We recently announced our registration with the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization for the Securities and Exchange Commission (SEC) that protects investors and ensures fair and honest markets. Pursuing this registration and becoming an official investment bank, was motivated by our dedication to protect our clients in the ever-changing regulatory landscape of healthcare transactions. Along with compliance protections, this advancement will allow us to provide a wide range of M&A support services to our lower-middle market healthcare clients.
While there are many categories of intermediaries in healthcare M&A, it is important to understand the distinctions between each role and the risks associated with hiring non-registered representation. In this article, we address the risks of working with non-registered intermediaries as well as the added benefits afforded to sellers when working with a registered agent of a Broker-Dealer.
Clarifying Roles: Compliance & Conduct
Partnering with a reputable and compliant intermediary is crucial when selling your healthcare business. With a simple search, a seller can quickly find themselves bombarded and overwhelmed around the differences between the types of intermediaries available in today’s market. While finders, advisors, business brokers, and registered agents of a broker dealer can all assist in an M&A process (at drastically different capacities), it is important to note the risks associated with hiring non-registered intermediaries.
Many non-registered intermediaries operate in direct breach of the requirements put in place by the SEC, one of the main governing bodies that monitors transactional activity in the United States, putting themselves and their clients at risk of penalties and investigations.
Finder
A finder is nothing more than an introductory party that identifies and connects a prospective buyer with a seller. Their involvement typically consists of building a brief information packet on a seller’s business and usually ends upon the initial introduction to a buyer or the subsequent stage of a seller receiving and accepting an offer. A finder usually doesn’t reappear until the end of the arduous diligence process and definitive agreement negotiations to collect their ‘finder fee’ at closing. Per the SEC, their role is limited in nature to basic introductions and nothing else outside of that.
In our experience, we have seen many finders employ predatory tactics as it pertains to exclusivity and tail periods within their contracts, often leaving their clients with few alternatives once they have locked them into an exclusive engagement. Should that finder under-perform, a seller can find themselves trapped in a long-term contract, with little to no other options.
While the category of finder may appear to be on the more cost-effective side of intermediaries, their limited capacity will likely not meet the many needs a seller will have in an M&A process.
Non-Registered M&A Advisors
The support services of a ‘M&A advisor’ or ‘M&A consultant’ typically extends beyond that of a finder, despite existing in the same ‘finder’ support category in the eyes of the governing bodies. M&A Advisory or Consulting firms will typically provide additional support services to their sell-side clients, going so far as prepare robust marketing materials, provide valuation analysis on a seller’s business, participate in the facilitation of investor/buyer calls, assist with assessment and negotiation of offers, and facilitate the general components and cadence of a due diligence process.
While these are all vital facets of what a seller should expect from an experienced intermediary, many of the services described above require registration with a Broker-Dealer, as defined by the SEC. Many non-registered Advisory firms in the lower middle market knowingly exist in direct breach of the regulatory requirements, exposing both themselves and their clients to the possibility of costly investigations and penalties.
Lack of Registration with a Broker-Dealer
There are many governmental agencies that exist to protect investor interests and moderate general market integrity. The Securities Exchange Act of 1934, was put in place to clarify the role of “Brokers” and “Dealers”, stipulating the activities associated with each and the cases where an intermediary is required to register with a Broker-Dealer.
The SEC provides the following checklist to determine if an intermediary is required to register with a Broker-Dealer:
- Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction?
- Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions? Do you receive any other transaction-related compensation?
- Are you otherwise engaged in the business of effecting or facilitating securities transactions, such as an equity or stock purchase?
- Do you handle the securities or funds of others in connection with securities transactions?
If the intermediary answers “yes” to any of the above questions then they are required to register, per the SEC
The “No Action” Precedent
While the SEC is well aware of finders and non-registered advisors providing services in the M&A market, there have historically been “No Action” recommendations put out by the SEC, setting a loose precedent that enforcement and pursuit of regulatory breaches by unregistered intermediaries is not recommended. But it needs to be said, that the “No Action” precedent only applies to finders who provide the most basic form of finder services: an introduction between a buyer and a seller. As discussed above, many finders and advisors provide services beyond that of basic introductions, placing them in direct breach of the requirements put in place by the SEC – including negotiation of offers, provision of valuation analysis, the management of securities (or equity) based transactions, and involvement in ‘due diligence’ related activities, to name a few.
While there was a conditional ‘finder’ exemption proposed in 2020 as a means to solidify the rules, regulations, and approved activity of finders in the market, SEC Release No. 34-90112; File No. S7-13-20, to date there has yet to be a definitive ruling on the proposed exemption. Finders and non-registered advisors exist in a gray area of compliance, so long as they restrict their services to basic introductions on securities transactions.
Just as importantly, if there were to be a definitive ruling in line with the proposed 2020 exemption, many finders and unregistered intermediaries still exist in direct breach of SEC regulations. The proposed stipulations state that finders can provide introductory ‘finder’ services so long as they:
- Are not involved in negotiating the terms of the transaction,
- Do not participate in the preparation of sale materials,
- Do not engage in any ‘due diligence’ activities, and
- Are not, in any case, involved in the trading of securities.
Essentially, all the main support services an intermediary should be providing to a client in an M&A Process. Broker-Dealer registration is required for an intermediary to participate in and provide these services in a securities transaction.
We strongly advocate that sellers do not embark on a sale process without qualified and compliant representation. In general, those in the ‘finder’ or ‘non-registered advisor’ category may exist in direct breach of the regulatory bodies and pose a significant risk to the parties who hire them. We recommend owners and operators fully understand the risks associated with hiring non-registered intermediaries who provide services beyond basic ‘finder’ introductions. There are a variety of legal risk factors in M&A transactions. It would be prudent for sellers to limit their exposure when selecting the appropriate M&A representation.
Should a seller hire a non-registered advisor, they should expect a reduced support role limited to basic introductions with buyers, nothing more. Prior to engagement, we strongly recommend that sellers ask Finder and M&A Advisor firms if they are registered with a Broker-Dealer. If the answer is “no,” then understand there may be risk of penalties and process deficiencies, regardless of whether the transaction is successful or not.
Compliance Matters
At M&A Healthcare Advisors (MAHA), we are registered with FINRA, as Agents of a Broker Dealer. Our registration and the associated education and testing qualify our firm as an investment bank. Our Broker-Dealer affiliation enhances our ability to provide our clients with high quality M&A support services and ensures compliance throughout every stage of the process, ultimately maximizing the benefits and options available to our clients. Hiring compliant representation should be a priority for those looking to reduce their risk and effectively reach their M&A goals
Our affiliation with a Broker-Dealer has expanded our traditional sell-side representation and M&A consulting services in the following ways:
Enhanced Legitimacy and Trust
Becoming an investment bank adds a higher level of expertise to our firm. The process of becoming an investment bank involves rigorous financial education and testing, showcasing our commitment to excellence and our understanding of financial metrics and capital markets vital to effectively navigate an M&A process. When you work with a registered agent of a Broker-Dealer, you are partnering with an intermediary who is held accountable to larger regulatory organizations. There is continued education and oversight to ensure the client’s best interests. Holding ourselves to the standard of an Investment Bank provides sellers with a high quality of advisory services, while existing within the highly regulated finance industry.
Compliance with SEC Regulations
One of the most significant advantages of registration is our adherence to strict SEC regulations. In our experience, we see many un-registered advisors and finders in the lower-middle market operate out of compliance, creating legal risks for their clients which could threaten transactional outcomes. By engaging an investment bank, our clients can be confident that their life’s work is protected from the financial regulators. We ensure all transactions comply with legal standards, minimizing regulatory and future legal risks. This compliance is particularly crucial in complex transactions involving securities or equities.
Broad Range of Services
Our registration furthers our ability to offer a diverse range of services, all within SEC regulations. Here’s a highlight of how we can assist our clients in their effort to generate capital:
- Conduct Securities or Equities Transactions
Without FINRA compliance, intermediaries cannot facilitate securities transactions. As registered representatives, certain individuals at MAHA can facilitate private placements, minority interest investments, and debt financing, among other non-majority investment options. Our registration mitigates seller risk by ensuring proper compliance throughout every stage of a sale or capital raise process. - Raise Capital Through Private Placements
We have expanded our avenues for capital raising beyond seller buyouts. Whether you are interested in minority interest investments or raising money through private placements, we can help. We also offer recapitalizations through debt financing options, working closely with underwriters. Regardless if it is an exempt transaction, capital-raising structures require the placement agent to be registered with a Broker Dealer. - Leverage Market Expertise and Investor Relations
Our extensive market knowledge and established relationships with institutional investors is an invaluable benefit to our clients. We help sellers navigate market dynamics, assess investor sentiments, and optimize transaction structures to suit their needs and M&A goals. Additionally, to provide valuation assessments in the public market, proper registration is necessary. - Ensure Regulatory and SEC Compliance
Compliance with strict regulatory requirements set by the SEC and other organizations is a cornerstone of our services. Our registration ensures that all transactions adhere to legal standards, significantly reducing regulatory and legal risks. For transactions structured as equity purchases, regulators require that the intermediary be a registered agent. - Access to Extensive Network and Capital Resources
Our affiliation with a Broker Dealer provides us with a broad range of deal resources. If you have capital needs or are looking to sell your company in any capacity, we can approach numerous “deal support” affiliates within our network. This support is compliant and capable of conducting various capital raises, ensuring you have the best possible options. - Expert Restructuring Services
If your company is in a distressed situation, we can work with you and your creditors to formulate a restructuring plan. This may involve collaborating with a legal team to define the debt payment schedule and recover the business from liquidation. We can also act as agents for a Section 363 process, providing comprehensive support during challenging times.
Contact M&A Healthcare Advisors Today
By choosing M&A Healthcare Advisors, you are partnering with a firm focused on achieving successful client outcomes. Our affiliation with a Broker Dealer allows us to more effectively maintain compliance on our client engagements and additionally, allows us to provide a comprehensive suite of M&A advisory services to the market. Contact us today to learn more about how we can assist you in achieving your business goals
All advisors at MAHA are registered representatives of Finalis Securities, LLC member FINRA/SIPC, in which securities are offered through.