22 May HR 2274 & the SEC No Action Letter–The Pros and Cons of a Little M&A Industry Deregulation
Those who really have a pulse on this market know there are some real changes a foot which will impact deal makers and makees alike. Thanks to HR 2274–part of the JOBS Act 2.0–there are a number of key provisions that tend to deregulate the industry and turn things on their head a bit. Deregulation is a bit of a double-edged sword. It cuts more than one direction and can often have unintended negative consequences, along with the positive ones. So I don’t feel the need to dive in to do explaining of what HR 2274 means, its rules and how it will ultimately impact, I’m going to share a few links that explain the new law much more succinctly so I don’t have to reinvent the wheel here.
- JW has a great piece outlining some of the rules for unregistered deal-makers in PDF form (I would have linked to the original, but I received it in an email so if anyone has the original, I would be happy to link to it directly).
- Sutherland also has a great article on the new rules, regs, boundaries and opportunities for unregistered M&A advisors.
- If you’re really motivated, you can read the bill in its entirety here or get another synopsis here.
The “Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act” will open up some doors, but could have some negative impacts on the industry as well. Outlined below are some potential pros and cons of the law and how we as intermediaries may be impacted.
One of the biggest boons to the whole simplification of the rules is that now there are rules. For so long, the SEC mostly turned a blind eye to deals that went on behind the scenes where licenses weren’t involved. The times when they did get involved were typically when things really hit the fan and deals would be unwound. The process also helps to boost the “finders” market. Where once finders were considered the dark knights of the industry, they’re now able to legally be paid for their services of performing outreach and finding deals. This will hopefully help to grease the skids somewhat and may also change the model a bit to one that can be more easily outsourced to a firm focused solely on finding deals, rather than doing them. That’s an interesting twist on a model that has worked very well for the likes of Generational Equity and others, but which has been a bit tainted because of the stiff sales tactics.
Furthermore, it expands the potential liquidity and opportunity for some on the very low-end of the market. For instance, a smaller business broker with the connections to larger firms, can reap the benefits of providing the services to clients within his network who may have larger companies that he could possibly represent in an M&A transaction. Not that this wasn’t going on before, but now it can be done above board and within the law.
Because many would-be advisory firms in the lower middle-market are nothing more than commercial real estate agents turned mergers and acquisitions consultants, it tends to cheapen things in my mind. I still think there needs to be some type of examination and barrier-to-entry in the industry. Otherwise, it will probably explode with many pretenders looking to insert their services into nearly any deal on the market. Barriers-to-entry may be slighted as a way to overly-inflate the salaries of workers in a particular market by dampening supply, but ultimately it means more than just dampening supply. It’s more about providing good service. If the industry gets tainted because of inexperience, malpractice or stupidity, then everyone suffers. The said truth is:
You now need less in terms of credentials and licensing to do M&A work, than you do to cut hair or do nails.
Luckily the complexities of M&A transactions are, in and of themselves, a hindrance and a barrier-to-entry for new agents and representatives entering the market, but now that we have Google Search and WebMD, everyone’s an self-assessed expert. Will the industry be forever tainted by the changes in the law? Probably not. I suspect that because of the “blind eye” turning for so long by the SEC that unlicensed reps already existed where they would exist and that we may not see a large increase in them. I may be wrong. Only time will tell.