Following its introduction earlier this month by Michigan congressman Bill Huizenga, HR 2274 — the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2013 — was referred to the Capital Markets subcommittee, a subcommittee of the U.S. House of Representatives’ Financial Services Committee.
Warner Norcross attorney Shane Hansen provided testimony on the bill during the subcommittee meeting. Hansen said the bill will likely be reviewed by the full Financial Services Committee later this summer, and he expects it will eventually become part of a package of bills to be introduced in the fall as the JOBS Act 2.0.
“Essentially, a mergers and acquisitions, or M&A, broker is regulated just like a Wall Street investment banking firm is regulated,” Hansen said. “Today’s one-size-fits-all federal and state securities laws regulate Main Street — i.e., Grand Rapids, Michigan, M&A brokers handling privately negotiated business sale transactions, the same way as Wall Street brokers handling transactions involving public companies.
“Bringing it close to home, brokering the sale of stock of a ‘ma and pa’ hotdog stand is regulated just like a Wall Street banking firm brokering the sale of a public company.”
Hansen said that cost of complying with current Securities and Exchange Commission and the Financial Industry Regulatory Authority is a key factor in the introduction of HR 2274.
“It is probably $150,000 to start up a registered broker-dealer or brokerage firm, ongoing cost probably $75,000 a year, so they are prohibitively expensive for the M&A broker,” he said.
Hansen noted that as a result of that expense, many brokerage firms don’t register. For those that do, the cost is passed on to the small business buyer or seller.
“The cost drives many small and mid-sized business buyers or sellers to hire unregistered people because they don’t incur those costs, and so a very high percentage of the M&A brokers are not registered. Technically, they are violating federal and state securities laws today.”
Hansen pointed to the baby boomer population as a reason for changing the laws. “An estimated $10 trillion of privately owned businesses will be sold or closed as baby boomers retire,” he said.
“What HR 2274 would do is appropriately scale federal regulation in the context of privately negotiated sales, small and mid-sized business sales, or M&A, and at the same time, it would enhance protections that really are the objective of these (existing) laws, trying to protect the public, really, by clarifying what the rules are and what the law is and to create relevant regulatory requirements.
“It would direct the Securities and Exchange Commission to create a simplified system of registration through a public notice filing that would be available on the SEC’s website, and it would require appropriate client disclosures from the M&A broker.
“So, for example, the M&A broker, when they are presenting their services to a seller or buyer, would deliver a disclosure document that says who they are, what they are, who they employ, what they’re going to do, what they are going to charge, and, importantly, if they have any conflicts of interest in the transaction. That would better protect the public and is not something even required today.”
Hansen said the bill has not received any opposition of which he is aware and called it a win-win-win for everyone involved, saying it would lower costs, increase compliance and better serve buyers and sellers of small and medium-size businesses who want to use brokerage services.