Why Your Transaction Advisor Should Be Licensed

Transactions are complicated. As such, company owners engaged in M&A or capital raising transactions typically employ a full deal team of investment bankers, attorneys and CPAs to successfully execute the transaction. There are numerous financial intermediaries who act as “investment bankers” on M&A transactions (and even capital raises) without registering as a broker-dealer. As you consider a particular firm as your investment banker, it is critical to understand the products and services the firm can – or cannot – provide. To ensure a successful and legal transaction process, it is critical to employ the services of a registered broker-dealer.

What is a Registered Broker-Dealer?

Licensed broker-dealers must register with the U.S. Securities and Exchange Commission (SEC) and be members of the Financial Industry Regulatory Authority (FINRA). Individual registered representatives must register with FINRA, pass a qualifying examination and be licensed by your state securities regulator before they can do business with you. Licenses required to act as a broker-dealer include FINRA Series 63 and Series 79. Background information on FINRA member firms and individual representatives is available online via FINRA BrokerCheck (https://brokercheck.finra.org) or by contacting your state regulator.

Limitations of an Unlicensed Advisor

In order for an unregistered advisor to serve in a transaction process, the transaction must meet all of the following restrictions:

  • Only 100% private companies purchased by 100% private companies
  • 100% cash transactions for assets only (i.e. no equity roll, seller financing, stock sales, earn-outs, etc.)
  • Buyer must have control and actively operate the company after the purchase
  • Broker cannot assist in forming buyer groups
  • Broker cannot handle funds or securities
  • Broker must disclose if assisting in financing
  • No transaction can involve a public offering
  • Written informed consent from both buyer and seller if representing both parties
  • Transfers to passive buyers not permitted
  • Broker must comply with all other provisions of securities laws, including anti-fraud provisions

Even if the contemplated transaction satisfies all of these restrictions, unregistered advisors still face major hurdles regardless of structure, including compliance with varying state law licensing requirements (where failure to comply is a misdemeanor or, in some states, a felony) and anti-fraud provisions requiring them to disclose the major limitations of their activities.

Risks of Using an Unlicensed Advisor

By employing an unregistered broker, you expose yourself to potentially serious legal and regulatory liability that could result in any or all of the following consequences:

  • Compromise Future Financings: May be required to provide legal opinion that prior financing arranged by unregistered broker complied with applicable laws
  • Rescission Rights: Purchaser (in either a capital raising or M&A transaction) may be able to require issuer to repurchase securities sold plus interest and legal fees
  • Voiding the Sale: Purchaser may make a claim under Section 29(b) of the Securities Exchange Act of 1934 which states that any transaction in violation of the act “shall be void”
  • Identification of the Unregistered Broker: Issuer/seller is required to disclose the employment of an unregistered broker
  • Void Exemptions: Securities transactions must be registered under federal and state law unless exempted but using an unregistered broker increases the possibility that the transaction will not be exempt and thus violate securities registration requirements
  • Direct Violation of State Law: Many states explicitly prohibit unregistered brokers wherein issuers can be held liable under both federal and state law for any known violations
Why Use a Registered Broker-Dealer

Registered broker-dealers are in full compliance with all applicable laws and regulations related to any transaction process and structure. Moreover, you can be sure of the validity as well as the legality of the transaction at hand, limiting your liability. By employing a registered broker-dealer, you mitigate substantial risk to all parties involved, especially you and your company.

About Bridgepoint Investment Banking

Bridgepoint Investment Banking is a middle market investment banking firm. The Bridgepoint team serves clients over their corporate lifecycles by providing merger and acquisition and corporate finance advisory services. In order to offer securities-related Investment Banking Services discussed herein, to include M&A and institutional capital raising, certain representatives of Bridgepoint are registered representatives of M&A Securities Group, Inc., an unaffiliated broker-dealer and member FINRA/SIPC.


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