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Understanding the Texas M&A Dealer Registration Exemption

For years, the Texas State Securities Board (TSSB) maintained a streamlined registration process for any “business broker” in Texas. That process allowed brokers to sidestep securities examinations, but still required payment of the filing fee and filing forms BD and U-4. Last year, the U.S. Securities and Exchange Commission (SEC) issued a no-action letter to permit mergers and acquisitions brokers to facilitate certain securities transactions without registering as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934. Earlier in 2015, the TSSB created a new registration exemption—Section 139.27 of Title 7 of the Texas Administrative Code—for certain mergers and acquisitions brokers (M&A dealers) that is largely based off of the SEC no-action letter. But the new exemption has a few key differences that have generated frequent questions.

The new Texas rule eliminates any licensing or registration and filing fees, but imposes three requirements beyond those outlined in the SEC letter. First, a broker entity will not qualify for the new exemption if any of its officers, directors, or employees are subject to various “bad-actor” disqualifications stated in the new rule. Those disqualifications include, among other things, any criminal convictions within the past five years. Second, an M&A dealer is required to maintain and preserve for a period of three years, records of “all compensation received and communications, agreements, or contracts with buyers and/or sellers in connection with any transaction in which the dealer received compensation”—a time period shorter than the TSSB rules impose on dealers registered under the Texas Securities Act. And finally, the M&A dealer must furnish to the Texas securities commissioner the required records upon request; failure to do so will result in loss of the exemption.

The new Texas rule requires the buyer to “actively operate” the company or its business after completing the qualifying M&A transaction. But the Texas rule defines “actively operate” in a somewhat more restrictive manner than the SEC letter. Texas law defines “actively operate” to mean having the power to elect executive officers and approve an annual budget, or serving as an executive or executive-level manager. Beyond that, requirements of the new Texas rule concerning scope of advertising for sale, permitted activities, and scope of disclosure, are substantially the same in effect or even less than required under the SEC regime, a welcome fact for M&A dealers. Because of that, securities intermediaries should find the new Texas rule beneficial, as long as they are careful to observe the added requirements for compensation-related records and disqualification.


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