February 20, 2025

When it comes to mergers and acquisitions (M&A), brokers play a crucial role in facilitating transactions, connecting buyers and sellers, and guiding clients through the complex process. Many M&A brokers often look to the federal broker exemption as a way to avoid the formalities and costs associated with FINRA (Financial Industry Regulatory Authority) registration. However, depending on the nature of the business and the scope of services provided, it’s worth considering FINRA registration via a reliable broker-dealer such as Britehorn Securities. Here’s why.

1. The Limitations of the Federal Broker Exemption

For many years, unregistered business brokers have been operating under the federal broker exemption (under Section 15 of the Securities Exchange Act of 1934) that allows certain individuals involved in M&A transactions to avoid the heavy regulatory burden that comes with FINRA registration. The amendments to this Act that Congress enacted in late 2022 also allowed business brokers to receive commissions for certain brokerage services. However, all these rules have strict limitations that could be risky for some brokers.

It’s important for brokers to understand the limitations of their protection under current guidelines. For one, the recent Congressional changes only apply to change-of-control transactions where the buyer will have “control” of (e.g., have the right to vote or direct the sale of 25% of the shares of) the eligible privately held company. The new rule also imposes limitations on the size of the acquired privately held company (either $25 million in earnings or $250 million in gross revenues). In addition, it remains to be seen whether any of the various states will adopt new exemptions or amend their current M&A broker exemptions to match these terms. They are within their rights to insist that business broker transactions only be conducted by FINRA-licensed professionals.

While the loopholes in the law may offer attractive shortcuts for some businesses, they can significantly limit an M&A broker’s ability to earn commissions or be involved in certain kinds of transactions.

2. Access to a Broader Range of Transactions

While relying on the federal broker exemption might seem simple at first, it can lead to complications down the line, particularly as business models evolve. A broker may inadvertently take on additional responsibilities or change the scope of their services, inadvertently stepping outside the confines of the exemption. Even relying on real estate licenses (which vary widely from state to state) can be risky. FINRA registration opens up the possibility for brokers to engage in a wider range of transactions.

By choosing to be FINRA-registered from the start, brokers are less likely to encounter issues in the future as their business grows or evolves. They can build their practices on a firm foundation, knowing they are compliant with all regulatory requirements, which reduces the risk of fines, penalties, or business interruptions. For example, we here at Britehorn Securities encourage all our registered representatives to consider taking their Series 82 Private Placement exam, as it allows them to also engage in institutional capital raising in case their M&A opportunities evolve into growth capital raises or minority recapitalizations. Even better, the Series 7 General Securities exam, allows representatives to do all that and also engage with public securities.

3. Credibility and Trust with Clients

Having FINRA registration can greatly enhance the broker’s credibility in the eyes of clients. In an industry where trust and reputation are paramount, a FINRA-registered broker is viewed as meeting industry standards and being subject to regulatory oversight. Clients tend to feel more comfortable working with professionals who have undergone the necessary vetting and are held to high regulatory standards.

Additionally, FINRA-registered brokers have access to the protections and resources that come with membership in a regulated body, such as dispute resolution mechanisms and compliance tools, adding an extra layer of security for both the broker and their clients.

4. A More Transparent Legal Framework

While the federal broker exemption may seem like a convenient shortcut, it leaves brokers walking a fine line between compliance and potential legal pitfalls. Operating without proper registration can be risky if a broker inadvertently crosses into activities that go beyond the scope of the exemption.

On the other hand, FINRA registration offers brokers clear guidelines on what is and isn’t allowed. FINRA has established rules and regulations that outline acceptable practices, and being part of this framework helps brokers stay compliant with the law. In case of a dispute or audit, being registered can provide clear evidence that the broker is following the rules, reducing the risk of regulatory action or legal challenges.

In addition, more and more lawyers on both sides of deals (buyer and seller) are advising their clients against paying commissions to unregistered business brokers because of the legal “gray area” and the risks posed to buyers under state and federal laws when participating in securities transactions where an unregistered broker is involved. Unregistered business brokers could do everything right on a transaction, find the perfect buyer, and still lose out on a fee based on a lawyer’s recommendation. Getting FINRA-registered is one extra step to ensure getting paid properly on a deal.

5. Long-Term Growth and Flexibility

M&A brokers looking to scale their business will benefit from the flexibility and opportunities that come with FINRA registration. There is no guarantee that the SEC “gray area” will remain a gray area. The SEC could elect to change its position at any time — or decide that a broker’s particular transaction falls outside the limited circumstances outlined in the letter.

As the market and business models evolve, a registered broker can easily transition to offering more specialized services or expand into other areas of securities trading without encountering the regulatory roadblocks that might be present under the federal broker exemption. Additionally, the credibility built while being FINRA-registered can be instrumental in long-term growth. It can lead to more partnerships, expanded business networks, and access to new markets.

Conclusion

While the federal broker exemption may seem like a straightforward way to enter the M&A business, it’s important to consider the potential limitations and risks that come with it. FINRA registration not only enables brokers to access a wider range of transactions but also provides an added layer of protection, credibility, and long-term opportunities for growth. For M&A brokers aiming to be competitive, scale their business, and avoid future compliance issues — becoming FINRA-registered is often the better choice in the long run. Please reach out to us at [email protected] if you’d like to talk about the options we offer to help facilitate your registration in the most seamless way possible, while adding minimal extra work to your business.