[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.

____________________