The Consolidated Appropriations Act, 2023 (H.R. 2617), signed into law by President Biden on December 29, 2022, includes a provision exempting brokers that facilitate small business M&A (Mergers and Acquisitions) from federal broker-dealer registration. The section on “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification” amends the Securities Exchange Act of 1934, effectively codifying the SEC’s sweeping 2014 M&A Broker No Action Letter. It benefits businesses who work with M&A advisors because advisors will no longer have the increased transaction cost and complexity of working under a broker-dealer who adds no real value to a transaction except to ensure compliance. The new exemption will go into effect at the end of March 2023.
The Securities Act amendment responds to the growing demand for M&A activities in the small business sector, which has increased in recent years. This exemption is expected to make it easier for small privately held companies to access M&A services and, by eliminating regulatory burden, reduce transaction costs for those looking to sell, merge or acquire other companies. Small businesses are defined in the law as those with up to $250 million revenue or $25 million EBITDA, which covers more than 99% of all privately held companies in the U.S.
The new law should bolster the overall economy as small businesses contribute significantly to job creation and economic growth.
The exemption applies to change-of-control transactions only, not equity securities offerings (i.e., capital raising). To qualify as a control transaction, the acquirer must end up with a 25% or greater interest in the acquired company and participate directly or indirectly in its management (e.g., board representation or executive management). The limits on the exemption easily cover all of Exit Strategies Group’s M&A activities.
In conclusion, this new law exempts M&A brokers from federal broker-dealer registration and right-sizes federal regulation of small business transactions while preserving important investor protections. It is a welcome change for small privately held companies and their stakeholders, those who advise them, and the broader economy.