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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1. Private Offerings, Business Brokers, and the SEC By: William
A. Price, Attorney at Law, www.growthlaw.com, 1-800-630-4780, email
[email protected]
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 sellers 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 firms 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 investors 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/