Nov. 6, 2020
Re: Notice of Proposed Exemptive Order
I am writing to express my opposition to the proposed exemptive order, as well as my opposition to the Commission codifying the M&A broker no-action letter.
By way of introduction, BA is a broker-dealer, headquartered in Pennsylvania, with roughly 180 registered representatives around the United States. I am a Principal of BA and have been involved in the securities business for over 30 years. For over 25 years I was an investment banker specializing in middle market mergers and acquisitions.
My responses to certain of the specific questions posed by the Commission are set forth below.
8. Should we limit the proposed exemption to offerings of a specific size threshold? If so, how should we define such threshold?
The proposed exemptive order is bad for all businesses, of all sizes. Even small businesses should be able to assume that the person representing them in a transaction that may be one of the most important in their businesses’ history is ethical, competent and regulated in a way designed to enforce professional conduct. However, if the Commission decides to move forward with some form of exemption, it should clearly be limited to offerings of no greater than $5 million. As mentioned above, I was an investment banker for over 25 years, and it was my experience that offerings above $5 million (and often offerings below $5 million) attract broad, strong interest from the FINRA registered investment banking community. It does not serve the purpose of “facilitating capital formation” for small companies to permit unregistered individuals to act as finders; it serves only to invite confusion, misrepresentation, conflicts of interest and suboptimal results.
14. Should Finders be able to “find” or solicit for all non-Exchange Act reporting companies or should they be able to solicit for a narrower or wider range of companies?
No, Finders should not be able to solicit for all non-Exchange reporting companies. As expressed earlier, I believe that the proposed exemptive order is bad for all investors and companies, regardless of size. However, it is beyond serious dispute that companies of a certain size have broad access to the market and are frequently called on and solicited by SEC and FINRA registered bankers and brokers to represent them in capital markets transactions. It has been my experience that companies with $10 million or more of revenue are regularly called on by registered investment bankers or brokers and have broad access to the capital markets. These companies generally don’t complain of too little professional attention, but that they are having to respond to too many offers of assistance. Combined with my earlier answer to Question #8, I believe that the proposed rule is bad for all companies of all sizes, essentially a solution in search of a problem. But if the Commission decides to move forward with some form of exemption, it is in the best interest of all market participants to limit the activities of unregistered Finders to (i) offerings of a size less than $5 million, and (ii) only for companies with revenue less than $10 million.
27. Are the explicit limitations on the activities in which Finders can or cannot engage appropriate for each tier of Finder? What other activities should be expressly permitted or prohibited for each class of Finder?
The Tier I limitations are appropriate.
The Tier II limitations are appropriate only in theory. They will not be followed in practice. For example, it is unrealistic to believe that a Finder who contacts potential investors, distributes offering materials to them, and discusses “issuer information” in the offering materials with the investor will not “provide advice as to the … advisability of the investment”. Just completely unrealistic. Once you open the door to unregistered Finders discussing potential investments with individual investors, all bets are off, and it seems clear that a significant percentage of those Finders will act in ways that are nominally “prohibited”. And who is there to prevent them from doing so? Nobody, because they won’t be registered, won’t be supervised, and won’t have their actions monitored or reviewed. The fact of the matter is that enacting this Finders exemption will result in thousands of unregistered, unsupervised and entirely unaccountable “pitchmen” pushing hard to sell investments that may, but probably won’t, be appropriate for the investor or in their best interest.
29. Should we provide further guidance on the solicitation-related activities in which Tier II Finders can engage on behalf of an issuer, for example, guidance surrounding a Tier II Finder’s discussion of issuer information and arrangement and participation in meetings with issuers and investors?
As expressed in my answer to question #27, I believe it is naive to believe that unregistered, unsupervised and unaccountable Finders will refrain from discussing any topic that will help them make a sale. Once you open this Pandora’s box, all bets are off.
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30. Should we provide guidance regarding activities of private fund advisors, M&A Brokers as defined in the M&A Broker Letter, or real estate brokers that may require registration under Section 15(a) of the Exchange Act? Should we consider codifying the M&A Broker Letter?
Codifying the M&A Broker Letter would be wrong both procedurally and substantively.
Procedurally, it would be improper for the SEC to take this action. The codification of the Letter raises issues that have nothing to do with the proposed Order. Legislation that addresses the issues presented by the Letter has been considered in past Congresses and failed to pass both Houses. This failure to enact legislation evidences the difficult issues presented by the regulatory status of M&A brokers, and in the absence of clear Congressional direction it is wrong to codify the Letter.
Substantively, the M&A Broker Letter has the potential to do significantly more damage than even the proposed Finders exemption. It throws open the doors to unlicensed, untrained and unsupervised brokers to “sell” their way into engagements for which they are not qualified.
The strength of America is based on small business and private enterprise. But although these entrepreneurs understand all of the “ins and outs” of their industry, they often have not been exposed to the rules and intricacies of the mergers and acquisitions marketplace. They deserve to know that the person selling their business - often constituting virtually their entire net worth - is both honest and competent. We need to do more to protect small business owners, not less. The Broker-Dealer regulatory framework established and overseen by the SEC and FINRA has for decades provided valuable educational and supervisory support to the industry and maintained a marketplace with high professional standards – to throw it out only invites manipulation. Small businesses deserve to know that their advisor meets at least minimum standards for both ethical and professional behavior, and that these standards are being enforced by an independent body. Broker-Dealer registration is cost effective, and there is no data to suggest that the modest cost of SEC and FINRA review and regulation adds anything to the cost to the ultimate consumer, i.e. the entrepreneur. And a new rule (the Capital Acquisition Broker, or “CAB” rule) makes it even easier and inexpensive for capital markets professionals to be registered. In addition to the negative impact on the individual entrepreneur, dismantling the Broker-Dealer M&A regulatory framework invites through weaker or no oversight a variety of broader problems, such as money laundering. Currently all M&A transactions require anti-money laundering procedures; without regulation, foreign individuals or entities would find it much easier to invest “dirty” money in the US.
Daniel N. Pickens
Principal
BA Securities, LLC