Friday, January 16, 2015

NASAA Proposes Model M&A Broker Exemption

[This story previously appeared in Securities Regulation Daily.]

By John M. Jascob, J.D.

NASAA’s Broker-Dealer Section has requested public comment on a proposed uniform model rule that would exempt certain merger and acquisition brokers from state registration requirements. The proposal follows federal legislation that was introduced in the 113th Congress that would exempt merger and acquisition brokers from some of the registration requirements in the federal securities laws.

Merger and acquisition broker. The proposed model rule defines the term “merger and acquisition broker” to include any broker or associated person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an “eligible privately held company,“ provided that certain conditions are met. The broker must reasonably believe that: (1) any person acquiring securities or assets of the eligible privately held company will control the company and will be active in management or conducting the company’s business; and (2) any person who is offered securities in exchange for securities or assets of the company will receive the issuer’s most recent fiscal year-end financial statements, a balance sheet, and certain other information pertaining to the management, business, and results of operations.

The proposed model rule defines an “eligible privately held company” to mean a company that does not have any class of securities registered, or required to be registered, with the SEC under Exchange Act Section 12. The company must also have either EBITDA of less than $25 million or gross revenues of less than $250 million, or both, for the fiscal year ending immediately before the fiscal year in which the services of the merger and acquisition broker are initially engaged with respect to the securities transaction.

Excluded activities. The proposed rule does not exempt, however, any merger and acquisition broker that engages in certain excluded activities. In order to qualify for the exemption, the broker must not: (1) hold, transmit, or have custody of the funds or securities to be exchanged by the parties to the transaction; (2) engage on behalf of an issuer in a public offering of any class of securities required to be registered with the SEC under Exchange Act Section 12; or (3) engage on behalf of any party in a transaction involving a public shell company, as defined by the rule.

Request for comments. In particular, the Broker-Dealer Section has requested comments on a number of specific questions. Among them, the Section has asked whether the proposed model rule should specify how long the buyers must control and actively operate the acquired company in the transaction. The Section has also asked whether the proposed model rule should specifically address and disallow fee splitting between a merger and acquisition broker and an unregistered or non-exempt party, and whether a private equity firm or a private fund should be permitted to qualify for exemption under the rule.

Public comment period. Comments are due by February 16, 2015. NASAA encourages comments to be sent by email, if possible, to Bryan Lantagne, Chair of NASAA’s Broker-Dealer Section; Carolyn Mendelson, Chair of the Market Regulatory Project Group; and Christopher Staley of the NASAA Corporate Office.

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