John blogged earlier this year about the new statutory exemption for M&A Brokers from federal broker-dealer licensing requirements. In case you missed it, a recent K&L Gates blog reminds us that this statutory exemption became effective on March 29 and the SEC formally withdrew its 2014 no-action letter.
As John had noted, the exemption is limited to “eligible privately held companies,” which is defined as a company that has, in the fiscal year ending prior to the one in which the M&A broker is initially engaged: (i) no class of securities registered or required to be registered under §12 of the Exchange Act, and (ii) EBITDA less than $25 million and/or gross revenues less than $250 million. This is a key departure from the no-action letter. Here’s an excerpt from this Morrison Foerster alert on why this creates complications:
Following adoption of the Act, while the No-Action Letter remained outstanding, private company M&A brokers could continue to rely on it for transactions involving larger private companies that did not fit within the limits set forth above. However, the SEC withdrew the No‑Action Letter on March 30, 2023, specifically citing the fact that the Act imposed size limitations not found in the No-Action Letter.
For many private company M&A advisers, the limitation on the size of eligible private companies will pose a major obstacle. We are in an era when more and more successful private companies decline to go public or postpone that decision to a later stage of their growth. According to The New York Times, the number of public companies in the United States dropped by approximately 52% from the late 1990s to 2016. As a result, the number of private companies that are larger than the caps permitted under the Act is likely to grow. M&A brokers servicing these companies now must register with the SEC as broker-dealers, even if they never engage in any other form of brokerage activity.
By contrast, M&A brokers who limit their involvement to the smaller “eligible” private companies will be entirely free of federal broker-dealer regulation. This stark difference may result in two different tiers of M&A boutiques, with some operating with limited or no regulatory oversight,  while those serving larger private companies will be subject to the extensive requirements of federal broker-dealer regulation. Some Congressional supporters of the Act argued that it was important to reduce the regulatory burden on brokers handling smaller deals in local communities. While that may be a worthwhile goal, it is not clear why brokers who, on occasion or on a regular basis, may advise larger private companies in M&A transactions and provide no other brokerage services should be subject to federal broker-dealer regulations that are equally ill-fitted to their business.
– Meredith Ervine, DealLawyers.com, May 10, 2023