Business acquisitions advisors have long waited for exemptions in securities rules that govern their business. However, based on recent economic and regulatory developments, professionals should understand and accept existing law, rather than hope for the get-out-of-jail-free card that may never come.

Over the last decade, trade and legal organizations have battled for reform of broker licensing laws that impose the full Wall Street broker registration on middle-market mergers and acquisitions brokers and advisors. Trade associations and the American Bar Association have lobbied for the better part of a decade for new rules that impose rules more fitting for Merrill Lynch than private business acquisitions advisors. Now, these mid-market acquisitions professionals must often register as if they were a Wall Street brokerage house selling retail investments.

With the financial meltdown and changing administration, federal and state comments to representatives of the American Bar Association and other trade groups suggest that any easing of the rules may be a much slower process than expected. This slowdown means that the industry must continue to rely on SEC 2006 Country Business, Inc. no-action letter. This SEC ruling provided that small- and mid-market business acquisitions advisors may assist companies sell their stock, so long as the advisor satisfies certain conditions. See http://sec.gov/divisions/marketreg/mr-noaction/cbi110806.htm. This ruling, primarily negotiated by the firm’s Craig McCrohon, exempted acquisition advisors from registration with the Securities and Exchange Commission as a broker-dealer.  

Among the more significant restrictions are that the business qualify as a “small business” under the rules of the small business administration. In addition, while the advisors may provide the typical valuation assistance, introduction to banks, and management of the transaction, they must not cross the line and negotiate the final terms of a stock purchase. In cases involving the sale of a company’s assets, no registration is required. For the size standards applicable to the ruling, see http://www.sba.gov/contractingopportunities/officials/size/index.html.

McCrohon represented Country Business, Inc. before the Securities and Exchange Commission in negotiating the letter, and has spoken on panels to various national organizations regarding the implication of the ruling for both advisors and the businesses they represent.

Until the Country Business, Inc. ruling, advisors and their clients contended with inconsistent court cases and letter rulings to determine whether registration was required. The only other applicable ruling was issued by the Securities and Exchange Commission 20 years earlier, in 1986, and was of very limited applicability. Regulators in several states have also indicated that they will apply the ruling to the federal securities laws to the laws of their own states.

Absent registration, laws subject the advisors to potential fines, disqualification for future registration, and the possibility that the clients can rescind their agreements with the advisor and with the purchase of the business being sold. After the issuance of the Country Business, Inc. ruling, staff at the Securities and Exchange Commission has publicly acknowledged that regulators need to better appreciate the distinction between the highly regulated world of brokering retail securities from that of advising a company on its sale.  

Based on a technicality — that the form of the sale was that of a “stock” security — advisors inadvertently triggered the onerous registration rules under the Securities Exchange Act. This letter ruling, regulators have acknowledged, more logically separates the securities activities of the Wall Street investment banks from the main street independent mergers and acquisitions professionals.

For more information on the Country Business, Inc. ruling, as well as the status of other rules affecting brokers of private placement investment securities, please contact Craig McCrohon at 312/840-7006 or cmccrohon@burkelaw.com.