As a part of the Consolidated Appropriations Act of 2023, President Biden signed into law several provisions aimed at promoting private mergers and acquisitions (M&A) activity by easing the regulatory burden faced by M&A intermediaries. The new law grants additional broker-dealer registration exemptions for M&A intermediaries engaging in M&A transactions involving certain qualified privately held companies. This new exemption took effect on March 29, 2023 and represents a significant change from previous M&A intermediary qualifications in the M&A space.
For background, an M&A intermediary (or M&A advisor) is a professional or firm that facilitates and acts on behalf of companies in the process of buying, selling, merging, or acquiring other companies. M&A intermediaries can undertake a wide range of services in order to help clients navigate the various stages and strategic decisions involved in a potential M&A transaction. M&A intermediaries can take several different forms, including investment banks, boutique advisory firms, business brokers, and legal or financial consulting firms, and provide a wide range of services at various levels that can include business valuation, deal identification, deal structuring, negotiation, due diligence, regulatory compliance, and integration planning.
Before enacting the new exemption, M&A intermediaries facilitating the sale or purchase of businesses were subject to a more rigorous regulatory framework enforced by the Securities and Exchange Commission (SEC). The prior framework required M&A intermediaries to register as broker-dealers with the SEC, imposing various registration requirements, as well as various licensing and disclosure obligations. These requirements often proved to be significant impediments to engaging in M&A transactions for potential parties.
This summary explores the details, implications, and potential benefits to M&A intermediaries.
The New Exemption
In recent years, the SEC has recognized the need to streamline onerous obligations and make the regulatory environment for M&A intermediaries more accessible and efficient. As a result, these newly adopted exemptions provide significant relief to M&A intermediaries from a large portion of the previous registration and compliance requirements. In order to qualify for the new exemption, M&A intermediaries must meet a specific set of conditions, including, but not limited to:
- Deal Size: The exemption applies to transactions involving privately held companies with (i) an enterprise value of $250 million or less or (ii) a prior-year EBITDA of $25 million or less.
- Transaction Structure: The exemption covers various transaction structures, including equity purchases, asset purchases, mergers, and similar business combinations.
- Active Control: The buyer or group of buyers involved in the proposed transaction must have the ability to actively manage and operate the target company or the assets acquired through the transaction.
- Limited Compensation: M&A intermediaries must receive transaction-based compensation, which cannot be in the form of payment in securities of the buyer or the target company. Typically, this means a standard success fee or commission.
Additional Exemption Limitations
In addition to the limitations and requirements mentioned above, there are several activities that M&A intermediaries must refrain from engaging in to qualify for the exemption. An M&A intermediary cannot:
- Have control/custody of a buyer or target company’s funds or securities;
- Form a consortium of potential buyers;
- Hold or provide financing for a transaction;
- Obtain or facilitate financing for a transaction without full disclosure to all parties involved, including the lender;
- Facilitate a transaction involving a shell company;
- Engage in a public offering of securities as part of the transaction;
- Acquire authority to legally bind either the buyer or the target company;
- Represent both the buyer and seller without written consent from each party.
Participating in any of the aforementioned activities will disqualify an M&A intermediary from qualifying for the new exemption. Some of these areas fall into gray areas, and specific activities should be discussed with an attorney on a case-by-case basis.
Implications and Benefits
The new exemption for M&A intermediaries provides several benefits and potential implications for all participants in a proposed M&A transaction:
- Regulatory Relief and Transaction Efficiency: M&A intermediaries who qualify for the exemption will no longer be required to formally register as broker-dealers with the SEC. Removing this regulatory burden and its associated costs allows M&A intermediaries to focus more on executing potential transactions without the distraction of burdensome regulatory requirements. This is expected to lead to more flexible and expeditious operations by M&A intermediaries, resulting in smoother deal negotiations and closures.
- Access to Broader Markets: The exemption provides breathing room for smaller M&A intermediaries who may have found it challenging to comply with extensive broker-dealer registration requirements. Additionally, this should lead to broader market access, encourage competition, and enhance deal flow across various sectors.
- Market Liquidity: Simplifying the regulatory landscape is expected to increase market liquidity. This should enable private companies to explore more strategic options and capital formation, contributing to more widespread economic growth across many market sectors.
The new exemption for M&A intermediaries from federal broker-dealer registration signifies a meaningful step toward market efficiency by streamlining the transaction process, fostering competition, and enhancing market liquidity. This does not, however, imply that the exemption opens the floodgates to a new “wild west” of M&A intermediary activity. As mentioned earlier, several disqualifying activities and narrow requirements must still be met to qualify for this exemption, and state-level requirements should always be considered.
The above is a high-level summary of the new exemption, and there are several details and excluded activities that may result in a registration requirement. For further discussion and answers to any questions, please reach out to any member of Varnum’s M&A Team.