President Biden signed, on December 29, 2022, the Consolidated Appropriations Act, 2023, H.R. 2617 (the “2023 Act”).^[1] The 2023 Act amends the Securities Exchange Act of 1934 (the "Exchange Act") to exempt certain "M&A brokers", as defined below, from registration as broker-dealers with the U.S. Securities and Exchange Commission (the "SEC"). The new exemption, Exchange Act Section 15(b)(13), will be effective on March 29, 2023. Section 15(b)(13) will allow an M&A broker to engage in securities transactions in connection with the purchase and sale of an “eligible privately held company,” as defined below, without registering as a broker-dealer under Section 15 of the Exchange Act.

Historically, M&A brokers have relied on a 2014 no-action letter (“NAL”)^[2] issued by the SEC Division of Trading and Markets, which permitted, in the specified circumstances contained in the NAL, an M&A broker to effect securities transactions in connection with the transfer of ownership of a privately held company without the M&A broker registering as a broker-dealer under Section 15(b) of the Exchange Act. Generally, a NAL is not regarded as a binding precedent on the SEC. Unlike the NAL, Section 15(b)(13) will provide a formal binding exemption for an M&A Broker.

Under Section 15(b)(13), the term ‘M&A broker’ means a broker, and any associated person, engaged in the business of effecting securities transactions solely in 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. Eligible privately held companies are limited to those either with prior-year EBITDA of less than $25 million or prior-year gross revenues of less than $250 million. The broker must reasonably believe that, upon consummation of the transaction, any person acquiring securities or assets, acting alone or in concert:

1. will control the eligible privately held company or the business conducted with the assets of such company; and

2. directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with its assets.

The following are examples of how a buyer could be deemed to be active in the management of the eligible privately held company:

1. electing executive officers;

2. approving the annual budget;

3. serving as an executive or other executive manager; or

4. carrying out such other activities as the SEC, by rule, may determine to be in the public interest.

Key Takeaways to Remember

• Section 15(b)(13) does not provide an exemption from broker-dealer registration under applicable state securities laws.

• An M&A broker is not exempt from registration if such broker or a related party is suspended from association with a broker or dealer.

• The anti-fraud prohibitions of the 1934 Act will continue to apply to any securities transactions and to any M&A brokers.

• Finally, the M&A broker will not be entitled to the exemption if he or she engages in certain activities outlined in Section 15(b)(13)(B).

FOOTNOTES

^[1] Public Law No. 117-328; H.R. 2617, Consolidated Appropriations Act, 2023, Division AA, Title V- Small Business Mergers, Sales, and Brokerage Simplification, Sec. 501. Registration Exemption for Merger and Acquisition Brokers.

^[2] Faith Colish, Esq., Carter Ledyard & Milburn LLP, et al (SEC No-Action Letter, Jan. 31, 2014).