Hello WSO Community,
I have a question that has been somewhat answered on this blog, but not completely. I have seen some discussion on whether an investment bank that is not registered with FINRA legit. I understand that financial institutions are allowed to work on M&A and leveraged finance services, as long as they do not transact in securities. However, I was wondering if these (non-FINRA) firms are less prestigious in terms of exit opportunities? I would like to eventually move to a bulge bracket or more aggressive middle market Ibank. I am obviously at some degree of a disadvantage, but is it a major milestone? Thank you.
Regards
They are operating illegally, as are most boutique investment banks. They fly under the radar and there doesn't seem to be much enforcement action by FINRA, the SEC, or the states. Securities transactions are very broadly defined and thus encompass every transaction done at a boutique investment bank. The only way around going through registration of the firm and reps with FINRA is if everything is done strictly on a consulting basis with no commissions or success fees.
Google: Asset Deal Vs. Stock Deal
I am not going to go into very much detail because you need to do the research to remember the information long term.
The sale of a business is always a securities transaction if… It is a “stock” sale vs an “asset” sale; It involves an exchange or issuance of stock in a merger; It involves the issuance or exchange of stock for assets; It involves the sale of stock to an ESOP.
The sale of a business may be a securities transaction if… – It involves an earn-out; – It involves a “Seller’s Note.”
Securities laws regulate . . . an offer, sale, exchange or issuance of securities. disclosure of material information to the parties. the intermediary who is “effecting” the transaction; Requires broker-dealer registration and regulation; Requires FINRA (f/k/a NASD) membership.
A “broker” is “any person engaged in the business of effecting transactions in securities for the account of others.” Receipt of transaction-based compensation (i.e., a success fee) is a key factor.
Registration is required by finders, business brokers, and others engaged in these activities: Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity; Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved); (http://www.sec.gov/divisions/marketreg/bdguide.htm).
In any business sale which involves the purchase, sale, issuance, or exchange of stock or other types of securities… US & state securities laws apply in addition to state laws like real estate licensing laws.
Why are “Asset Sales” included as a regulated activity under Series 79?
Upon learning that "asset sales" are included in the list of regulated activities under the new rule, many business brokers and M&A advisors have mistakenly concluded that the SEC and FINRA are "breaking new ground" that was previously the sole province of the states, and/or state real estate law.
Examining FINRA’s Series 79 exam study guide suggests that the reference to “asset sales” pertains to transactions where the Buyer issues stock or other securities in exchange of the Seller’s assets, not purely asset sales that do not involve any securities. This is how some firms get away with not being registered with FINRA and is dependent upon the formation of the Company. (Ex. S-Corp, C-Corp, LLC, etc....) Asset sales for cash consideration are generally exempt from securities laws and FINRA jurisdiction if conducted outside of the registered B-D firm.
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