SEC building with official seal
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For certain M&A deals involving privately held target companies, business brokers don’t have to be registered as broker-dealers, according to U.S. Securities and Exchange Commission staff. Proposed legislation winding its way through Congress would forge that SEC staff position—which applies when the buyer controls and is actively involved in operating the acquired business-- as binding securities law. Shane Hansen, a partner at Warner Norcross & Judd with a financial services regulation practice, is the principal author of the proposed legislation. We spoke to him at the Alliance of Merger & Acquisition Advisors 2015 Summer Conference in Chicago in July.

How have U.S. broker-dealer regulations affected M&A transactions?

The trouble is if you buy or sell a business--cash for assets-- there's no securities involved. But, if you instead buy or sell or merge or exchange the stock of a company, stock is a security, so now you’re required to be registered and regulated just like Merrill Lynch to buy or sell a small business like a manufacturing company or a book store. The whole system of regulation is highly complex, really built around the concept of protecting passive retail investors, and public stock markets. So in the context of the purchase and sale of a business, there are a lot of protections that are unnecessary, that are very expensive and just not relevant to the buying and selling of a business.

Where does the SEC stand on this issue now?

The SEC staff suggested to us informally that because their priorities were being driven by Congress, that we should go talk to Congress, and so we did. And we wrote legislation to amend the Securities and Exchange Act of 1934 to exempt M&A brokers from having to be registered as broker-dealers. Literally the day the legislation was introduced, we also met with the SEC staff about getting what’s called a no-action letter, which essentially is a statement by the SEC staff stating that based on a set of facts, they would take no action. In this context, the no-action letter came out two weeks after the legislation passed the U.S. House of Representatives unanimously.

What's at stake for lower middle market dealmakers?

For these folks, it really is about trying to give them protection. If they invest their time, sweat, effort, their work, in trying to facilitate the sale of a business, whether they’re working with a seller or a buyer, they’re going to invest a lot of time and effort in helping that business get sold. And today, their work is at risk of going unpaid, because if someone wants to fight about it, they can say: “I don’t want to pay your fee, because you should have been registered as a broker dealer.”

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