For decades, the SEC (and state securities regulators) have interpreted the broker/dealer registration requirements to cover “finders,” who were deemed to be broker/dealers (in the business of selling the securities of others) and who thus had to be registered as such. The registration was tedious, expensive, opened the finder to continuous disclosure, and most importantly was irrelevant to the functions the finders were performing.
Finders generally operated in two spheres: raising capital for companies by the sale of securities, and engaging in the sale of businesses.
The SEC on January 31st issued a so-called “no action letter” materially impacting the analysis relating to finders working on the sale of a company. (The SEC action does not address the continuing interpretation of the law where finders retained to sell company stock are classified as brokers.)
Simply put, the SEC letter says that the SEC staff will not take enforcement action against finders in the sale of a business for failure to register as broker/dealers, in the following circumstances:
- The general business of the finder is to arrange acquisition transactions, whether structured for the sale of assets or for a stock transaction, between privately-held companies.
- The buyer must “actively operate” the target after the transaction.
- The standard for “actively operate” is very broad; the buyer must end up with 25% of the vote or equity, and the finder itself cannot put together a group of buyers in order to reach that threshold.
The theory is that if a finder is brokering the sale of a business, such transaction can be structured either as an asset sale or a sale of securities, depending upon the negotiations between the parties (which depend on business or tax considerations); it seems anomalous to not require a finder to be registered if the parties elect to structure the transaction as an asset sale, but to require registration if the parties elect to utilize securities in the deal.
There are many subtleties in the SEC’s letter not covered here; the area still remains sensitive. The SEC letter is strictly limited to specific facts contained in it. Assertions that I have seen on the internet, that now all business finders are not classified as broker/dealers according to the SEC, are inaccurate; the SEC specifically says only that the staff will not undertake enforcement action in the limited cases described, but that the SEC is not conceding the legal principle. Finders need to carefully structure transactions to conform to the SEC letter and, further, there is no assurance that state regulators will see matters the same way (although surely this SEC action will take some wind out of the States’ sails).