By Jim Verdonik
I'm an attorney with
Ward and Smith PA. I also write a column about business and law for American
Business Journals , have authored multiple books and teach an eLearning course
for entrepreneurs.
You can reach me at JFV@WardandSmith.com.
or read my newspaper
articles at
This article is one of
14 articles in a series of articles about Deal-Makers called:
LET'S MAKE A DEAL: REGULATING DEAL-MAKERS ON WALL STREET, MAIN
STREET AND IN SILICON VALLEY IN THE CROWDFUNDING ERA
For many years, people who do deals have advised the SEC
that there is no reason to apply strict broker-dealer rules to business brokers
and finders who help people sell their businesses.
Business' sell assets all the time without dealing with
securities laws. In most situations,
assets are not securities. Why would
selling all the assets in one transaction be covered by securities laws, but
selling the same assets in several transactions not be covered by securities
laws?
But the neat divide between asset sales and securities sales
often gets blurred after an owner decides to sell the business. One reason is that whether a sale is
structured as an asset sale or a stock sale or merger is influenced by tax,
accounting, liability and other issues that have little to do with securities
laws.
For example, if a corporation that is taxed under Sub-Chapter
C of the tax code sells its assets, the owner may be subject to double taxation
– the corporation is taxed on the gain on sale if the assets and the owners
taxed when they receive a liquidating dividend.
To avoid double taxation, the owners prefer to sell stock rather than
assets.
A business might have leases or other valuable contracts
that cannot be sold. Depending on how
these contracts are worded, you might be able to avoid renegotiating favorable
contracts by selling stock instead of transferring assets.
Stock sales usually involve fewer employee related issues,
because the employees remain employed by the same company when the stock is
sold. In an asset sale, employees have
to quit or be fired and then be re-employed by the buyer.
For many reasons, what might start out as a seller trying to
sell the business' assets can turn into a stock sale after the business broker
finds the buyer. Likewise, stock sales
can turn into asset sales when buyers seek to avoid taking on unknown
liabilities or want to be able to depreciate assets.
Since all of these reasons for choosing deal structure have
nothing to do with securities laws, it often makes little sense to apply
broker-dealer registration rules to business sales – especially where there is
a single buyer in a highly negotiated transaction.
Broker-Dealer
Registration Requirements
For many years, people thought the sale of
all the stock in a business to a single buyer was not a securities
transaction. Then, the courts reminded
us that if you sell something that is called stock, it is covered by the
definition of a security under both the Securities Act of 1933 ad the
Securities and Exchange Act of 1934.
Business brokers usually charge success
fees that are not payable unless the business is sold and is calculated based
on the purchase price of the business.
As discussed in other articles in this series of articles, charging a
success fee has been one of the hot button issues for the SEC in determining
whether someone needs to register as a broker-dealer.
The broker registration provisions of the
Exchange Act do not include a specific exemption for selling all the stock of a
business a single buyer.
For this reason people have requested the
SEC to create an exemption to permit business brokers to do deals without fear
they will have liability for failing to register as a broker inder Section 15
(a) (1) of the Exchange Act.
M&A
Broker No Action Exemption
The SEC's staff issued a no-action letter
in January 2014 that indicates the staff would not take action against people
who collect success fees for selling businesses under the circumstances
described in the no action letter request.
The SEC indicated it took the following factors into account in issuing
this no-action letter:
1.
The
M&A Broker will not have the ability to bind a party to the M&A
Transaction.
2.
The M&A
Broker will not directly, or indirectly through any of its affiliates, provide
financing for the M&A Transaction. Any M&A Broker that assists purchasers to
obtain financing from unaffiliated third parties must comply with all
applicable legal requirements, including, as applicable, Regulation T (12 CFR
220 et seq.), and must disclose any compensation in writing to the
client.
3.
The M&A
Broker will not have custody, control, or possession of or otherwise handle
funds or securities issued or exchanged in connection with the M&A
Transaction or other securities transaction for the account of others.
4.
The M&A
Transaction will not 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. No party to the M&A Transaction will be a
shell company, other than a business combination related shell company. The
term "business combination related shell company" means a shell
company (as defined in Securities Act Rule 405) that is: (1) formed by an
entity that is not a shell company solely for the purpose of changing the
corporate domicile of that entity solely within the United States; or (2)
formed by an entity that is not a shell company solely for the purpose of
completing a business combination transaction (as defined in Securities Act
Rule 165(f)) among one or more entities other than the shell company, none of
which is a shell company. (SEC Rule 405
defines a shell company to include any company that has minimal business
operations and only cash and cash equivalent assets. Note that the shell company exclusion is not
limited to shell companies the M & A Broker organizes. Any shell company in the transaction brings
the transaction outside the scope of this no action letter. Of course, being outside the scope of the no
action letter does not necessarily mean that the person that arranges the sale
is required to be registered as a broker-dealer. People organize shell companies every day for
legitimate business reasons. If a buyer
organizes the shell and raises money for the shell without the assistance of
the person who arranges the sale, it is difficult to see why the mere existence
of the shell should require different treatment of the person who arranges the
sale of the business.)
5.
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.
6.
An
M&A Broker will facilitate an M&A Transaction with a group of buyers
only if the group is formed without the assistance of the M&A Broker.
7.
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. A buyer, or group of buyers collectively,
would have the necessary control if it has the power, directly or indirectly,
to direct the management or policies of a company, whether through ownership of
securities, by contract, or otherwise. The
necessary control will be presumed to exist if, upon completion of the
transaction, the buyer or group of buyers has the right to vote 25% or more of
a class of voting securities; has the power to sell or direct the sale of 25%
or more of a class of voting securities; or in the case of a partnership or
limited liability company, has the right to receive upon dissolution or has
contributed 25% or more of the capital. In addition, the buyer, or group of buyers,
must actively operate the company or the business conducted with the assets of the
company.
8.
The
M&A Transaction will not result in the transfer of interests to a passive
buyer or group of passive buyers.
9.
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 of 1933, because the securities would have been issued in a
transaction not involving a public offering.
10. The M&A Broker (and, if the M&A
Broker is an entity, each officer, director or employee of the M&A Broker):
(i) has not been barred from association with a broker-dealer by the Commission, any state or any self-regulatory
organization; and (ii) is not suspended from association with a broker-dealer.
This SEC's staff
position is limited to the registration requirements of Section 15(a) of the
Exchange Act. Other provisions of the
federal securities laws, including the anti-fraud provisions, continue to
apply. State laws regarding
broker-dealer registration continue to apply even if you satisfy all the
conditions stated in the SEC staff's no action letter.
Or you can check out
my eLearning course at www.YouTube.com/eLearnSuccess
or read my newspaper
articles at
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