New Texas M&A Broker Exemption


Effective February 16, 2015, the Texas State Securities Board (the "Securities Board") adopted a new rule, Section 139.27 of Title 7 of the Texas Administrative Code (the "Rule"), that exempts certain mergers-and-acquisitions brokers from dealer registration under the Texas Securities Act.  An exempt mergers-and-acquisitions broker is defined in the Rule as an "M&A Dealer."  The Rule was prompted by, and is based on, the no-action letter issued by the SEC Division of Trading and Markets issued on January 31, 2014 (and revised February 4, 2014) to permit certain mergers-and-acquisitions brokers to facilitate certain securities transactions without registering as a broker-dealer under the Section 15(b) of the Securities Exchange Act of 1934  (the "No-Action Letter").[1]  The Securities Board has (and has had) a streamlined registration or licensing process, not involving the satisfaction of any examination requirement, for a dealer that is only acting as a "business broker."[2]  In contrast, the Rule provides an exemption from any registration or licensing obligation for an M&A Dealer and its agents and does not require any filing with the Securities Board.

In large part, the criteria or conditions to be satisfied for the exemption under the Rule are the same as the criteria specified in the No-Action Letter and are stated in substantially similar language.  The Rule, however, differs from the No-Action Letter in three critical respects:

  • Neither the M&A Dealer nor any officer, director, or employee of the M&A Dealer may be subject to various "bad-actor" disqualifications stated in the Rule, which are in addition to the disqualifications described in the No-Action Letter. The disqualifications stated in the Rule are substantially the same as those in the exemption for investment advisers to private funds that was adopted by the Securities Board within the last year (Section 139.23 of the Texas Administrative Code)[3]
  • The M&A Dealer must maintain and preserve, for three years, records of "all compensation received and communications, agreements, or contracts with buyers and/or sellers in connection with any transaction in which the dealer received compensation."
  • The M&A Dealer must make available to the Texas Securities Commissioner the required records upon request by the Securities Commissioner or his or her authorized representative.

The Rule also expressly states that a failure to comply with the record-keeping requirement or the requirement to furnish records to the Securities Commissioner will result in the loss of the exemption.

We also note a few other, less significant, differences:

  • Like the No-Action Letter, the Rule requires that the buyer actively operate the company or its business upon completion of the Qualifying M&A Transaction. The Rule defines  the power of the buyer or group of buyers, upon the completion of a Qualifying M&A Transaction, to elect executive officers and approve the annual budget or serve as an executive or other executive manager as the power to "Actively Operate" the purchased company or business conducted with the assets of the company.  By that definition, however, the Rule may be somewhat more restrictive than the No-Action Letter.  The No-Action Letter states that a buyer "could actively operate the Company through the power to elect executive officers and approve the annual budget or by service as an executive or other executive manager, among other things." (emphasis added)  Although we suspect that, as a practical matter, the Rule may not really be more restrictive, a prospective M&A Dealer may need to pay more attention under the Rule to the manner in which the buyer actively operates the acquired company or its business.
  • The Rule defines "Privately-Held Company" as, among other things, a company "that does not have any class of securities registered or required to be registered with a securities regulator." As might well be expected, the comparable definition in the No-Action Letter refers only to a registration with the SEC "under Section 12 of the Exchange Act."  The Rule's definition requires that the M&A Dealer pay attention to registration under the securities law of Texas or any other state as well as under federal securities law.
  • The scope of disclosure required of an M&A Dealer under the Rule may be less than that required of an M&A Broker under the No-Action Letter in one particular circumstance. Both the Rule and the No-Action Letter contemplate that an M&A Dealer or M&A Broker may, under certain circumstances, represent both the buyer(s) and the seller(s), so that each of the buyer(s) and the seller(s) would be "the client" for that transaction.  Under the No-Action Letter, an M&A Broker that assists a buyer in obtaining third-party financing for the transaction must disclose any compensation received for that to "the client," but under subsection (f)(2) of the Rule, that disclosure must be made only to "the buyer."

OUR TAKE: A securities intermediary relying on the No-Action Letter who wishes to be involved in transactions to which the Texas Securities Act may apply should find the Rule to be a significant benefit, notwithstanding the differences between the No-Action Letter and the Rule.  The intermediary should be careful, however, to note and comply with the additional criteria or requirements stated in the Rule.

[1] We briefly described the No-Action Letter in a post last year

[2] A business broker's activities are restricted to acting as a broker between principals for the sale of a majority of the equity securities of a privately held business under a privately negotiated purchase agreement, where the purchaser(s) will obtain managerial control of the business and where compensation received by the broker will be payable only for the brokerage activities.

[3] One of the disqualifications, in subsection (g)(1)(B) of the Rule, refers to a criminal conviction "within five years prior to the filing of the notice required under this exemption."  Because the Rule contains no filing requirement, that reference is mistaken; we assume that the reference should simply be "within the past five years," as it is in certain of the other specific disqualifications in subsection (g) of the Rule.  We understand that the Securities Board is aware of this and will make the correction.

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