Is Your Investment Banker Licensed?

Is Your Investment Banker Licensed?

By Robert St. Germain

March 08, 2011

You worked long and hard to grow your company and now it is time to exit and reap the rewards. In your case, you decided to sell to a third party because you learned that is typically how business owners maximize their selling price. To that end, you elected to engage the services of a business broker/intermediary/M&A advisor. You heard that they can help you to more effectively recast your financials, create a descriptive memorandum, market your company, screen inquirers, facilitate due diligence, negotiate deal terms, and otherwise professionally manage the detailed, comprehensive, and confidential process of selling a company. All those are burdens you would prefer to leave to someone who specializes in such a process so you can focus on your specialty of operating and growing your business to increase its value.

You found such an advisor and, with everything seemingly in order, you next signed her standard engagement agreement. Included therein, as is typical in such agreements, was the requirement to pay a fee to the advisor contingent upon the successful sale of your company. Now you are looking forward to accepting a great offer that will allow you to move to sunnier climes and pursue full-time all your other life’s passions. What is not to like about that scenario?

For one thing, do you know if your advisor has her securities licenses and appropriate state registration(s) i.e. is a “registered representative” sponsored by a “registered broker-dealer”? If not, you and she may have just violated both federal and state securities laws, which generally require that anyone who “effects the transaction of securities” be registered as a broker-dealer (B-D) and be regulated by an organization such as the Financial Industry Regulatory Authority (FINRA), formerly known as NASD. “But”, you ask, “what do securities have to do with the sale of my private company?” Well, in fact, securities are a component of most business sale/purchase transactions.

You should note that there are two primary ways to sell your company. It can be sold via either a transfer of stock or a transfer of assets with the choice being the result of negotiations between your side and that of the buyer. In the case of a stock sale, securities in your company will be offered for sale and, at close, will be purchased by the buyer. Not surprisingly that transfer of stock is considered a securities transaction as defined by the Securities Exchange Act of 1934.

In the case of an asset sale, the assets of your company will be offered for sale and, at close, will be purchased by the buyer. If the asset sale is for all cash at close, that is the one case that would not be considered a securities transaction. However, most asset sales include partial payment of the purchase price over a negotiated period of time via a promissory note and/or as certain metrics are achieved as defined in an earn-out agreement. Like stock, such notes and agreements are also deemed to be securities by our securities laws.

So it is quite probable that the advisor you hire will be “effecting the transaction of securities” of one type or another. And at the beginning of an engagement there is no way to predict the final form of the transaction.

Now you might ask, “What is the big deal in not using a properly licensed and registered advisor and how would it affect me anyway?” First, as implied above, business transfers with a securities component facilitated by non-licensed/non-registered advisors are illegal. Second, the remedy available under the law to cure illegal securities transactions is onerous.

That remedy? The law allows up to five years for an aggrieved party to an illegal securities transaction to exercise their right of rescission. Thereby, the transaction would be reversed or annulled with the company returned to the seller and any consideration paid returned to the buyer. Now think of the difficulties in unwinding such a deal: What is the condition and form of the company compared to when it was “sold” up to five years ago? Where now, after being paid out partly in taxes and/or into trusts, are the proceeds you received from the buyer over the last five years? Etc., Etc. And you thought you had permanently moved on to the next stage of your life!

Then, as one might predict, all parties to the transaction, including you, could find themselves the subject of civil suits. Imagine the recriminations at that point: Who recommended the hiring of that unlicensed advisor? Who hired that advisor? Who failed to validate the credentials of that advisor? Who failed to craft protective language into the deal documents? Who failed to properly review those deal documents? Who advised signing the deal documents? Who can I sue for my losses?

And that unlicensed/unregistered advisor that got you into this mess in the first place? She would be personally liable both civilly, as well as, criminally for her role in the transaction. And to add insult to injury, you too could also be criminally liable because you hired her.

Given the potential liabilities associated with an illegal securities transaction, the obvious question arises: “Why would any advisor practice without the required securities licenses and registrations?” The answer is simple. It is extremely time consuming and costly to establish and maintain a Registered Broker-Dealer and to become and maintain oneself as a Registered Representative. In addition, once registered, both the B-D and its affiliated Representatives then operate in a highly regulated environment where the failure to comply with any and all applicable regulations exposes them to severe potential penalties. Thus, unlicensed advisors save themselves large overhead expenses and avoid scrutiny by our securities regulators while they leave their clients exposed to the risk of an expensive post-close deal rescission.

You deserve the sale of your business to be a successful, one-time event. You should not risk having your sale revisited and reversed years later or the associated legal liabilities. Therefore, you would be wise to only engage the services of a business broker, intermediary or M&A advisor who is also a Registered Representative i.e. is sponsored by a Registered B-D and has his or her required securities licenses (e.g. Series 79) and state registration(s). Proof of licensures and registrations is available at and at your state’s division of securities. Seek legal counsel first to insure that you are selecting your advisor properly.

Disclaimer: Mr. St. Germain is not an attorney and this article is neither intended to be nor should it be considered legal advice. If you have any questions, please consult an attorney who specializes in securities law.

Posted by Robert St. Germain.