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Nebraska Exempts “M&A Brokers” From State Broker-Dealer Registration Requirements

08.14.2019

On August 9, 2019, the Nebraska Department of Banking and Finance (the “NDBF") issued Interpretive Opinion No. 19[i] (the “Interpretive Opinion”) that excludes M&A Brokers (as defined in the Interpretive Opinion and discussed below) from the Nebraska Securities Act’s (the “Act”) definition of broker-dealer. The Interpretive Opinion conforms with the Securities and Exchange Commission’s (the “SEC”) 2014 M&A Brokers No-Action Letter[ii] and allows an M&A Broker to engage in certain activities in connection with the purchase or sale of privately-held companies without registering as a broker-dealer with the NDBF under the Act.

Background

Even though the SEC’s 2014 M&A No-Action Letter exempted certain M&A Brokers from federal broker-dealer registration in connection with the purchase and sale of privately-held companies, prior to the issuance of the Interpretive  Opinion, a person who effected the sale of a private company through the sale of securities could be viewed as falling within the meaning of the term “broker-dealer” as defined in Section 8-1101(2) of the Act and, therefore, be required to register as a broker-dealer with the NDBF pursuant to Section 8-1103 of that Act. Conversely, if the transaction were structured as an asset sale and did not involve a sale of securities, a person could engage in the same types of activities without registering as a broker-dealer.

Under the Interpretive Opinion, M&A Brokers that facilitate mergers, acquisitions, business sales, and business combinations (together, “M&A Transactions”) between sellers and buyers of privately-held companies, are not within Section 8-1101(2) of the Act’s definition of a broker-dealer and therefore are not required to register as broker-dealers with the NDBF. The antifraud provisions in Section 8-1102 of the Act continue to apply to M&A Brokers that facilitate M&A Transactions that involve the sale of securities.

Summary of M&A Broker Interpretive Opinion

M&A Broker. The Interpretive Opinion defines an “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 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.

Privately Held Company. The Interpretive Opinion defines “privately-held company” as a company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Securities Exchange Act of 1934 (“1934 Act”), or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15(d) of the 1934 Act. A privately-held company must be an operating company that is a going concern and not a shell company.

For purposes of the Interpretive Opinion, a “shell company” is a company that: (1) has no or nominal operations; and (2) has: (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. In this context, a “going concern” need not be profitable, and could even be emerging from bankruptcy, so long as it has actually been conducting business, including soliciting or effecting business transactions or engaging in research and development activities.

Conditions to Relief. Like the relief granted by the SEC’s 2014 M&A No-Action Letter, the relief granted by the Interpretive Opinion is subject to the following conditions.

  • No Ability to Bind Parties: An M&A Broker may not have the ability to bind any party to an M&A Transaction.
  • Financing Prohibition: An M&A Broker may not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction, although the M&A Broker may assist purchasers in obtaining financing from unaffiliated third parties if the M&A Broker complies with all applicable requirements and discloses any related compensation in writing to the client.
  • No Custody: An 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 transactions for the account of others.
  • No Public Offering: An M&A Transaction may not involve a public offering. Any offering or sale of securities must be conducted in compliance with an applicable exemption from registration under the Act and the Securities Act of 1933 (the “1933 Act”).
  • No Shell Companies: No party to any M&A Transaction may be a shell company, other than a business combination related shell company.[iii]
  • Dual Representation Disclosure: If an M&A Broker represents both buyers and sellers, it must provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
  • Buyer Groups: An M&A Broker may facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance of the M&A Broker.
  • Control: Upon completion of any M&A Transaction, the buyer or group of buyers must control and actively operate the company or the business conducted with the assets of the business. The buyer (or a 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, and such necessary control shall be presumed to exist if, upon completion of the M&A Transaction, the buyer or group of buyers has: (1) the right to vote 25% or more of a class of voting securities; (2) the power to sell or direct the sale of 25% or more of a class of voting securities; or (3) in the case of a partnership or limited liability company, the right to receive upon dissolution, or has contributed, 25% or more of the capital.
  • No Passive Buyers: The M&A Transaction may not result in the transfer of interests to a passive buyer or group of passive buyers.
  • Restricted Securities: 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 1933 Act because the securities would have been issued in a transaction not involving a public offering.
  • Disqualified Brokers: An M&A Broker (and, if the M&A Broker is an entity, each officer, director, or employee of the M&A Broker) must not (1) have been barred from association with a broker-dealer by the SEC, any state, or any self-regulatory organization or (2) be suspended from association with a broker-dealer.

Conclusion

The Interpretive Opinion is a welcome development that modernizes and streamlines Nebraska’s securities rules and regulations by providing a limited, Nebraska broker-dealer registration exemption for M&A Brokers that conforms with the broker-dealer registration exemption the SEC adopted in 2014. We anticipate that the Interpretive Opinion may, by providing needed regulatory relief for M&A Brokers, generate greater opportunities for Nebraska-based owners of privately-held operating companies to sell their businesses with the assistance of qualified M&A Brokers who will no longer be required to register as broker-dealers with the NDBF.

 

† Anshu and Jeff are shareholders in the M&A/Securities practice group at Koley Jessen P.C., L.L.O. Their practices include advising on all aspects of private company mergers and acquisitions. Jeff proposed to the NDBF that it adopt the Interpretive Opinion in order to provide M&A Brokers Nebraska registration relief that conforms with the federal relief provided by the SEC’s 2014 M&A Brokers No-Action Letter.

[i] NDBF Interpretive Opinion No. 19 is available at the following link: https://ndbf.nebraska.gov/sites/ndbf.nebraska.gov/files/legal/IO_19-Merger%20%26%20Acquisition%20Brokers.pdf

[ii] The SEC’s M&A Brokers No-Action Letter is available at the following link: https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf

[iii] For purposes of the Interpretive Opinion, the term “business combination related shell company” means a shell company 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 Rule 165(f) of the 1933 Act among one or more entities other than the shell company, none of which is a shell company.

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