In late December last year, President Biden signed the Consolidated Appropriations Act of 2023 into law. Among its provisions is one that clarifies SEC and FINRA registration and regulation requirements for M&A brokers (the “M&A Broker Exemption” or the “Exemption”), which became effective on March 29, 2023.
Starting on that date, M&A brokers now have much-needed regulatory clarity after operating for close to a century in a regulatory gray space since the Securities Exchange Act of 1934 (the “1934 Act”)—and only slightly improved by the 2014 SEC staff M&A Brokers No-Action Letter (“NAL”). The new statutory exemption largely codifies the SEC staff’s NAL into law with a couple of important tweaks.
This statutory amendment to the 1934 Act adds a federal exemption from registration as or with a registered broker-dealer in certain M&A transactions involving securities. The SEC’s jurisdiction and securities anti-fraud prohibitions continue to apply in all securities transactions. Importantly, the Exemption does not change any state laws.
This blog post outlines the key points regarding this change in federal law, and details Finalis' position on FINRA regulation requirements for registered and unregistered M&A professionals working on certain M&A transactions involving securities.
M&A Broker Exemption: eligibility & requirements
An “M&A broker” is a “broker” (defined in the 1934 Act), and any person associated with a broker, who is 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 securities or assets of that target company. The definition is both broad and narrow in scope—broad in that any legal structure used to transfer ownership is covered, but narrow in that it only applies to transfers of ownership, not capital-raising in general.
An “eligible privately held company” is a company that has no class of securities registered or required to be registered under Exchange Act Section 12. For example, this definition does not apply to “pink sheet” public companies with a class of securities registered with the SEC. The target company must fit within either of two cap size metrics: EBITDA less than US$25 million and/or gross revenues less than US$250 million based on the last fiscal year’s actual financial statements (without adjustments). [See note 1] The M&A transaction cannot involve a “SPAC” (special purpose acquisition company) with SEC-registered securities that, when merged with a private company, would turn the target into a public company.
To qualify for the exemption, the M&A broker must reasonably believe that:
- The buyer will acquire a controlling interest in the target company or a business to be conducted with its assets; ownership of at least 25% of the acquired company's voting securities will be presumed to constitute control.
- After closing, the buyer will be active, directly or indirectly, in the management of the company or business. Non-exclusive examples are included in the Exemption.
- In those M&A securities transactions where the seller is offered the buyer’s securities (e.g., an equity rollover), the seller must receive or have access to the buyer/issuer’s financial information, including: (i) the most recent fiscal year-end financial statements and any related CPA statements about those financials (which need not be audited, compiled or reviewed), (ii) a balance sheet dated no more than 120 days before the offer date, and (iii) information about the buyer’s business, its management, and any material loss contingencies.
While there are no record-keeping requirements in the Exemption, written evidence forming the basis for this “reasonable belief” should be created and retained. Written evidence could include the M&A broker’s engagement letter describing the anticipated type(s) of M&A transaction and subsequently any term sheet, letter of intent, definitive agreements, financial disclosures, and closing documents.
Limits to the M&A Broker Exemption
The M&A Broker Exemption has significant limitations, and it is important to consider the range of excluded activities and disqualifications. For example, M&A brokers cannot: (1) engage in a public offering or transaction involving a shell company; (2) provide deal financing; (3) represent both buyer and seller without full disclosure and both parties’ consent; (4) bind a party to a transaction; (5) assist any party in obtaining financing (not including capital raising) from an unaffiliated third party without complying with Regulation T (Reg T) or other applicable law and disclosing any compensation in writing to the party; or (6) have been barred or suspended from associating with a broker-dealer under federal or state law or by a self-regulatory organization.
The Exemption does not preempt or change state securities laws – all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands regulate “brokers” in securities transactions. State-level broker registration as, or with, a broker-dealer is required unless an exemption is available in all states having jurisdiction over the M&A broker and the parties to an M&A transaction involving securities. To date, while 20 states [note 2] have adopted M&A-specific exemptions or similar exemptive relief by lawmaking (Florida), rulemaking (11 states), administrative order or no-action position (8 states), 30 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands [note 3] have not adopted M&A-specific exemptive relief such as the model state M&A broker exemption published by the association of state securities regulators, the North American Securities Administrators Association (NASAA).
Neither the SEC nor FINRA has legal authority to enforce state securities laws, but the absence of a required state-level exemption could put the M&A securities transaction and the M&A broker at risk for potential state regulatory action, a buyer’s post-closing rescission of that transaction, and/or voiding the M&A broker’s engagement as unlawful, resulting in the loss of transaction-related compensation and expense reimbursements.
Finally, it is important to remember that M&A brokers who actively maintain their licenses with FINRA remain subject to FINRA rules and the policies of the broker-dealer with whom they are registered. These FINRA rules include Rule 2210 (Communications with the Public); Rule 3270 (Outside Business Activities); and Rule 3280 (Private Securities Transactions). While Rule 2040 (Payments to Unregistered Persons) generally prohibits payments of securities compensation to unregistered persons, it permits those payments when the recipient is not required to be registered as, or with, a broker-dealer. So paying/sharing compensation with respect to an M&A securities transaction that qualifies under the new federal exemption is not prohibited by Rule 2040.
In sum, the new federal M&A Broker Exemption provides regulatory clarity for M&A brokers who reliably engage in M&A securities transactions that meet the requirements.
How Finalis can help M&A Brokers
The M&A Broker Exemption is a helpful development that delivers regulatory clarity. However, as this blog has summarized, this new federal registration exemption is no panacea and multiple challenges remain–including state-level compliance. No M&A broker should lose sleep at night because of differing interpretations of the Exemption or the large remaining number of state securities laws without an M&A-specific exemption.
Finalis is proud to announce the launch of our Exempt Deal Monitoring solution that will deliver much-needed relief to M&A brokers who continue to struggle with the regulatory overhead associated with growing their businesses with confidence.
Through Exempt Deal Monitoring, Finalis reviews all the elements of the M&A Broker Exemption and makes a determination that considers whether or not the Exemption’s elements are met, and that the parties to the transaction are located in the states that have not yet adopted state-level M&A-specific exemptive relief. If so, Finalis applies only a nominal fee on such M&A transactions.
This approach gives investment bankers and M&A brokers alike the benefits of the M&A Broker Exemption and state-level exemptive relief whenever applicable—while at the same time maintaining the many benefits of registration with FINRA. A broker-dealer registration with Finalis allows M&A professionals to position their firms for growth to win larger transactions, while gaining the optionality of supporting a far broader range of deals, including M&A transactions that do not meet the specific elements of the Exemption and capital raises, across all 53 states and territories.
As regulations continue to rapidly evolve, M&A brokers and investment bankers alike deserve the opportunity to capitalize on the fast-growing private securities industry with confidence. Those M&A professionals will join a rapidly growing and unprecedented network of 185 Finalis-affiliated investment banks and M&A advisories globally, with over 950 active mandates valued at over $20B.
Interested in finding out more about Finalis’ Exempt Deal Monitoring solution? Contact our team to learn more.
 The M&A Broker Exemption also provides for an inflation adjustment to the target company’s size caps every five years after the date of enactment, December 29, 2022.
 The 20 U.S. states that have adopted some form of M&A broker registration exemption: Alaska, Arkansas, Colorado, Florida, Georgia, Illinois, Iowa, Maryland, Michigan, Mississippi, Montana, Nebraska, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, and Vermont.
 The 33 U.S. states and territories that have not adopted some form of M&A-specific broker registration exemption: Alabama, Arizona, California, Connecticut, Delaware, Hawaii, Idaho, Indiana, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Puerto Rico, Rhode Island, U.S. Virgin Islands, Virginia, Washington, Washington D.C., West Virginia, Wisconsin, and Wyoming.
Finalis, Inc. and its affiliates do not make investment recommendations and this communication should not be construed as a recommendation, and they do not provide legal, regulatory, accounting, insurance, tax or similar advice and you should rely on your own counsel, accountants and other advisors for such advice.