By Mark S. Nelson, J.D.
StillPoint Capital LLC founder and CEO Amy C. Cross has submitted a rulemaking petition to the SEC asking the agency to engage in rulemaking to assess the statutory dollar amounts for mergers and acquisition brokers and then to adjust those amounts downward to better implement the new law. According to the petition, lawmakers who drafted the recently enacted law set the dollar amounts defining the types of eligible transactions too high.
The M&A broker provision is contained in the Consolidated Appropriations Act, 2023 (Pub L. No. 117-328), which became law on December 29, 2022, and added an Exchange Act provision to address the issue of how smaller M&A transactions might occur in a more efficient manner. The law largely tracks prior SEC guidance but also granted the SEC some flexibility to implement specific provisions in the law.
Finally enacted. The M&A brokers bill that was included in the federal government’s FY23 appropriations legislation has been a long-running project within Congress that has evolved over multiple Congresses to meet the terms of prior SEC guidance and even spawned a separate state-law track in the form of a proposal by the North American Securities Administrators Association to exempt M&A brokers from state registration requirements. Title V of Division AA of the FY23 appropriations bill provided for a registration exemption for small business mergers and acquisitions brokers by amending Exchange Act Section 15(b) to add a new subsection (13).
According to the 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.
Moreover, “eligible privately held company” means a company with: (1) no securities registered or required to be registered under Exchange Act Section 12; and (2) EBITDA less than $25 million and/or gross revenues less than $250 million. The Commission has authority to alter the dollar amounts in the definition of “eligible privately-held company.” The dollar amounts also must be adjusted for inflation every five years after enactment. The M&A broker law becomes effective 90 days after enactment.
Rulemaking petition. The petition seeks to call attention to the consequences of the M&A broker law as it was enacted. Recall that, among other things, the law limits its application to eligible privately held companies where such company has EBITDA of less than $25 million and/or gross revenues of less than $250 million. These financial thresholds have been included in drafts of the legislation since at least 2017.
The petition, however, suggests that a typical selling multiple for a company with EBITDA of $25 million would be 10x EBITDA, or $250 million. The petition said this implicates the entire middle market for M&A activity, which already utilizes sophisticated legal and financial advisers in order to comply with securities and other financial regulations. (The petition defines the middle market in terms of revenue—not EBITDA—as consisting of companies with revenues between $10 million and $999 million.).
By contrast, the petition said the M&A broker law was originally intended to aid only much smaller “Main Street” companies that would otherwise find it challenging to engage the same kind of sophisticated legal and financial advisers as middle market or larger companies.
The petition posits that unless the SEC adjusts the financial thresholds in the M&A broker law downward, the law may open new avenues for evading federal securities laws and regulations and may create a new opportunity for money laundering. Likewise, state regulators may not be able to handle the crush of a potentially high volume of regulatory matters that may arise.
As a result, the petition asks the SEC to conduct a rulemaking to adjust the financial thresholds in the M&A broker law downward: (1) EBITDA of less than $25 million would be reduced to EBITDA of less than $1 million; and (2) gross revenues would be reduced from revenues of less than $250 million to revenues of less than $10 million. The petition also seeks SEC guidance to ensure a level playing field in instances where professional investors are involved on one side of a transaction that is subject to the M&A broker law.