Bipartisan bill will help level the playing field for small businesses

U.S. small businesses were among the hardest hit by the pandemic. Many were shut down by state and local governments while their employees were displaced, and their customers barred from entry. Meanwhile, their business was diverted to “essential” big box stores and Amazon and their supply and distribution chains were disrupted. Now, small businesses are also struggling because they must compete with the federal government’s enhanced unemployment benefits to re-engage workers.

Small businesses need to grow, consolidate, and restructure to recover from the challenges that have been exacerbated by the pandemic. Our Baby Boomer entrepreneurs need successors, rather than closing their doors and forcing employees into unemployment lines. We must level the playing field that gives unfair advantages to “the big guys.” But how?

Merger and acquisition (M&A) advisors and business brokers (M&A brokers) perform critical roles in preparing privately held businesses for a sale or merger by finding and screening potential business buyers or partners. These brokers play a vital role in navigating M&A transactions to successful outcomes. However, under current securities laws these business sellers and buyers commonly have no choice but to engage Wall Street-type registered investment bankers to perform these services — yet another advantage enjoyed by “the big guys.” When an M&A transaction involves the purchase, sale, or exchange of stock or other securities (often not known for months into the M&A process), an M&A broker must be registered as or with a broker-dealer regulated by the Securities and Exchange Commission (SEC) and FINRA. SEC and FINRA regulation comes with very substantial initial costs and on-going regulatory costs ultimately borne by the sellers and/or buyers who use their professional services. But why?

In 2014, the staff of the SEC issued its M&A Brokers No-action Letter concluding that no enforcement action would be recommended if an M&A broker was not broker-dealer registered so long as 10 simple conditions in private M&A transaction were satisfied. The SEC staff concluded that, in light of the recurring facts and circumstances in private M&A transactions, SEC registration is not warranted, even though otherwise required by a literal reading of the Securities Exchange Act of 1934. But why did that fail to solve this problem?

The SEC staff’s no-action position cannot change federal securities law — that’s up to Congress. Amending the Securities Exchange Act to conditionally exempt M&A Brokers from SEC broker-dealer registration would be accomplished by passing legislation I have introduced to solve this problem known as the Small Business Mergers, Acquisitions, and Sales Brokerage Simplification Act of 2021. The SEC staff’s M&A Brokers No-action Letter and a length list of similar staff no-action letters spanning nearly four decades affirms the public policy foundation for this legislation. H.R. 935 codifies and includes the extensive investor protections in the SEC M&A Brokers No-action Letter, while not affecting the SEC’s jurisdiction over M&A brokers. H.R. 935 would remove unwarranted regulatory costs, allowing privately-owned business sellers and buyers to engage unregistered M&A brokers, rather than expensive Wall Street-type investment bankers. This one easy step would help level the playing field for small business owners, including retirees, by reducing the costs of their M&A transactions.

This legislation and its underlying public policy is supported by the SEC staff’s no-action letter and the broadest range of legislative advocates including: the U.S. Chamber of Commerce, the Association of State Securities Regulators, the North American Securities Administrators Association (NASAA). All of the national, state, and regional professional associations of M&A brokers support passage of H.R. 935. Unsurprisingly, the nominal opposition from Wall Street-type registered investment banking firms has been focused on protecting their perceived barriers to competition from lower-cost and more widely available M&A brokers.

H.R. 935 is a truly bipartisan small business bill. In recent years, this legislation has passed the House twice unanimously. In prior sessions it has been amended to closely track with the SEC M&A Brokers No-action Letter (different only because of the legislative process and related timing). As amended, this legislation has received strong support from past chairs and ranking members of the U.S. House Financial Services Committee. In fact, in 2017, then Ranking Member Maxine Waters (D-Calif.) stated for the record:

I am pleased that this Congress, Representative Sherman and Representative Huizenga have worked on a bipartisan basis to add these protections back in through an amendment. If so amended, I will support H.R. 477, which would strike the right balance between regulatory relief and the protection of small companies and their investors.

She further observed:

As our Nation’s baby boomers head into retirement and look to sell their privately owned businesses to a new generation of entrepreneurs, it is important that they are able to do so in an efficient and cost-effective manner.

Importantly, she concluded:

This is an important bill for all of us. We are all so supportive of our small businesses. We want them to do well, and we do not want them to be hindered by unnecessary regulations.

Our country thinks Congress is broken, and who can blame them — we argue over everything. H.R. 935 is simple, laser-focused, adds nothing to the federal deficit, and allows the SEC and FINRA to more effectively focus their limited regulatory resources on their mission of protecting public markets and passive investors. Let’s show the American people we can work together to level the playing field for our privately-owned small business entrepreneurs.

Bill Huizenga represents Michigan’s 2nd District and is ranking member of the Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.