U.S. Congress Passes M&A Broker Registration Exemption!

SEC allows business brokers to sell $25,000 EBITDA
How to sell my business in Florida

On Friday, December 23, 2022, the U.S. House of Representatives joined the Senate in passing H.R. 2617, the Consolidated Appropriation Act, 2023, which funds the federal government for fiscal year 2023. President Biden signed the bill into law on December 29, 2022, ensuring continued government operations.

Among its provisions is Division AA, Title V: Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification, which will take effect 90 days after enactment—on March 29, 2023.

This landmark legislation is the result of a 16-year industry-wide effort supported by national business brokerage and M&A advisory associations to clarify and simplify the conditions under which business brokers and M&A advisors (M&A brokers) must register with the SEC as securities brokers.

Key Features of the Legislation

Title V amends the Securities Exchange Act of 1934, introducing a conditional exemption from SEC broker-dealer registration for M&A brokers involved in qualifying private company transactions. This statutory exemption will supersede the SEC’s 2014 no-action letter on M&A brokers, further clarifying the legal landscape for these transactions.

Scope of the Exemption

M&A Advisors and Business brokers may now legally facilitate private securities transactions involving eligible privately held companies or their assets, provided certain conditions are met:

  • The transaction involves the transfer of ownership of an “eligible privately held company” to a buyer who acquires control of the company, either through ownership, contract, or other means. Control is presumed when the buyer acquires at least 25% of the company’s stock or ownership rights and assumes an active management role.
  • An “eligible privately held company” must:
    • Be an operating business with no registered securities or SEC reporting requirements.
    • Meet size caps: EBITDA under $25 million or gross revenues under $250 million (as per the most recent fiscal year).

Conditions and Restrictions

The exemption comes with the following restrictions:

M&A advisors and business brokers may not:

  • Handle funds or securities during the transaction.
  • Facilitate public offerings of registered securities.
  • Engage in transactions involving shell companies, except for those formed specifically for a business combination.
  • Provide financing for the transaction.
  • Assist in forming buyer groups or facilitate passive ownership transfers.
  • Bind any party to a transfer of ownership.

M&A advisors and business brokers, including Florida Business Brokers. may:

  • Assist with third-party financing, provided compensation is disclosed, and all applicable laws (e.g., Regulation T) are followed.
  • Represent both buyer and seller in the same transaction with clear written disclosure and consent from both parties.

Additional Provisions and State-Level Impact

The exemption does not apply to capital-raising activities involving passive investors. Furthermore, brokers barred or suspended from association with a broker-dealer by the SEC, states, or self-regulatory organizations are ineligible for this exemption.

This federal exemption does not override state-level securities licensing requirements. Currently, 20 states, including Florida, have enacted similar M&A broker exemptions. Efforts to harmonize the remaining state laws with this federal statute are ongoing, supported by the North American Securities Administrators Association (NASAA).

Industry Significance

For most business brokers and M&A advisors, this exemption represents a significant step forward. It provides much-needed clarity, avoids the need for FINRA qualification exams, and aligns with existing best practices. However, brokers should remain mindful of both federal and state requirements to ensure full compliance.