1. Private Offerings, Business Brokers, and
the SEC
By: William A. Price, Attorney at Law,
www.growthlaw.com, 1-800-630-4780,
email wprice@growthlaw.com

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. “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. 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. 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. Resources For Offerers And Brokers
• SEC No Action Letter In County Business Inc:
– Letter: http://sec.gov/divisions/marketreg/mr-noaction/cbi110806incoming.pdf
Reply: http://sec.gov/divisions/marketreg/mrnoaction/cbi110806.htm
• SEC Information For Small Business:
http://www.sec.gov/info/smallbus.shtml
• North American Securities Administrators Association:
http://www.nasaa.org/
• Financial Industry Regulatory Authority (FINRA):
http://www.finra.org/