Private offerings and broker dealer registration exemptions


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This slide deck describes current legislation that would exempt merger and acquisition professionals from broker-dealer registration requirements, lists SEC rules governing raising capital through private securities offerings, and shows the difference the JOBS Act made in those rules

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Private offerings and broker dealer registration exemptions

  1. 1. Private Offerings, Business Brokers, and the SEC By: William A. Price, Attorney at Law,, 1-800-630-4780, email
  2. 2. Business Broker Exemption Legislation • HR 2274 passed US House 422-0 on January 14, 2014 • Exempts merger and acquisition brokers from SEC “BrokerDealer” registration requirements • Identical Senate legislation, S. 1923, is pending in the Senate • “Campaign for Clarity” coalition (Association of Merger and Acquisition Advisers, International Business Brokers Association and regional affiliates like Midwest Business Brokers and Intermediaries, M&A Source all support)
  3. 3. Broker-Dealer vs Business Broker: Current Rules Broker-Dealer Business Broker/M&A Broker SEC and FINRA firm registration/rules State laws/rules $250,000 minimum capitalization No minimum capitalization Series 7, Series 36, other examinations No examination requirements High annual fees/insurance required Fees as low as $50/insurance optional
  4. 4. Current Rules Allow Broker Compensation • SEC No-Action Letter in County Business, Inc., 2006 SEC No-Act. LEXIS 669 (11/8/06) allowed contingent compensation for persons in the business of helping sell companies. • Note that broker participation in negotiation of terms of sale must be strictly limited if asset sale turns into stock sale or other sale of a security • This could include terms of a seller’s earn-out
  5. 5. HR 2274/S1923 • Complete exemption for “M&A Advisers” engaged in business of securities sales from “Broker-Dealer” registration • Advised party must control target company before or after sale • Company to be sold must meet federal small business size standards (generally, less than 500 employees) • Limited disclosure requirements before sale, but all antifraud requirements still apply
  6. 6. Private Offerings Rules • SEC and State “Blue Sky” Laws Limit Offerings Without Public Registration • “Accredited Investors” ($1 million in assets beyond house, or high income, or some institutions that represent investors) only allowed targets • Some limits on amount raised, depending on exception used • JOBS Act allowed public announcement of private offerings • Sales of securities must be through “broker-dealers” or company officers with compensation not based on sale
  7. 7. Private Offerings Rules, SEC Regulation D contains Rules 504, 505, and 506, provides exceptions to public registration requirements • Rule 504 (up to $1 million raised/12 mos., no general solicitation, restricted resales) • Rule 505 (up to $5 million/12 mos., accredited investors plus up to 35 nonaccredited, disclosure requirements for nonaccredited, restricted resales) • Rule 506 (any amount, accredited only if general solicitation, otherwise up to 35 nonaccredited with disclosures, state rules preempted)
  8. 8. Additional Exceptions • Accredited Investors Only (less than $5 million), and • Intrastate Offering (Most of firm’s business in state where offered securities, offering only to residents of that state, state law determines offering limits and disclosures)
  9. 9. JOBS Act Additions to Private Offerings • Rule 506 ( c ) is new, implements JOBS Act • Unlimited sales to accredited investors only, verification of accredited status required • Public solicitation of such investors allowed • Anti-fraud laws still apply • Some “private offerings” limited broker-dealer license categories added
  10. 10. Restricted Resale • Rule 144 or other valid exception from public registration needed, or public offering is required • Basic element: hold for more than a year • Different rules if sale to persons “affiliated” with offeror • Amounts allowed to be sold may be limited
  11. 11. Small Public Offerings • Regulation A has simplified disclosures, offering up to $5 million • JOBS Act provides for similar offering up to $50 million: regulations still pending • Multistate offerings and some state offerings laws allow public solicitation in-state with more limited disclosures (e.g. Wisconsin, limits amount investable, noncertified accounts allowed up to $1 million)
  12. 12. The Private Offerings Process 1. Introduction of parties: SEC says broker-dealer registration required for any contingent compensation, some courts disagree 2. Financial/Business Disclosures: All information “material” to investor’s decision must be disclosed before investment $$ taken, or all offerors and assisting professionals can be sued under criminal and civil anti-fraud laws (SEC ruled 10b-5, state equivalents). “Private Offering Memorandum” the usual document 3. Information Filing with state or SEC within 15 days after investment
  13. 13. “Term Sheet” Negotiations With Investors • Note limited role, if any, for M&A Advisers/Business Brokers in structuring any deal unless exemption applies or HR 2274/S1923 create exemption • Negotiations on terms can cover valuation, special rights for investor class like nondilution, right to participate in further rounds, Board seats for investment group, information rights, preference to other obligations on liquidation by loan status (convertible of investment), etc… • Insiders may lose control with first or later rounds, could have to earn back their own shares
  14. 14. Sources of Outside Investors • Earliest round: friends, family, and fools • Second round: business associates, customers, competitors, local “angel” groups, technology competitions, MBA plan competitions, lawyer, accountant, bank referrals • Mezzanine and other pre-public rounds: p/e groups, larger angel networks, “private offering” broker-dealers, investment portals, international sources, loan brokers, strategic buyers or investors, “cause” investors
  15. 15. Things To Think About In The Offering • Full disclosure of possible business risks, and plans for each • Management Team, other “Special Sauce” (IP, etc…) • Business model (how investment $$ turn into profits) • Corporate governance/inside team rights after investment • When investments are due/capital calls allowed, how much • Hoped-for exit events, assistance with same (or with next rounds of $$) available from investors
  16. 16. Resources For Offerers And Brokers • SEC No Action Letter In County Business Inc: – Letter: Reply: • SEC Information For Small Business: • North American Securities Administrators Association: • Financial Industry Regulatory Authority (FINRA):