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Exemptions to Broker-Dealer Registration: Issuer, M&A Broker, and 15a-6 Chaperone Explained

The Securities Exchange Act of 1934 (“Exchange Act”) specifies numerous definitions and requirements for broker-dealers in the United States. It classifies a “broker” as anyone making security transactions on behalf of others and “dealer” as any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.

In certain circumstances, firms or people can be exempted from having to register as a broker dealer. This blog post will explore the most important exemptions that exist.

Broker-Dealer Registration Requirements

There are multiple factors to consider and forms to go through to register as a broker-dealer. 

Who needs to register as a broker-dealer?

When defining whether a person or a firm is acting as a broker, the U.S. Securities and Exchange Commission (“SEC”) applies a facts-and-circumstances analysis. They look at multiple factors, including: 

• Assisting an issuer in structuring securities transactions
• Identifying potential investors for a securities offering
• Soliciting securities transactions (including advertising/marketing)
• Screening potential participants in a transaction for creditworthiness
• Negotiating between the issuer and the investor(s)
• Making valuations as to the merits of an investment or giving advice
• Taking “orders” or facilitating the execution of a securities transaction
• Handling customer funds or securities.

Compensation Structures

Compensation that the person or firm receives from soliciting investors also plays an important role.

Receiving commissions, fees, or other forms of compensation tied to the success or completion of securities transactions is a strong indicator of broker activity. Indeed, compensation factors are among the most critical when it comes to classifying a person or a firm as a broker-dealer.

There are multiple factors related to a firm receiving a payment as transaction-based compensation, such as the size or completion of any securities transaction, commission, or success fee.

There may be occurrences when a person or firm does not receive transaction-based compensation, but can still be considered a “broker” due to their activities related to securities transactions, such as soliciting clients, negotiating on behalf of clients, etc.

Risks and Consequences for Unregistered Brokers

Engaging in broker activity without a broker-dealer license can cause serious consequences, ranging from reputational harm to criminal liabilities and harsh sanctions. The SEC can block the ability to enforce contracts and the companies may even face criminal prosecution under state and federal law.

Section 20 of the Exchange Act imposes liabilities on “control” persons, subject to a good faith defense, as well as persons who aid and abet anyone in violation of the Exchange Act. The securities laws of some states have similar liability provisions.

Exemptions to Broker-Dealer Registration

There are several exemptions to registering as a broker-dealer:

1. Issuer Exemption

Issuers generally don’t qualify as either brokers or dealers, and hence under specific circumstances are exempt from the broker-dealer registration requirement. They are generally not considered brokers because they don’t sell securities for other firms, and they are generally not considered dealers because while they do sell their own securities, they do not do so as part of their day-to-day business. 

SEC Rule 3a4-1: The Issuer Exemption

SEC Rule 3a4-1 outlines specific conditions under which an associated person of an issuer can be exempt from broker-dealer registration under the Exchange Act. To qualify for this exemption, the person must meet several criteria:

• No Statutory Disqualification: The person must not have committed certain "bad actor" events as defined in Section 3(a)(39) of the Exchange Act, which includes specific disqualifying misconduct.
• No Transaction-Based Compensation: The person must not receive compensation that is contingent on the transaction's success, such as commissions or bonuses based on the amount of funds raised.
• No Association with a Broker-Dealer: The person must not be associated with a broker-dealer, such as being a registered representative engaged in sales activities outside the supervision of the broker-dealer.
• Meeting One of Three Alternative Arrangements: Additionally, the associated person must satisfy the conditions of one of the following three exemptions:
  • First Exemption (Restricted Sales): The associated person may engage in sales to certain financial institutions, sell securities that are exempt from registration under specific sections of the Securities Act of 1933 (Sections 3(a)(7), 3(a)(9), or 3(a)(10)), conduct sales in connection with reorganizations, or sell securities as part of an employee benefit plan.
  • Second Exemption (Limited Sales): The associated person must primarily perform substantial duties for or on behalf of the issuer other than selling securities and has not been a broker or dealer, or an associated person of a broker-dealer, within the past twelve months; neither did he participate in the sale of securities for any issuer more than once every 12 months.
  • Third Exemption (Passive Sales): The associated person may only engage in passive sales activities, which include responding to unsolicited requests by prospective investors or performing clerical or ministerial work related to effecting any transaction.

Limitations and Additional Requirements

While SEC Rule 3a4-1 provides an exemption from broker-dealer registration under the Exchange Act, associated persons of an issuer must also consider whether they need to register under applicable state securities laws. State regulations can vary, and compliance with these laws is essential to ensure lawful operation in different jurisdictions.

2. M&A Broker Exemption

On March 29, 2023, a new federal exemption became effective under the Exchange Act (Section 15(b)(13)) for brokers facilitating merger and acquisition (M&A) transactions involving certain privately held companies. This M&A Broker Exemption codifies principles from the SEC's 2014 "M&A Broker" no-action letter but includes limitations on the size of the company involved in the transaction.

Federal and State Regulations

The M&A Broker Exemption does not preempt state broker-dealer registration requirements. M&A brokers must still comply with state securities laws, assessing whether they qualify for any exclusions or exemptions under those laws.

Definition of an M&A Broker

An M&A broker is a broker, including any associated persons, involved in effecting securities transactions related to the transfer of ownership of an eligible privately held company. This can involve various activities such as purchase, sale, exchange, issuance, repurchase, redemption, or business combinations involving securities or assets of the company.

Conditions for the Exemption

• Control and Management: Upon transaction completion, any acquiring party must control the company and be active in its management. Control is presumed if the buyer can vote or sell 25% or more of a class of voting securities or, in partnerships or LLCs, has the right to 25% or more of the capital upon dissolution.
• Access to Financial Information: Any person offered securities in exchange for assets must receive access to recent fiscal year-end financial statements and other relevant financial information before finalizing the transaction.

• Eligible Privately Held Company: A privately held company with no registered securities under Section 12 of the Exchange Act and no requirement to file periodic reports under Section 15(d). In the fiscal year preceding the engagement of the M&A broker, the company must have less than $25 million in EBITDA or less than $250 million in gross revenues. These thresholds will adjust for inflation every five years.

Excluded Activities

• Custody of Funds or Securities: M&A brokers cannot directly or indirectly handle the funds or securities exchanged in the transaction.
• Public Offerings: M&A brokers cannot engage in public offerings of any securities registered under Section 12 or subject to Section 15(d) reporting.
• Shell Companies: Transactions involving shell companies are generally excluded unless they are business combination-related shell companies.
• Providing Financing: Brokers cannot provide financing for the transaction or assist in obtaining financing without complying with applicable laws and disclosing any compensation.
• Dual Representation: Brokers must disclose and obtain consent if representing both buyer and seller.
• Passive Buyers: Transactions involving passive buyers are not allowed.
• Binding Parties: Brokers cannot bind parties to the transaction.

Disqualification

Brokers (including officers, directors, or employees) barred or suspended by the SEC, any state, or SRO from association with a broker-dealer cannot rely on this exemption.

3. 15a-6 chaperone 

Foreign broker dealers have an exemption from registering as a broker-dealer provided they work with a chaperone service under SEC Rule 15a-6. Such services provide an opportunity to save time and money by employing a licensed US chaperone. Marco Polo Exchange (MPX) is a leading provider of 15a-6 rule service and has experience serving over 100 clients from 50 countries via its revolutionary product called MPX Passport.

What is 15a-6?

Rule 15a-6 of the Exchange Act provides conditional exemptions from broker-dealer registration for foreign broker-dealers that engage in certain specified activities involving U.S. investors. These activities include:

1. Unsolicited Transactions: Foreign broker-dealers can effect unsolicited securities transactions with U.S. investors. This means that the transaction must be initiated by the U.S. investor, not solicited by the foreign broker-dealer.
    
2. Research Reports: They can provide research reports to major U.S. institutional investors (“MUSSIs”) and effect transactions in the subject securities with or for those investors. The research reports must comply with certain SEC requirements. Providing research reports to major U.S. institutional investors, and effecting transactions in the subject securities with or for those investors;
    
3. Chaperoned Transactions: Foreign broker-dealers can solicit and effect transactions with or for U.S. institutional investors or major U.S. institutional investors (“MUSIIs”) if the transactions are conducted through a registered U.S. broker-dealer acting as a “chaperone.” The chaperone must ensure compliance with SEC regulations and take responsibility for certain activities of the foreign broker-dealer.
    
4. Transactions with Certain Entities: Soliciting and effecting transactions with or for registered broker-dealers, banks acting in a broker or dealer capacity, certain international organizations, foreign persons temporarily present in the U.S., U.S. citizens resident abroad, and foreign branches and agencies of U.S. persons.

MPX facilitates the chaperoning process for foreign broker-dealers through our technology platform, MPX Passport. This platform provides real-time tracking, compliance management, and data insights. The chaperoning is provided by Marco Polo Securities, Inc., the U.S. broker-dealer affiliate of MPX. 

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