[This story previously appeared in Securities Regulation Daily.]
By Jay Fishman, J.D.
The Texas States Securities Board adopted a mergers and acquisitions dealer exemption.
Qualifications. Mergers and acquisitions (M&A) dealers and their agents are exempt from registration when effecting a qualified M&A transaction. The M&A transaction is "qualified" if: (1) it is a transfer of ownership and control of a “privately-held company,” as defined, to a buyer through the purchase, sale, exchange, issuance, repurchase, or redemption of securities, or a business combination involving the company's securities or assets; (2) the buyer (or group of buyers), on completing the qualifying M&A transaction, actively operate the company or the business using the company's assets; (3) no qualifying M&A transaction involves a public offering of securities but, will instead be effected in reliance on an applicable Texas Securities Act exemption from registration; (4) no party to a qualifying M&A transaction is a shell company, unless it is a "Business Combination Related Shell Company," as defined; (5) the buyer (or group of buyers) must, on completing the qualifying M&A transaction, control the company; (6) no qualifying M&A transaction may result in a securities transfer to a passive buyer (or group of passive buyers); and (7) any securities received by the buyer or M&A dealer in a qualifying M&A transaction are "restricted securities" as defined in the Securities Act of 1933, Rule 144A.
Permitted activities. M&A dealers may advertise a privately held company for sale with information such as the business description, general location and price range, so long as the dealers do not include an offer to sell securities. M&A dealers may also facilitate a qualifying M&A transaction with a group of buyers but only if the group is formed without the M&A dealers' assistance.
Prohibited activities. M&A dealers may not: (1) bind a party to a qualifying M&A transaction; (2) provide financing for a qualifying M&A transaction, either directly or indirectly through the dealers’ affiliates; or (3) retain custody, control or possession of funds or securities issued or exchanged to effect a qualifying M&A transaction (or other securities transaction) for others' accounts.
Disclosures. M&A dealers representing both buyers and sellers must, in writing, clearly disclose the parties the M&A dealer represents, and must obtain the buyers' and sellers' written consent to the joint representation. Additionally, M&A dealers helping buyers obtain unaffiliated third party financing must comply with applicable legal requirements, and disclose to the buyer in writing any compensation the M&A dealer will receive.
Disqualifications. M&A dealers subject to federal Regulation A, Rule 262 securities violations and other prescribed "bad boy" provisions are prohibited from claiming the exemption.
Recordkeeping. M&A dealers must maintain and preserve for three years all communications, agreements or contracts with buyers and/or sellers pertaining to transactions for which the M&A dealers received compensation. M&A dealers must make these records available to the Texas Securities Commissioner on request, or forfeit the exemption.
Definitions. An "M&A dealer" is a person engaged in the business of effecting securities transactions solely in connection with a qualifying M&A transaction. "Actively operate," "privately-held company," "shell company," and a "business combination related shell company" are also defined.