Recent Regulatory Changes
SEC M&A & Private Business Broker No-Action Letter:
On January 31, 2014, the Securities & Exchange
Commission (SEC) released a no-action
letter that allows M&A and private business brokers (M&A Broker) to
be compensated for facilitating a transaction involving the transfer of
ownership of a privately-held company without requiring broker-dealer
registration under the Securities Exchange Act of 1934 ("No-Action Letter”). This
No-Action Letter specifically sets out the guidelines by which any M&A
Broker will receive safe harbor from registration requirements. One should keep
in mind that a M&A Broker may be required to register or be licensed at the
state level and will only be exempted from SEC registration requirements.
What is an M&A
According to the No-Action Letter, an M&A Broker is:
"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. 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.”
What does the SEC consider a Privately-Held Company Under the No
"A company that does not have any class of
securities registered or required to be registered, with the Commission under
Section 12 of the Exchange 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 Exchange Act…[This] would be an operating company that is a going
concern and not a ‘shell’ company.”
M&A Broker May Engage In Without Registering with the SEC as a Broker Dealer:
M&A Brokers may advertise a privately-held company for sale with
information such as the description of the business, general location and price
M&A Brokers may assess the value of any securities being sold.
M&A Brokers may participate in the
negotiations surrounding an M&A Transaction.
Buyers & Sellers: M&A Brokers may advise the buyer and seller to
issue securities and can effect the transfer of a qualifying company by means
· Financings: M&A Brokers may assist buyers in
obtaining financing from 3rd parties as long as they disclose to
buyers any compensation they receive for these services [so long as they comply with applicable requirements under Regulation T
(a regulation that governs the
extension of credit by broker dealers)].
both Parties: M&A Brokers may represent both buyers and sellers, as
long as they provide clear, written disclosure of the joint representation and
obtain consent in writing.
M&A Broker Information
Restrictions: There are no size restrictions on the privately-held
companies in which an M&A Broker may facilitate a merger, acquisition, business
sale or business combination ("M&A Transaction).
Parties: M&A Brokers may not bind a party to an
Provide Financing: M&A Brokers may not, directly or indirectly through
an affiliate, provide financing for an M&A Transaction.
Custody of Funds or Securities: M&A Brokers cannot have custody,
control or possession of, or otherwise handle funds or securities issues or
exchanged in connection with an M&A Transaction or other securities
transaction for the account of others.
Offering: The M&A Broker cannot engage in an M&A Transaction that
will involve a public offering. Any
offering or sale of securities must be conducted in compliance with an
application registration exemption under the Securities Act of 1933.
Companies: No party to an M&A Transaction can be a shell corporation, other
than a business combination related shell company (defined under Rule 405 to the Securities Act of 1933)
Buyers Restrictions: M&A Brokers
may facilitate a M&A Transaction with a group of buyers, only if that group
is formed without the assistance of the M&A Broker.
Operation: The buyer or group of buyers in any M&A Transaction must
control and actively operate the company or the business conducted with the
assets of the business. This ability to
control can be demonstrated by the buyer or group of buyers through certain
tests set out by the SEC in the No Action Letter.
Passive Buyers: Any M&A
Transaction facilitated by an M&A Broker must not result in the transfer of
interests to a passive buyer or a group of passive buyers.
Securities: Any securities received
by the buyer or M&A Broker in an M&A Transaction will be restricted
securities under Rule 144(a)(3).
M&A Broker Must Be Reputable: The M&A Broker must not have been
barred from association with or suspended from association with a broker-dealer
by the SEC, any state or self-regulatory organization.
[This communication is for general informational purposes
only and is not intended to constitute legal advice or a recommended course of
action. This communication is not intended to be, and should not be, relied
upon by the recipient in making legal decisions. The recipient is encouraged to
consult independent counsel before making any decisions or taking any action
concerning the matters in this communication.]
Regulatory Proposals Upon Which SBIA is Seeking Member Input
SEC Rules on Implementation of JOBS Act Section 401, Updating & Expanding Regulation A Offerings (Regulation A+)
Securities & Exchange Commission - Proposed Rules
Comments Are Due On March 24, 2014
SBIA is seeking general comments from members as well as specific comments. Please contact Chris Hayes, SBIA's Legislative & Regulatory Counsel (firstname.lastname@example.org) if you have any thoughts on this proposal. The specific comments we are seeking are set out below:
1. Do Business Development Companies (BDCs) wish to be able to access the Regulation A exemption?
2. Should the SEC amend Regulation A to make BDCs eligible to rely on it? Why or why not? Would it raise particular concerns about investor protection? If so, please explain.
3. Would extension of Regulation A issuer eligibility to BDCs be inconsistent with the exemption's current prohibition on use by reporting companies? If so, should we limit the extension of Regulation A issuer eligibility to only non-Exchange Act reporting BDCs? If not, should we permit BDC ongoing reporting under the Exchange Act to satisfy their reporting obligations under Regulation A? If Regulation A eligibility were extended to BDCs, should other rules be amended to require additional disclosure about such issuers? If so, what specific additional disclosure should we require about BDCs?
The Proposed Rules Currently Do Not Contemplate Allowing Business Development Companies to Utilize Regulation A+.
Purpose - the SEC released their proposed rules to implement changes to Regulation A, which would increase the amount of capital that can be raised under the Regulation A exemption from $5 million annually to $50 million annually (this is called Regulation A+). The current Regulation A exemption has been little used as a result of the low amount of capital that can be raised. The SEC proposes two levels for Regulation A+: Tier 1 (up to $ 5 million) in any 12-month period, including up to $1.5 million for the account of selling securityholders) and Tier 2 ($50 million and 15$ million respectively). Other benefits include:
- Eligible issuers under Tier 1 and Tier 2 can submit draft offering statements to the SEC on a non-public basis for review prior to filing;
- The rules would permit use of "test the waters" solicitation materials both before and after the filing of the offering statement;
- The rules would modernize the offering process, requiring electronic filing of offering materials and permitting issuers and intermediaries to satisfy prospectus delivery requirements under an "access equals deliver" model.
- Tier 2 offerings would be limited to purchasing an amount of securities that do not exceed 10% of the greater of the investor's annual income or net worth;
- Tier 2 offerings would require that financial statements included in the offering circular would have to be audited;
- Tier 2 issuers would be required to file annual and semi-annual reports and current event updates that are similar to those of a public company
- State Securities Regulation would be preempted for Tier 2 offerings.
Regulatory Proposals SBIA Has Commented On
SBA Rule Revising the Regulations for the SBIC Program, Allowing Up to Two Passive Holding Companies as Pass-Through Entities
Small Business Administration - Proposed Rule
Comments Submitted on January 21, 2014 - Available Here
Purpose - The SBA released their proposed rule to allow SBICs to structure an investment utilizing up to two passive small businesses as pass-through entities, as long as the investment proceeds pass through to one or more subsidiaries. Current rules allow the use of only one passive small business as a pass-through entity. The modification will help place SBICs on a closer to equal footing with their non-SBIC counterparts in which multiple holding company structures are common for tax and structural purposes. The SBIA supports the change
Expected Future Action - The SBA will issue a final rule at some point in the future. SBIA expects the final rule to be substantially similar to the proposed rule.
SEC Rule on Implementation of JOBS Act Allowing Private Funds to Advertise and Solicit for Fundraising
Proposed Rule on Amendments to Form D for General Solicitation and Advertising
SBIA Comments Submitted on September 23, 2013 Regarding Form D
Innovation Coalition Comments to the SEC on October 30
The SEC also issued proposed rules requiring any issuer to file Form D in Rule 506(c) offerings
before the issuer engages in general solicitation and requires the
filing of a closing amendment to Form D after the termination of any
Rule 506 offering.
Proposed Rule on Verification of Accredited Investor Status
Final Rule on Verification of Accredited Investor Status
SBIA Comments Submitted on October 5, 2012 - Available Here
The SEC issued the proposed Rule on September 5th, 2012, to implement the provision in the JOBS Act to allow private funds to advertise and solicit to the public for fundraising purposes. The Act states that Funds must verify the accredited investor status of its investors in order to be allowed to advertise or solicit to the general public. SBIA commented to the SEC to take into consideration new administrative burdens on PE funds, particularly smaller funds, and asks for several safe harbors.
Expected Future Action: Final Rules on verification of accreditation status went into effect on September 23, 2013. Final Rules on Form D have not been finalized.
Volcker Rule Implementation
Financial Stability Oversight Council – Proposed Rule
Financial Stability Oversight Council - Final Rule
Comments Submitted on February 13, 2012 – Available Here
Purpose: The Federal Deposit Insurance Corporation ("FDIC”), the Board of Governors of the Federal Reserve System ("Board”), the Securities and Exchange Commission ("SEC”), and the Department of Treasury ("Treas.”) have issued their proposal for implementing the Volcker Rule, which sharply restricts the ability of banks to engage in proprietary investing in private equity funds. According to the proposed rule, banks can still invest in SBIC funds without restrictions.
Expected Future Action: The four agencies overseeing the implementation of the Volcker Rule have not yet released a Final Rule.
Early-Stage Small Business Investment Companies
Small Business Administration – Proposed Rule
Comments Submitted on February 7, 2012 - Available Here
Purpose: The SBA has proposed the guidelines for a new type of Small Business Investment Company called an Early Stage SBIC. This type of SBIC is being created as a vehicle to access SBA leverage and make investments through the newly-formed SBIC Innovation Fund aimed at providing early-stage capital to companies that have not yet achieved positive cash-flows.
Exemption from SEC Registration for Private Funds with less than $150 Assets Under Management
Securities and Exchange Commission - Proposed Rule
Comments Submitted on January 24, 2011 - Available Here
Purpose: As required by Title IV of the Dodd-Frank Act – the Private Fund Investment Advisers Registration Act of 2010, for the purpose of being exempt from SEC registration requirements, the proposed rules would define "venture capital fund” as well as define elements related to the exemption for advisers with less than $150 million in private fund assets under management in the United States. The proposed rule would also clarify the meaning of certain terms included in a new exemption for foreign private advisers.
Expected Future Action: According to the Dodd-Frank Act, the provisions involving SEC registration requirements were effective on 7/21/2011.
Proposed Revisions to SBIC Reporting Form 468
Small Business Administration – Notice of Submission to Office of Management and Budget
Comments Submitted on February 3, 2011 - Available Here
Purpose: In order to ensure the collection of SBIC financial data that is most relevant to the SBA’s Investment Division while attempting to reduce redundancy, the SBA proposed various changes to reporting form 468. SBIA commented and the SBA took into consideration many of our concerns and issues.
Frequently Asked Questions: The SBA has compiled a list of FAQs for the updated changes to the Form 468. Click here to access the FAQS.
Study on Volcker Rule
Financial Stability Oversight Council- Notice and Request for Information
Comments Submitted on November 5, 2010 - Available Here
Purpose: Under Section 619, the Office of the Comptroller of the Currency ("OCC”), the Federal Deposit Insurance Corporation ("FDIC”), the Board of Governors of the Federal Reserve System ("Board”), the Securities and Exchange Commission ("SEC”) and the Commodity Futures Trading Commission ("CFTC”) must consider the recommendations of the FSOC study in developing and adopting regulations to implement the Volcker Rule. To assist the FSOC in conducting the study and formulating its recommendations, the FSOC is issuing this request for information through public comment.
Expected Future Action: The above-referenced study is available here. Agencies are required, not later than nine months after the completion of this study (completion date was January, 2011), to adopt rules to implement the Volcker Rule and must consider the recommendations of the Council in developing and adopting such regulations (The Proposed Rule was released in October 2011 and Alliance commented on it, as seen above).