From: Mike Ertel
This letter is in support of the proposed recommendations from the SEC Government-Business Forum on Small Business Capital Formation for the adoption of the ABA Task Force’s Private Placement Broker rule and the development of a limited broker registration exemption for M&A and business broker intermediaries who are not involved in raising capital.
Before investing capital, an investor has three fundamental questions: (1) What’s my return? (2) What’s my risk? (3) When and how can I cash out, i.e., what’s my liquidity?
Investors will avoid “Black Hole” investments, which promise attractive returns with acceptable risk, but offer no way out. Therefore, the “back-end” liquidity of a proposed investment is important to the “front end” investment decision.
In the “No Man’s Land” of mid-sized companies, which are too small to affordably access the public capital markets using a traditional, full-service investment banking broker-dealer, and are too big to qualify for SBA guaranteed financing, the M&A advisor/intermediary plays a multi-faceted and important role in creating an efficient capital market – which goes well beyond the role of a pure “finder” as envisioned in the IBEC letter ruling, but stop short of directly raising private capital – by facilitating the liquidity events which may be caused by the divorce, retirement, failing health, or financial planning of an owner; or by the need to merge with a strategic or financial partner.
With the demise of the “sale of business doctrine,” conflicting rulings and court decisions have created tremendous uncertainty for intermediaries who are operating in full compliance with state business licensing laws, but are not registered under federal or state securities laws as broker/dealers. The present regimen of NASD regulatory applications, qualification, testing, and on-going compliance requirements make little sense to an intermediary’s services in this context. The significant cost, in both time and money, to learn and comply with these largely irrelevant requirements causes many intermediaries to ignore them. If these requirements were fully enforced, the intermediaries’ services would be unaffordable to most small businesses, and many intermediaries would cease offering their services. Without their services, the “back end” liquidity for small business investment would dry up.
The SEC is long overdue to provide clear guidelines in this area, and the ABA proposal for establishing a Private Placement Broker, and the proposal presented at the Forum for a establishing a limited exemption for M&A advisors who facilitate the sale of a business but stop short of directly raising private capital, would be giant steps in the right direction.
Mike Ertel, BSEE, MSIA, CBI, M&AMI