By Mark S. Nelson, J.D.
The House passed the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2021 (H.R. 935) by a vote of 419-0. The bill would provide statutory authority for certain persons to engage in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company. The bill, which the House has passed previously in various forms, would mostly codify existing SEC no-action guidance on M&A brokers. If it becomes law, the provisions in the bill would become effective 90 days after enactment. The House also passed the Empowering States to Protect Seniors from Bad Actors Act (H.R. 5914) by a vote of 371-48.
M&A brokers. The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act would create an exemption from the broker-dealer registration requirement under federal securities laws for mergers and acquisition brokers. As a result, M&A brokers would be allowed to facilitate transactions involving eligible privately-held companies.
“Small businesses need to grow and have to do a couple of different things to be successful. For some that means they need to consolidate; some may need to restructure and try to recover from the challenges that have been exacerbated by the pandemic or the economy or whatever it might be; and sometimes it may be a family succession plan that is happening within those small businesses,” said Rep. Huizenga, the bill’s sponsor, as the bill was debated for the third time since it was first introduced several Congresses ago. Representative Huizenga added that “[t]hese innovators, entrepreneurs, and risk takers are critical to our country’s economic growth and prosperity. We need to level the playing field that gives an unfair advantage to those Wall Street big guys” (See, Congressional Record, May 10, 2022, p. H4748).
According to the bill’s definition of “M&A broker,” such person must reasonably believe that: (1) upon consummation of the transaction, any person who acquires the securities/assets of an eligible privately-held company will control and actively manage the company; and (2) any person who is offered securities in exchange for the securities/assets of an eligible privately-held company will, before the transaction is consummated, receive or have reasonable access to, the company’s most recent fiscal year-end financials, any related statement from the independent accountant (if the financials are audited), a balance sheet dated no more than 120 days before the offer date, and information about the business, its management, and any material loss contingencies.
For purposes of the bill, “eligible privately-held company” would mean a company with: (1) no securities registered or required to be registered under Exchange Act Section 12; and (2) EDBITDA less than $25 million and/or gross revenues less than $250 million. The Commission would have authority to alter the dollar amounts in the definition of “eligible privately-held company.” Moreover, the dollar amounts would have to be adjusted for inflation every five years after enactment.
The bill also contains a list of activities that would require registration as a broker-dealer because they are outside the scope of the proposed exemption for M&A brokers. Non-exempt activities would include many of the sine qua non of a broker-dealer, such as maintaining custody of or transmitting funds or securities to be exchanged by parties to a transaction involving an eligible privately-held company. Lastly, the bill would deny the exemption to any person who has been barred or suspended from associating with a broker-dealer under federal or state law.
Senior investors. The Empowering States to Protect Seniors from Bad Actors Act, sponsored by Rep. Josh Gottheimer (D-NJ), would amend Dodd-Frank Act Section 989A to create a grant program to be administered by a task force overseen by the SEC. The task force would make competitive grants to eligible entities, which consist of state securities and insurance commissions (or their equivalents), for the purpose of funding efforts to combat financial fraud perpetrated against seniors.
Grants made by the task force would not be permitted to exceed $500,000 (the maximum amount would be adjusted for inflation annually). Grant recipients could, in consultation with the task force, make subgrants. The bill would appropriate $10,000,000 for each of fiscal years 2023 to 2028.
Representative Gottheimer has recently pitched the Empowering States to Protect Seniors from Bad Actors Act, along with the National Senior Investor Initiative Act (Senior Security Act) of 2021 (H.R. 1565), which passed the House last year, as part of what he calls a “Senior Security Strategy.”
“Millions of seniors across the country, including my own mother, have been the victims of financial scams, and far too many have been cheated out of their retirement savings. Every few weeks, when I get a call from someone who fell prey to a shameless huckster, there’s often a robocall somewhere involved in that scam,” said Rep. Gottheimer via press release. “Our seniors should be spending time with their kids, grandkids, and friends—not staying up late at night worrying about whether someone is preying on their retirement nest egg. Seniors need a cop on the beat and we’re here today to do something about it.”