to be in the public interest.” 15 U.S.C. 78o(b)(13)(E)(iv)(I)(bb).               

[7] The information to be made available is: (i) the most recent financial statements of the issuer of the securities, with any related statement by the independent accountant that prepared it, if applicable, (ii) a balance sheet dated not more than 120 days before the date of the offer, and (iii) information pertaining to the management, business, results of operations for the period covered by the foregoing financial statements, and material loss contingencies of the issuer.

[8] The statute requires that these amounts be adjusted for inflation every five years. 15 U.S.C. 78o(b)(13)(E)(iv)(II).

[9] A “business combination related shell company” is defined in the statute as a company with no or nominal operations and no or nominal assets that is created solely for the purpose of changing the corporate domicile of the entity that formed it (which may not itself be a shell company) or solely for the purpose of completing a business combination transaction. 15 U.S.C. 78o(b)(13)(E)(i).

[10] 15 U.S.C. 78o(b)(13)((B).

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