By David Mainzer

April 2014

The Securities and Exchange Commission’s (the “SEC”) Division of Trading and Markets recently issued a no action letter (the “M&A Broker No Action Letter”) exempting M&A Brokers from the requirement to register with the SEC as broker-dealers under Section 15(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”). In this context, an “M&A Broker” is defined 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 … 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.” As a result of the M&A Broker No Action Letter, companies or individuals that are acting as M&A Brokers (and comply with the various other qualifications and limitations under the M&A Broker No Action Letter) are no longer required to register as broker-dealers with the SEC.

That’s the good news. But, for M&A Brokers located in California, this is not the end of the story. This is because being registered with the SEC as a broker-dealer has the effect of exempting M&A Brokers from certain other registration and licensing requirements under California Law. Once an M&A Broker is no longer registered with the SEC, these exemptions disappear and the M&A Broker becomes subject to the California requirements.

Section 25210 of the California Corporate Securities Law of 1968 (the “California Securities Law”) requires securities brokers doing business in California to register with the California Department of Business Oversight (the “DBO”). The DBO has granted an exemption (10 CCR § 260.204.5) from this registration requirement for “Merger and Acquisition Specialists,” which means “any person who effects transactions in securities in this state only in connection with mergers, consolidations or purchases of corporate assets, and who does not receive, transmit, or hold for customers any funds or securities in connection with such transactions.” There are obviously some differences between the SEC exemption for M&A Brokers and the DBO exemption for Merger and Acquisition Specialists, but private company merger and acquisition brokers may be able to come within the exemptions from both the federal and California securities broker registration requirements.

However, even assuming that a merger and acquisition broker is exempt from both the federal and California securities broker registration requirements, this is still not the end of the story. This is because the broker may be required to obtain a real estate broker license from the California Bureau of Real Estate (the “BRE”) under Section 10130 of the California Business and Professions Code (the “BPC”).

Under Section 10131 of the BPC, the term “Real Estate Broker” includes brokers of “business opportunities.” Under Section 10030 of the BPC, business opportunities “include the sale or lease of the business and goodwill of an existing business enterprise or opportunity.” This definition includes asset sales and, under Section 10131.3 of the BPC, transactions involving the sale of all of the outstanding securities of a business. Because the coverage of the M&A Broker No Action Letter is very different than the coverage of the BPC, there will be circumstances where an M&A Broker not registered with the SEC will be required to be licensed as a Real Estate Broker under California law.

While there has been a great deal of commentary about the M&A Broker exemption under the Exchange Act, brokers with California contacts need to carefully consider the implications under California law of no longer being registered with the SEC. For a number of them, this will mean making sure that their activities comply with California law. For others, the analysis will lead them to the conclusion that it is better to remain registered with the SEC, even if they are not legally required to.

The foregoing discussion considers only federal and California law. In practice, brokers also will need consider the applicable laws of other states.

You can view the M&A Broker No Action Letter here:

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