[House Report 113-326]
[From the U.S. Government Publishing Office]
113th Congress Report
} HOUSE OF REPRESENTATIVES {
2d Session } { 113-326
======================================================================
SMALL BUSINESS MERGERS, ACQUISITIONS, SALES, AND BROKERAGE
SIMPLIFICATION ACT OF 2013
_______
January 14, 2014.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services,
submitted the following
R E P O R T
[To accompany H.R. 2274]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 2274) to amend the Securities Exchange Act of
1934 to provide for a notice-filing registration procedure for
brokers performing services in connection with the transfer of
ownership of smaller privately held companies and to provide
for regulation appropriate to the limited scope of the
activities of such brokers, having considered the same, report
favorably thereon with amendments and recommend that the bill
as amended do pass.
The amendments are as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Small Business Mergers, Acquisitions,
Sales, and Brokerage Simplification Act of 2013''.
SEC. 2. REGISTRATION EXEMPTION FOR MERGER AND ACQUISITION BROKERS.
Section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b)) is amended by adding at the end the following:
``(13) Registration exemption for merger and acquisition
brokers.--
``(A) In general.--Except as provided in subparagraph
(B), an M&A broker and any person associated with an
M&A broker shall be exempt from registration under this
section.
``(B) Excluded activities.--An M&A broker or a person
associated with an M&A broker is not exempt from
registration under this paragraph if such broker or
associated person does any of the following:
``(i) Directly or indirectly, in connection
with the transfer of ownership of an eligible
privately held company, receives, holds,
transmits, or has custody of the funds or
securities to be exchanged by the parties to
the transaction.
``(ii) Engages on behalf of an issuer in a
public offering of any class of securities that
is registered, or is required to be registered,
with the Commission under section 12 or with
respect to which the issuer files, or is
required to file, periodic information,
documents, and reports under subsection (d).
``(C) Rule of construction.--Nothing in this
paragraph shall be construed to limit any other
authority of the Commission to exempt any person, or
any class of persons, from any provision of this title,
or from any provision of any rule or regulation
thereunder.
``(D) Definitions.--In this paragraph:
``(i) Control.--The term `control' means the
power, directly or indirectly, to direct the
management or policies of a company, whether
through ownership of securities, by contract,
or otherwise. There is a presumption of control
for any person who--
``(I) is a director, general partner,
member or manager of a limited
liability company, or officer
exercising executive responsibility (or
has similar status or functions);
``(II) has the right to vote 20
percent or more of a class of voting
securities or the power to sell or
direct the sale of 20 percent or more
of a class of voting securities; or
``(III) in the case of a partnership
or limited liability company, has the
right to receive upon dissolution, or
has contributed, 20 percent or more of
the capital.
``(ii) Eligible privately held company.--The
term `eligible privately held company' means a
company that meets both of the following
conditions:
``(I) The company does not have any
class of securities registered, or
required to be registered, with the
Commission under section 12 or with
respect to which the company files, or
is required to file, periodic
information, documents, and reports
under subsection (d).
``(II) In the fiscal year ending
immediately before the fiscal year in
which the services of the M&A broker
are initially engaged with respect to
the securities transaction, the company
meets either or both of the following
conditions (determined in accordance
with the historical financial
accounting records of the company):
``(aa) The earnings of the
company before interest, taxes,
depreciation, and amortization
are less than $25,000,000.
``(bb) The gross revenues of
the company are less than
$250,000,000.
``(iii) M&A broker.--The term `M&A broker'
means a broker engaged in the business of
effecting securities transactions solely in
connection with the transfer of ownership of an
eligible privately held company, regardless of
whether the broker acts on behalf of a seller
or buyer, through the purchase, sale, exchange,
issuance, repurchase, or redemption of, or a
business combination involving, securities or
assets of the eligible privately held company,
if the broker reasonably believes that--
``(I) upon consummation of the
transaction, any person acquiring
securities or assets of the eligible
privately held company, acting alone or
in concert, will control and, directly
or indirectly, will be active in the
management of the eligible privately
held company or the business conducted
with the assets of the eligible
privately held company; and
``(II) if any person is offered
securities in exchange for securities
or assets of the eligible privately
held company, such person will, prior
to becoming legally bound to consummate
the transaction, receive or have
reasonable access to the most recent
year-end balance sheet, income
statement, statement of changes in
financial position, and statement of
owner's equity of the issuer of the
securities offered in exchange, and, if
the financial statements of the issuer
are audited, the related report of the
independent auditor, a balance sheet
dated not more than 120 days before the
date of the offer, and information
pertaining to the management, business,
results of operations for the period
covered by the foregoing financial
statements, and material loss
contingencies of the issuer.
``(E) Inflation adjustment.--
``(i) In general.--On the date that is 5
years after the date of the enactment of the
Small Business Mergers, Acquisitions, Sales,
and Brokerage Simplification Act of 2013, and
every 5 years thereafter, each dollar amount in
subparagraph (D)(ii)(II) shall be adjusted by--
``(I) dividing the annual value of
the Employment Cost Index For Wages and
Salaries, Private Industry Workers (or
any successor index), as published by
the Bureau of Labor Statistics, for the
calendar year preceding the calendar
year in which the adjustment is being
made by the annual value of such index
(or successor) for the calendar year
ending December 31, 2012; and
``(II) multiplying such dollar amount
by the quotient obtained under
subclause (I).
``(ii) Rounding.--Each dollar amount
determined under clause (i) shall be rounded to
the nearest multiple of $100,000.''.
SEC. 3. EFFECTIVE DATE.
This Act and any amendment made by this Act shall take effect on the
date that is 90 days after the date of the enactment of this Act.
Amend the title so as to read: A bill to amend the Securities
Exchange Act of 1934 to exempt from registration brokers
performing services in connection with the transfer of
ownership of smaller privately held companies.
Purpose and Summary
Introduced by Rep. Bill Huizenga, H.R. 2274 is a bill to
amend the Securities Exchange Act of 1934 to exempt mergers and
acquisition brokers (``M&A broker'') from registration under
that Act. The term ``M&A broker'' means a broker engaged in the
business of effecting securities transactions solely in
connection with the transfer of ownership of a smaller
privately held company. Despite the fact that an M&A broker
does not engage directly or indirectly in securities or
underwriting transactions, an M&A broker is subject to the same
regulatory regime as a traditional broker-dealer. Those
compliance costs are often passed on to the portfolio companies
that are the M&A brokers' clients, making the transfer of
ownership more costly.
Background and Need for Legislation
According to a recent white paper released by Alliance of
Merger and Acquisition Advisors (AM&AA) and the International
Business Brokers Association, ``M&A Brokers play a vital role
in helping small- and mid-cap companies manage the transition
from one owner to the next. Their services enable successful
entrepreneurs to liquidate their accumulated capital and move
on to the next phase of their lives--often retirement--while
simultaneously aiding new entrepreneurs to invest their capital
in the continued success of the company. This fosters continued
economic development, growth, and innovation, all of which are
critical to preserving and creating jobs.''
Despite the valuable services they provide to small
business owners and investors, according to Shane Hansen with
the Alliance of Merger & Acquisition Advisors, who testified at
a June 12, 2013, hearing in the Capital Markets and Government
Sponsored Enterprises Subcommittee, ``The burdens and costs of
initial broker-dealer registration and on-going compliance with
current SEC and FINRA requirements are substantial. Initial
set-up and compliance related costs often exceed $150,000. On-
going compliance costs often exceed $75,000 per year.'' Mr.
Hansen added, ``Substantially all of these costs are
necessarily passed on to the business sellers and buyers who
use the registered broker-dealer's services. These high costs
drive some business sellers and buyers to engage unregistered
M&A Brokers if they want professional assistance with their
transactions.''
In an October 8, 2013 piece on The Hill's website, Michael
Nall, President of AM&AA, a leading international organization
serving the middle-market M&A industry, stated, ``HR 2274, the
Small Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act of 2013 is an excellent bipartisan bill, one
whose time has come, and Congress should get it done before the
end of the year. It's not a sexy bill, not one that prime-time
TV will be talking about, and not one that will evoke a
question in the next presidential debates, but it's a bill that
does have teeth and it is a serious and substantive piece of
small business legislation. . . . The current one-size-fits-all
law treats the sale of a small, privately held business the
same as a Wall Street investment banker selling securities of a
public company. For instance, a sale of a local candy store
with seller financing can technically be considered a
securities transaction requiring broker-dealer registration
with the SEC. There is a big difference between the sale of a
small business to a buyer who will be active in managing the
business after the sale and the sale to passive investors of
securities of a publicly-traded company on the New York Stock
Exchange. Current law does not distinguish between these two
activities--and it should. It's time for Washington to define
the differences. HR 2274 does just that.''
According to the October 23, 2013, testimony of Tom
Quaadman, Vice President of the Center for Capital Markets
Competitiveness at the U.S. Chamber of Commerce, ``[H.R. 2274]
would simplify the registration of these brokers, it contains a
number of safeguards to prevent abuses. . . . This is a common
sense reform that should help entrepreneurs avail themselves of
expert assistance in selling their business and realizing the
full value of their enterprise, thereby providing further
incentives for aspiring entrepreneurs to push forward with
their ideas. By facilitating M&A activity, it would provide
another source of capital for smaller companies.''
Heath Abshure, testifying on October 23, 2013, on behalf of
the North American Securities Administrators Association
(NASAA), stated ``State securities administrators generally
support the targeted, well-balanced provisions of H.R. 2274 . .
. the traditional registration process for broker-dealers is
not particularly well suited for the M&A Firms. Furthermore,
individuals who work for these firms and earn commission-based
compensation in M&A deals have the additional burden of
affiliating with a registered broker-dealer firm in order to
obtain registration. . . . Investor protection is best served
when regulatory necessity and transparency is balanced sensibly
with the practicalities inherent in any business model. ''
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing on H.R. 2274 on October 24, 2013.
Committee Consideration
The Committee on Financial Services met in open session on
November 14, 2013, and ordered H.R. 2274, as amended, to be
reported favorably to the House by a recorded vote of 57 yeas
to 0 nays (Record vote no. FC-38), a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto.
1. A motion by Chairman Hensarling to report the bill (H.R.
2274), as amended, to the House with a favorable recommendation
was agreed to by a record vote of 57 yeas to 0 nays (Record
vote no. FC-38). [please see attached vote tally]
RECORD VOTE NO. FC-38
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Hensarling................. X ........ ......... Ms. Waters....... X ........ .........
Mr. Gary G. Miller (CA)........ X ........ ......... Mrs. Maloney (NY) X ........ .........
Mr. Bachus..................... X ........ ......... Ms. Velazquez.... X ........ .........
Mr. King (NY).................. X ........ ......... Mr. Watt......... X ........ .........
Mr. Royce...................... X ........ ......... Mr. Sherman...... X ........ .........
Mr. Lucas...................... X ........ ......... Mr. Meeks........ X ........ .........
Mrs. Capito.................... X ........ ......... Mr. Capuano...... X ........ .........
Mr. Garrett.................... X ........ ......... Mr. Hinojosa..... X ........ .........
Mr. Neugebauer................. X ........ ......... Mr. Clay......... X ........ .........
Mr. McHenry.................... X ........ ......... Mrs. McCarthy ........ ........ .........
(NY).
Mr. Campbell................... ........ ........ ......... Mr. Lynch........ ........ ........ .........
Mrs. Bachmann.................. ........ ........ ......... Mr. David Scott X ........ .........
(GA).
Mr. McCarthy (CA).............. X ........ ......... Mr. Al Green (TX) X ........ .........
Mr. Pearce..................... X ........ ......... Mr. Cleaver...... X ........ .........
Mr. Posey...................... X ........ ......... Ms. Moore........ X ........ .........
Mr. Fitzpatrick................ X ........ ......... Mr. Ellison...... X ........ .........
Mr. Westmoreland............... X ........ ......... Mr. Perlmutter... X ........ .........
Mr. Luetkemeyer................ X ........ ......... Mr. Himes........ X ........ .........
Mr. Huizenga (MI).............. X ........ ......... Mr. Peters (MI).. X ........ .........
Mr. Duffy...................... X ........ ......... Mr. Carney....... X ........ .........
Mr. Hurt....................... X ........ ......... Ms. Sewell (AL).. X ........ .........
Mr. Grimm...................... X ........ ......... Mr. Foster....... X ........ .........
Mr. Stivers.................... X ........ ......... Mr. Kildee....... X ........ .........
Mr. Fincher.................... X ........ ......... Mr. Murphy (FL).. X ........ .........
Mr. Stutzman................... X ........ ......... Mr. Delaney...... X ........ .........
Mr. Mulvaney................... X ........ ......... Ms. Sinema....... X ........ .........
Mr. Hultgren................... X ........ ......... Mrs. Beatty...... X ........ .........
Mr. Ross....................... X ........ ......... Mr. Heck (WA).... X ........ .........
Mr. Pittenger.................. X ........ .........
Mrs. Wagner.................... X ........ .........
Mr. Barr....................... X ........ .........
Mr. Cotton..................... X ........ .........
Mr. Rothfus.................... X ........ .........
----------------------------------------------------------------------------------------------------------------
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 2274,
among other things, exempts mergers and acquisitions brokers
from registration under the Securities Exchange Act of 1934.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, December 9, 2013.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2274, the Small
Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act of 2013.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 2274--Small Business Mergers, Acquisitions, Sales, and Brokerage
Simplification Act of 2013
CBO estimates that implementing H.R. 2274 would lead to a
minor increase in spending by the Securities and Exchange
Commission (SEC) to clarify the applicability of regulations
regarding registration requirements for brokers of mergers and
acquisitions. The SEC is authorized to collect fees sufficient
to offset its annual appropriation; therefore, CBO estimates
that the net budgetary effect of implementing the bill would be
negligible. Pay-as-you-go procedures do not apply to this
legislation because it would not affect direct spending or
revenues.
Under H.R. 2274, brokers engaging in certain securities
transactions that involve transferring ownership of a privately
held company would be exempt from requirements to register with
the SEC. CBO expects that the change in the workload of the SEC
to implement H.R. 2274 would not be significant because the
bill would not require the agency to undertake a formal
rulemaking.
H.R. 2274 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
The CBO staff contact for this estimate is Susan Willie.
The estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 2274 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013),
the Committee states that no provision of H.R. 2274 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013),
the Committee states that H.R. 2274 requires the SEC to
promulgate regulations to carry out the provisions of H.R.
2274.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This Section cites H.R. 2274 as the ``Small Business
Mergers, Acquisitions, Sales, and Brokerage Simplification Act
of 2013.''
Section 2. Merger and acquisition brokers
This section prescribes the guidelines that govern whether
and when a mergers and acquisitions broker, as defined in the
bill, is exempt from registration under the Securities Exchange
Act of 1934.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
registration and regulation of brokers and dealers
Sec. 15. (a) * * *
(b)(1) * * *
* * * * * * *
(13) Registration exemption for merger and
acquisition brokers.--
(A) In general.--Except as provided in
subparagraph (B), an M&A broker and any person
associated with an M&A broker shall be exempt
from registration under this section.
(B) Excluded activities.--An M&A broker or a
person associated with an M&A broker is not
exempt from registration under this paragraph
if such broker or associated person does any of
the following:
(i) Directly or indirectly, in
connection with the transfer of
ownership of an eligible privately held
company, receives, holds, transmits, or
has custody of the funds or securities
to be exchanged by the parties to the
transaction.
(ii) Engages on behalf of an issuer
in a public offering of any class of
securities that is registered, or is
required to be registered, with the
Commission under section 12 or with
respect to which the issuer files, or
is required to file, periodic
information, documents, and reports
under subsection (d).
(C) Rule of construction.--Nothing in this
paragraph shall be construed to limit any other
authority of the Commission to exempt any
person, or any class of persons, from any
provision of this title, or from any provision
of any rule or regulation thereunder.
(D) Definitions.--In this paragraph:
(i) Control.--The term ``control''
means the power, directly or
indirectly, to direct the management or
policies of a company, whether through
ownership of securities, by contract,
or otherwise. There is a presumption of
control for any person who--
(I) is a director, general
partner, member or manager of a
limited liability company, or
officer exercising executive
responsibility (or has similar
status or functions);
(II) has the right to vote 20
percent or more of a class of
voting securities or the power
to sell or direct the sale of
20 percent or more of a class
of voting securities; or
(III) in the case of a
partnership or limited
liability company, has the
right to receive upon
dissolution, or has
contributed, 20 percent or more
of the capital.
(ii) Eligible privately held
company.--The term ``eligible privately
held company'' means a company that
meets both of the following conditions:
(I) The company does not have
any class of securities
registered, or required to be
registered, with the Commission
under section 12 or with
respect to which the company
files, or is required to file,
periodic information,
documents, and reports under
subsection (d).
(II) In the fiscal year
ending immediately before the
fiscal year in which the
services of the M&A broker are
initially engaged with respect
to the securities transaction,
the company meets either or
both of the following
conditions (determined in
accordance with the historical
financial accounting records of
the company):
(aa) The earnings of
the company before
interest, taxes,
depreciation, and
amortization are less
than $25,000,000.
(bb) The gross
revenues of the company
are less than
$250,000,000.
(iii) M&A broker.--The term ``M&A
broker'' means a broker engaged in the
business of effecting securities
transactions solely in connection with
the transfer of ownership of an
eligible privately held company,
regardless of whether the broker acts
on behalf of a seller or buyer, through
the purchase, sale, exchange, issuance,
repurchase, or redemption of, or a
business combination involving,
securities or assets of the eligible
privately held company, if the broker
reasonably believes that--
(I) upon consummation of the
transaction, any person
acquiring securities or assets
of the eligible privately held
company, acting alone or in
concert, will control and,
directly or indirectly, will be
active in the management of the
eligible privately held company
or the business conducted with
the assets of the eligible
privately held company; and
(II) if any person is offered
securities in exchange for
securities or assets of the
eligible privately held
company, such person will,
prior to becoming legally bound
to consummate the transaction,
receive or have reasonable
access to the most recent year-
end balance sheet, income
statement, statement of changes
in financial position, and
statement of owner's equity of
the issuer of the securities
offered in exchange, and, if
the financial statements of the
issuer are audited, the related
report of the independent
auditor, a balance sheet dated
not more than 120 days before
the date of the offer, and
information pertaining to the
management, business, results
of operations for the period
covered by the foregoing
financial statements, and
material loss contingencies of
the issuer.
(E) Inflation adjustment.--
(i) In general.--On the date that is
5 years after the date of the enactment
of the Small Business Mergers,
Acquisitions, Sales, and Brokerage
Simplification Act of 2013, and every 5
years thereafter, each dollar amount in
subparagraph (D)(ii)(II) shall be
adjusted by--
(I) dividing the annual value
of the Employment Cost Index
For Wages and Salaries, Private
Industry Workers (or any
successor index), as published
by the Bureau of Labor
Statistics, for the calendar
year preceding the calendar
year in which the adjustment is
being made by the annual value
of such index (or successor)
for the calendar year ending
December 31, 2012; and
(II) multiplying such dollar
amount by the quotient obtained
under subclause (I).
(ii) Rounding.--Each dollar amount
determined under clause (i) shall be
rounded to the nearest multiple of
$100,000.
* * * * * * *