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For almost a century, professionals working in mergers and acquisitions operated in a sort of regulatory limbo, as outlined by the Securities Exchange Act of 1934 (Exchange Act) Section 15(a). In short, the legislation required “any person engaged in the business of effecting transactions in securities for the account of others” to register with the SEC or commission of securities brokers.
The act wasn’t just a tangle of superfluous red tape. It was created in large part as a reaction to the malfeasance that steered the U.S. financial enterprise into the Great Depression and was designed to protect investors and create confidence in the securities industry. Even after an M&A broker exemption was signed into law in 2023, there remained a gray area in which advisors or “finders” can legally operate in the assistance of financing certain deals.
This isn’t inherently a bad thing. Unlicensed but upstanding business brokers and finders have their place in the current M&A ecosystem, and companies seeking to raise capital shouldn’t reflexively avoid them. But they should be aware of some of the potential risks.
Why Unlicensed Advisors Add Risk to M&A Transactions
For representatives working on private M&A deals, licensing isn’t always required. That could provide an advantage for all parties involved in a private transaction, allowing business brokers and finders to avoid expenses and layers of oversight, potentially expediting a deal and reducing the associated costs for buyers and sellers.
Still, although regulation may allow for it, working with unlicensed advisors can create unnecessary risks for sellers. The federal exception, for instance, doesn’t preempt state regulations for M&A brokers, and the updated NASAA Model Rules are making it even more complex.
This creates risks when conducting deals with implications in different states, as brokers may have to register in some places but not others. Sellers must be aware of which different regulations they’re beholden to when conducting deals involving multiple states, to ensure their advisors are compliant.
Uncredentialed business brokers and finders may also lack knowledge or key context regarding certain compliance concerns. For example, Finalis has seen deals unravel when buyer's counsel discovered an unlicensed advisor stood to receive a success fee, sparking legal challenges, and in some cases, total fee loss. In another case, a cross-border deal involving an unregistered intermediary triggered scrutiny from a state securities regulator, causing significant delays. These compliance concerns are real – and avoidable.
Moreover, unlicensed advisors can also create contractual issues, as buyers may want to unwind deals if they discover they’ve been working with a broker or finder who isn’t credentialed. Or, buyer’s attorneys could dispute making a payment of success fees to the unlicensed broker given those success fees are a key jurisdiction FINRA and a Broker-Dealer oversees for any private market deals where success fee compensation is paid. No one wants to spend 9-24 months of work to earn a success fee only to end up in litigation over receiving their pay or having the buyer walk away due to lack of broker-dealer oversight.
How Companies Can Find the Right Broker for Their Deal
In cases when an unlicensed M&A advisor is found to be engaging in activities that require securities registration, the SEC doesn’t only scrutinize the finder. Any company that compensates an unlicensed intermediary for services associated with a securities transaction is in violation of the law and can be subject to significant consequences.
That scenario puts some companies in a bind. Small and medium-sized businesses may struggle to find credentialed bankers to facilitate their transactions. And in general, businesses seeking capital investment often don’t know what they don’t know. Finding the right partner to assist in the deal-making process, even among licensed brokers and advisors, can be a complicated and daunting task for many companies.
Enter Finalis. The ultimate dealmaking platform, Finalis has an extensive network of licensed, proven professionals for sellers to work with. By providing a back-office compliance solution to global dealmakers, Finalis removes the hassle for companies, facilitating easier, faster transactions while providing the peace of mind that comes with the assurance of legal and regulatory compliance.
Finalis users never have to sweat finding credentialed advisors that fit their specific vision – check out our site to learn more about how you can join today.
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