[Congressional Record Volume 163, Number 200 (Thursday, December 7, 2017)]
[House]
[Pages H9739-H9742]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      SMALL BUSINESS MERGERS, ACQUISITIONS, SALES, AND BROKERAGE 
                       SIMPLIFICATION ACT OF 2017

  Mr. HENSARLING. Mr. Speaker, pursuant to House Resolution 647, I call 
up the bill (H.R. 477) 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, and ask 
for its immediate consideration in the House.
  The Clerk read the title of the bill.
  The SPEAKER pro tempore. Pursuant to House Resolution 647, an 
amendment in the nature of a substitute consisting of the text of Rules 
Committee Print 115-43 is adopted and the bill, as amended, is 
considered read.
  The text of the bill, as amended, is as follows:

                                H.R. 477

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Small Business Mergers, 
     Acquisitions, Sales, and Brokerage Simplification Act of 
     2017''.

     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 shall be exempt from registration under this 
     section.
       ``(B) Excluded activities.--An M&A broker is not exempt 
     from registration under this paragraph if such broker 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).
       ``(iii) Engages on behalf of any party in a transaction 
     involving a public shell company.
       ``(C) Disqualifications.--An M&A broker is not exempt from 
     registration under this paragraph if such broker is subject 
     to--
       ``(i) suspension or revocation of registration under 
     paragraph (4);
       ``(ii) a statutory disqualification described in section 
     3(a)(39);
       ``(iii) a disqualification under the rules adopted by the 
     Commission under section 926 of the Investor Protection and 
     Securities Reform Act of 2010 (15 U.S.C. 77d note); or
       ``(iv) a final order described in paragraph (4)(H).
       ``(D) 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.
       ``(E) 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 privately held 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, 
     and any person associated with 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 fiscal year-end financial statements of 
     the issuer of the securities as customarily prepared by the 
     management of the issuer in the normal course of operations 
     and, if the financial statements of the issuer are audited, 
     reviewed, or compiled, any related statement by the 
     independent accountant, 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.

       ``(iv) Public shell company.--The term `public shell 
     company' is a company that at the time of a transaction with 
     an eligible privately held company--

       ``(I) has any class of securities registered, or required 
     to be registered, with the Commission under section 12 or 
     that is required to file reports pursuant to subsection (d);
       ``(II) has no or nominal operations; and
       ``(III) has--

       ``(aa) no or nominal assets;
       ``(bb) assets consisting solely of cash and cash 
     equivalents; or
       ``(cc) assets consisting of any amount of cash and cash 
     equivalents and nominal other assets.
       ``(F) 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 
     2017, and every 5 years thereafter, each dollar amount in 
     subparagraph (E)(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.''.

[[Page H9740]]

  


     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.

  The SPEAKER pro tempore. The bill, as amended, shall be debatable for 
1 hour equally divided and controlled by the chair and ranking minority 
member of the Committee on Financial Services.
  After 1 hour of debate, it shall be in order to consider the further 
amendment printed in part A of House Report 115-443, if offered by the 
Member designated in the report, which shall be considered read, shall 
be separately debatable for the time specified in the report equally 
divided and controlled by the proponent and an opponent, and shall not 
be subject to a demand for a division of the question.
  The gentleman from Texas (Mr. Hensarling) and the gentlewoman from 
California (Ms. Maxine Waters) each will control 30 minutes.
  The Chair recognizes the gentleman from Texas.


                             General Leave

  Mr. HENSARLING. Mr. Speaker, I ask unanimous consent that all Members 
have 5 legislative days in which to revise and extend their remarks and 
submit extraneous material on the bill under consideration.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from Texas?
  There was no objection.
  Mr. HENSARLING. Mr. Speaker, I yield myself such time as I may 
consume.
  Mr. Speaker, if it weren't for the last moment, a lot of things 
wouldn't get done in life, but last evening, the ranking member and I 
came to a meeting of the minds on a path forward for H.R. 477. So in 
the interest of efficiency of time for the House, I want to thank the 
ranking member for her willingness to work on a bipartisan basis to 
move this bill forward.
  Unfortunately, Mr. Speaker, our small businesses labor under a 
gazillion regulations, some of which are quite good and quite helpful; 
but, in the aggregate, they can be a very heavy burden and cost upon 
our small businesses. One is an unnecessary registration system for 
small business brokers.
  I want to thank the gentleman from Michigan (Mr. Huizenga) for his 
leadership to ensure that they have a simplified registration regime, 
which can help our small businesses as they are ready to engage in 
sales or mergers or other transactions. It is a good, bipartisan piece 
of legislation. I thank him for his leadership.
  Again, I thank the ranking member for working on a bipartisan basis, 
and I reserve the balance of my time.
  Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself 5 
minutes.
  H.R. 477 seeks to provide a statutory exemption from registration 
with the Securities and Exchange Commission, or SEC, for certain 
brokers who facilitate the merger or acquisition of small businesses, 
known as M&A brokers.
  When Congress first considered this exemption in a similar bill 
during the 113th Congress, our goal was to prompt the SEC to provide 
regulatory relief for these brokers from ill-fitting restrictions 
designed for persons helping companies raise capital rather than 
facilitating their transfer of ownership.
  We succeeded. Two weeks after the House passed that bill, the SEC 
issued a no-action letter, which contained staff's view that, if an M&A 
broker complied with the terms and conditions of the letter, it would 
recommend that the SEC not take enforcement action against that broker 
for failing to register with the Commission.
  Specifically, the no-action letter required the M&A broker to abide 
by certain commonsense restrictions to prevent such an exemption from 
being misused to raise capital or abused by bad actors.
  According to the bill's proponents, H.R. 477 is still necessary to 
provide legal certainty since the no-action letter is merely the 
nonbinding opinion of SEC staff. I understand that concern; however, 
the bill inexplicably omits several of the conditions contained in the 
no-action letter that protect small businesses and their investors.
  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.
  In particular, the amended bill would require an M&A broker that 
represents both the seller and the buyer to provide them with clear, 
written disclosures and obtain their consent to that conflict of 
interest; prohibit M&A brokers from misusing the exemption to raise 
capital rather than transfer ownership of small businesses; prohibit 
shell companies from using the exemption as a backdoor way to take a 
small business public; and prohibit fraudsters and other bad actors 
from using the exemption.
  In addition, the bill would not change the statutory definition of 
broker, thereby preserving the SEC's ability to investigate and bring 
enforcement actions for violations of the antifraud provisions in the 
securities laws.
  The bill also would limit the relief to mergers and acquisitions 
involving companies with less than $250 million in annual gross 
revenues, which is the total income of the company, or $25 million in 
annual earnings, which is the amount of income minus expenses. The 
amendment would then provide the SEC with the authority to modify these 
thresholds as necessary or appropriate in the public interest or for 
the protection of investors.
  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. If amended, H.R. 477 would allow them to do just 
that, and so I would support the bill.
  I would like to thank my colleagues. I would like to thank Mr. 
Hensarling. I would like to thank Mr. Sherman.
  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.
  Mr. Speaker, I yield back the balance of my time.
  Mr. HENSARLING. Mr. Speaker, I yield 1 minute to the gentleman from 
Ohio (Mr. Chabot), the distinguished chairman of the Small Business 
Committee.
  Mr. CHABOT. Mr. Speaker, I thank the gentleman for yielding.
  I rise in support of H.R. 477, and I want to thank Chairman 
Hensarling and Chairman Huizenga for their hard work on this effort.
  While we are finally seeing improvements in our economy, we will not 
experience its full potential until we fully unleash American small 
businesses.
  As chairman of the House Small Business Committee, I frequently hear 
from small-business owners that regulations are preventing their growth 
and expansion. The bill before us today addresses one of the many 
regulatory hurdles that stand in the way of small business development. 
Reducing red tape on brokers would decrease the burdens on small 
businesses that are going through the next phase of their growth, 
including transitions in ownership.
  This should be a time of expansion and increased opportunities, not 
higher cost and bureaucratic red tape. Let's work together on behalf of 
our Nation's small businesses so they can continue to grow today and 
create the jobs of tomorrow.

                              {time}  1530

  Mr. HENSARLING. Mr. Speaker, I yield 3 minutes to the gentleman from 
Michigan (Mr. Huizenga), who is the sponsor of the legislation and the 
chairman of the Financial Services Subcommittee on Capital Markets, 
Securities, and Investments.
  Mr. HUIZENGA. Mr. Speaker, I appreciate the chairman's hard work on 
this.
  The mission of the Securities and Exchange Commission is to protect 
investors; maintain fair, orderly, and efficient markets; and 
facilitate capital formation. As part of that mission, the SEC was 
mandated by law to conduct an annual forum focusing on small business 
capital formation.
  For nearly a decade, the SEC Government-Business Forum on Small 
Business Capital Formation has highlighted the merger and acquisition 
broker proposal as one of its top recommendations to help small 
businesses.
  The MAB proposal would address securities regulation of business 
brokers

[[Page H9741]]

and merger and acquisition advisers who are in the business of 
facilitating the purchase and sale of privately held small companies. 
This proposal would significantly reduce their Federal regulation 
compliance costs, which can initially exceed $150,000 per broker and, 
after that, cost $75,000 per additional year. However, the SEC has 
never acted on this, despite their recommendation.
  As we see more and more baby boomers retire, it has been estimated 
that $10 trillion--with a T--of equity is locked up into these small, 
family-owned typically privately held businesses.
  Today the Federal securities regulations require an M&A broker to be 
registered and regulated by the SEC and FINRA just like a Wall Street 
investment banker buying or selling publicly traded companies.
  Anyone who is trying to sell a hometown business, like a family 
hardware store, a jewelry store, or even a pizza parlor, suddenly has 
to be treated like they are being sold or bought by a Wall Street 
investment bank regardless of their size. We don't think that is right.
  But the impact of this legislation is meaningful because it reduces 
transaction costs, promoting competition among those small business 
brokers and facilitating private business merger, acquisitions, and 
sales of these small businesses. This small business initiative 
promotes economic growth and development.
  So we have worked very closely across the aisle with our colleagues, 
and I thank them. Even in today's politically charged environment that 
we have, it is nice to show the American people that we can actually do 
some positive, efficient, and effective initiatives with bipartisan 
support.
  I would like to thank my colleagues, Representatives Posey, Higgins, 
Sherman, and Maloney, as well as Chairman Hensarling and Ranking Member 
Waters for their efforts to reach a bipartisan consensus and to get the 
important legislation across the finish line.
  I have been working on this now for three Congresses, and we believe 
that we have a very positive spot here where we can all support this. I 
want to encourage my colleagues to support and vote for H.R. 477 and 
demonstrate that Congress can actually work in a bipartisan manner and 
get some things done for the American people.
  Mr. Speaker, I urge swift consideration.
  Mr. HENSARLING. How much time do I have remaining, Mr. Speaker?
  The SPEAKER pro tempore. The gentleman from Texas has 25 minutes 
remaining.
  Mr. HENSARLING. Mr. Speaker, I will conclude by saying that, again, 
this is a commonsense reform. It is a balanced reform. It is good for 
small business. It is bipartisan. I urge all of my colleagues to adopt 
H.R. 477.
  Again, I thank the ranking member and the gentleman from California 
for their leadership to work on a bipartisan basis.
  Mr. Speaker, I yield back the balance of my time.
  The SPEAKER pro tempore. All time for debate on the bill has expired.


                 Amendment No. 1 Offered by Mr. Sherman

  Mr. SHERMAN. Mr. Speaker, I have an amendment at the desk.
  The SPEAKER pro tempore. The Clerk will designate the amendment.
  The text of the amendment is as follows:

       Page 2, line 18, strike ``public''.
       Page 2, line 19, insert before the period the following ``, 
     other than a business combination related shell company''.
       Page 2, after line 19, insert the following:
       (iv) Directly, or indirectly through any of its affiliates, 
     provides financing related to the transfer of ownership of an 
     eligible privately held company.
       (v) Assists any party to obtain financing from an 
     unaffiliated third party without--

       (I) complying with all other applicable laws in connection 
     with such assistance, including, if applicable, Regulation T 
     (12 C.F.R. 220 et seq.); and
       (II) disclosing any compensation in writing to the party.

       (vi) Represents both the buyer and the seller in the same 
     transaction without providing clear written disclosure as to 
     the parties the broker represents and obtaining written 
     consent from both parties to the joint representation.
       (vii) Facilitates a transaction with a group of buyers 
     formed with the assistance of the M&A broker to acquire the 
     eligible privately held company.
       (viii) Engages in a transaction involving the transfer of 
     ownership of an eligible privately held company to a passive 
     buyer or group of passive buyers. For purposes of the 
     preceding sentence, a buyer that is actively involved in 
     managing the acquired company is not a passive buyer, 
     regardless of whether such buyer is itself owned by passive 
     beneficial owners.
       (ix) Binds a party to a transfer of ownership of an 
     eligible privately held company.
       Page 3, after line 16, insert the following (and 
     redesignate subsequent clauses accordingly):
       ``(i) Business combination related shell company.--The term 
     `business combination related shell company' means a shell 
     company that is formed by an entity that is not a shell 
     company--

       ``(I) solely for the purpose of changing the corporate 
     domicile of that entity solely within the United States; or
       ``(II) solely for the purpose of completing a business 
     combination transaction (as defined under section 230.165(f) 
     of title 17, Code of Federal Regulations) among one or more 
     entities other than the company itself, none of which is a 
     shell company.''.

       Page 4, line 1, strike ``officer exercising'' and insert 
     ``corporate officer of a corporation or limited liability 
     company, and exercises''.
       Page 4, line 4, strike ``20'' and insert ``25''.
       Page 4, line 7, strike ``20'' and insert ``25''.
       Page 4, line 12, strike ``20'' and insert ``25''.
       Page 5, after line 18, insert the following flush-left 
     text: ``For purposes of this subclause, the Commission may by 
     rule modify the dollar figures if the Commission determines 
     that such a modification is necessary or appropriate in the 
     public interest or for the protection of investors.''.
       Page 7, strike lines 15 through 25 and insert the 
     following:
       ``(v) Shell company.--The term `shell company' means a 
     company that at the time of a transaction with an eligible 
     privately held company--

       ``(I) has no or nominal operations; and
       ``(II) has--''.

  The SPEAKER pro tempore. Pursuant to House Resolution 647, the 
gentleman from California (Mr. Sherman) and a Member opposed each will 
control 5 minutes.
  The Chair recognizes the gentleman from California.
  Mr. SHERMAN. Mr. Speaker, I yield myself such time as I may consume.
  Mr. Speaker, I rise today to offer an amendment to H.R. 477, the 
Small Business Mergers, Acquisitions, Sales, and Brokerage 
Simplification Act of 2017.
  I want to thank the gentleman from Michigan (Mr. Huizenga) for 
working with me on this amendment. It has been a pleasure to work with 
him on this bill over a period of three Congresses.
  With the adoption of this amendment, the bill will be in a form that 
will secure support from both sides of the aisle, not only my support, 
but, more importantly, the ranking member's support.
  In the 113th Congress, the House of Representatives supported a 
similar bill to provide relief to the M&A community by providing that, 
in certain circumstances, a small business merger or acquisitions 
broker would not have to register.
  As a result of that action by the House, which was not matched by 
action in the Senate, the Securities and Exchange Commission understood 
the wisdom of this House and introduced a no-action letter dated 
January 2014 to provide the same level of relief requested by the 
House.
  In their no-action letter, however, the SEC placed several 
limitations on the exemption from registration that were not included 
in the House bill, but, with this amendment, will be included in this 
year's bill.
  These limitations provided additional protections for investors and 
small businesses. It excluded bad actors and shell companies. It 
prohibited passive buyers in the M&A transaction to ensure that 
companies cannot use this exemption from registration as a capital-
raising mechanism. It prohibited an M&A broker from providing financing 
for the transfer. It prohibited M&A brokers from binding a party to a 
transfer of ownership. I think this is most important: it required 
that, to be eligible, a broker would have to disclose to both parties 
and get their consents if they are being paid by both parties. So if 
there is both a seller's commission and a buyer's commission, you have 
to tell the buyer and the seller.
  Now, those who want to step outside this safe harbor can simply 
register. But those who will be exempt from registration need to comply 
with these six elements.
  The Small Business Mergers, Acquisition, Sales, and Brokerage 
Simplification Act will codify the SEC's no-action letter and provide 
certainty to

[[Page H9742]]

small business merger and acquisition brokers.
  In the last Congress, I opposed the bill because it included only two 
of the six restrictions that were included by the SEC. With this 
amendment, the bill will include all of the restrictions. This is a 
bipartisan amendment and it includes all the limitations of the SEC's 
no-action letter. It has been a pleasure to work with the gentleman 
from Michigan (Mr. Huizenga) on it.
  In addition, our amendment provides that the SEC has the rulemaking 
authority to determine the correct thresholds for gross revenues and of 
EBITDA--that is to say, earnings of the company before interest, taxes, 
depreciation, and amortization--in determining whether a company 
qualifies as an eligible company under this bill.
  The SEC is the agency with the expertise to do this. I encourage them 
to examine this issue closely and to ensure that any threshold in place 
is evidence-based. I encourage them in future years to inflation-adjust 
whatever limitation dollar figures they have in their regulations.
  I am pleased to offer this amendment with my colleague, Mr. Huizenga, 
whom I may have previously identified as the gentleman from Michigan. I 
offer it also with the support of the ranking member. I urge the 
passage of this amendment, as it will ensure bipartisan support for the 
bill.
  Mr. Speaker, I reserve the balance of my time.
  Mr. HUIZENGA. Mr. Speaker, I claim the time in opposition to the 
amendment, even though I am not opposed.
  The SPEAKER pro tempore. Without objection, the gentleman from 
Michigan is recognized for 5 minutes.
  There was no objection.
  Mr. HUIZENGA. Mr. Speaker, I appreciate the opportunity to address 
the amendment and the work of Mr. Sherman, Mrs. Maloney, the ranking 
member, and, obviously, our chairman as well. So I do agree and accept 
this amendment as a friendly amendment.
  It does confirm what the no-action letter has put in place. I believe 
it properly makes sure that the SEC's role is preserved but that 
Congress has its imprimatur on this as well. It aligns the bill with 
the principles outlined in the SEC's no-action letter.
  I think this is a good, reasonable amendment. I am pleased to work 
with the gentleman from California as well. I am glad that we can get 
this settled in a timely manner.
  Mr. Speaker, I yield back the balance of my time.
  Mr. SHERMAN. Mr. Speaker, I thank the gentleman from Michigan, and I 
yield back the balance of my time.
  The SPEAKER pro tempore. Pursuant to the rule, the previous question 
is ordered on the bill, as amended, and on the amendment offered by the 
gentleman from California (Mr. Sherman).
  The question is on the amendment offered by the gentleman from 
California (Mr. Sherman).
  The amendment was agreed to.
  The SPEAKER pro tempore. The question is on the engrossment and third 
reading of the bill.
  The bill was ordered to be engrossed and read a third time, and was 
read the third time.
  The SPEAKER pro tempore. The question is on the passage of the bill.
  The question was taken; and the Speaker pro tempore announced that 
the ayes appeared to have it.
  Mr. HENSARLING. Mr. Speaker, on that I demand the yeas and nays.
  The yeas and nays were ordered.
  The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further 
proceedings on this question will be postponed.

                          ____________________