Tag: Finder

M&A Broker vs. Broker-Dealer

SEC issues M&A Advisor interpretations.

Securities and Exchange Commission
SEC issues M&A Advisor interpretations.

I have written in the past about the challenges of people looking to facilitate deals without a broker-dealer license. Short answer: You probably can’t get paid.

However, there is an entire industry of business brokers and M&A advisors that seem to get close to the line. In January 2014, the SEC outlined when an M&A advisor could assist in the sale of a privately held company without registering as a broker-dealer. Its been hanging out there for a while, but I figured this was a good enough time to write about it.

First, it defined “M&A Broker” as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.”

In addition, a “privately-held company” is not an SEC filing company

The SEC provided a list of several conditions:

  • The M&A Broker will not have the ability to bind a party to an M&A Transaction.
  • An M&A Broker will not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction.
  • The M&A Broker may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.
  • No M&A Transaction will involve a public offering.
  • Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933.
  • No party to any M&A Transaction may be a shell company, other than a business combination related shell company.
  • To the extent an M&A Broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  • An M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance ofthe M&A Broker.
  • The buyer, or group of buyers, in any M&A Transaction will, upon completion of the M&A Transaction, control and actively operate the company or the business conducted with the assets of the business.
  • Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

There are more details in the SEC’s letter, which we may cover in another post. It will be interesting over time to see if the SEC focuses on one or more elements of the interpretation.

When Introductions Go Bad. Be Wary of the Unregistered Broker-Dealer.

I frequently get questions along these lines:  “If we pay someone a commission to make introductions to investors, that’s okay, right?  I mean, people do it all the time.”

Then we get into discussions about broker-dealer vs. finder and the requirements for a finder under the Texas statutes.  However, if someone is getting paid a commission for introductions to investors, you can bet he or she is acting as broker and better have a license.

Another unregistered broker-dealer case came down from the SEC last month.  In this case, an investment fund retained Stephens as a “consultant” to find potential investors.  Stephens had not been registered with the SEC in any capacity since he was barred from association with investment advisers since 2002. However, due to connections with the fund and a long history in the industry, he still had contacts with potential investors.

Stephens’ consulting arrangement entitled him to a percentage of all capital commitments from investors he introduced, which was revised for other introductions. He earned about $3.8 million on commitments of $569 million, which is not too shabby.  He was also involved significantly in the investor solicitation process and provided services way beyond the “finder” function.

Fines, industry suspensions and cease-and-desist orders were delivered to the fund and the principals of the fund, proving that someone else’s improper conduct can hurt the issuer and the individuals involved (another thing I hear:  “If it is a problem, it isn’t my problem, right?”  Wrong.).  Although the facts of the case seem egregious, most situations seem to be closer calls.  However, the results are usually the same, and calling someone a “consultant” (a frequent suggestion) does not change the analysis.

For $3.8 million (or even a lot less), just get licensed or hire someone who is.

Link:
In re: Ranierei Partners LLC and Donald W. Phillips