There are rule changes for M&A deals

On Behalf of | Feb 21, 2023 | Outsourced Business Counsel |

President Joe Biden signed the Consolidated Appropriations Act of 2023. The 1.7 trillion spending bill covered much ground, including a policy rider to the Securities Exchange Act of 1934. This new exemption was drafted to better facilitate change of control transactions and create cost-saving strategies.

One change in regulation offers an exemption to SEC mergers and acquisitions broker-dealer registration. This bill existed in many forms but was finally passed as part of the must-pass omnibus bill to keep the federal government operating.

Conditions for the exception

The exception applies to the sale, purchase, exchange, issuance, repurchase, redemption, or in some combination, of assets or securities of eligible privately held companies if the broker or advisor believes that:

  • The buyer will actively run the business.
  • The buyer will control at least 25% of the company’s shares.
  • The buyer received documentation on the company’s management, profits, business dealings, and material loss contingencies.
  • The buyer received disclosure documents, including the most recent fiscal year-end statement.

Which companies are eligible?

The privately held company cannot have securities that must be registered with the SEC under Exchange Act Section 12 or Section 15 under filing obligations. The M&A broker must not earn more than $25 million (prior to taxes, depreciation and amortization) or not gross more than $250 million in revenue.

M&A broker guidelines

They cannot take advantage of the exception by doing the following:

  • Help assemble investors to buy the company.
  • Represent buyers and sellers without notifying without a written disclosure, which both parties must sign.
  • Work directly or indirectly with a shell company unless it was formed solely for the deal.
  • Directly or indirectly offer to finance all or part of the deal.
  • Directly or indirectly handle, receive or hold funds or securities connected with the deal.
  • Assist with securing third-party financing unless it complies with applicable regulations.
  • Help transfer ownership from an active ownership to a passive one.
  • Bind a party to transfer ownership to an ineligible company.

No change to the previous no-action relief

This new exemption is similar to the SEC’s previous offers to M&A brokers but addresses smaller transactions and privately held companies. So, the SEC’s similar 2014 M&A Broker No-Action Letter for brokers and dealers is still in place.

Changes at the federal level

As a federal bill involving the SEC, these changes have no bearing on existing or pending state laws on mergers and acquisitions. Privately held businesses and M&A brokers and advisors must still follow state rules. Those with questions can talk to a business law attorney who handles M&A transactions.