Before running a client's sale process, an M&A attorney should put a specific set of questions to the firm's own counsel about how the federal M&A broker exemption and the rules of each relevant state apply to the activities the firm will perform and the fees it will charge. The federal statute lists conditions and excluded activities, including custody of transaction funds or securities, passive buyers, certain public-company transactions, and binding a party, but applicability still depends on the facts. [1] This article lists those questions. It does not answer them, because the answers depend on the firm's practice, its states, its fee structure, and facts that only the firm and its counsel can assess. The goal is a documented review before the first engagement, not a conclusion borrowed from an article.
Why the review belongs before the first engagement
Most firms that expand into process work do it gradually. A partner helps a longtime client find a buyer as a favor, then does it again for a second client, then realizes the firm has a practice. By the time anyone asks the regulatory question, the firm has a fact pattern it did not design.
A review before the first engagement reverses that. The firm decides what activities it will take on, what it will leave to the client, and how it will be paid, and then asks its counsel whether that design raises issues. If it does, the design can change before any client is affected. The engagement letter, the fee schedule, and the internal procedures all follow from the review rather than being retrofitted to it.
The review also produces something the firm can point to. If a client, a carrier, or a bar inquiry ever asks how the firm approached the question, the answer is a memorandum from counsel with a date on it. That is a materially better position than a partner's recollection of having thought about it.
Questions about activities
The first group of questions concerns what the firm will do. Counsel should see a phase-by-phase description of the work, which the scoping article in this series lays out, and should be asked about each activity specifically.
Does preparing a valuation range for discussion with the client, using a deterministic software engine and the client's own financial data, raise any issue under the applicable rules? Does drafting a teaser and a CIM from the client's questionnaire and data room? Does building a prospective buyer list for the client's review, and does the answer change depending on whether the firm or the client makes the initial contact with a buyer the client has approved? Does managing NDA execution, data room access, and the collection of IOIs on the client's behalf? Does presenting an IOI comparison and advising the client on which to pursue?
For each, the firm should also ask whether the answer depends on who performs the task. A partner negotiating an LOI is practicing law. A paralegal sending a teaser to a buyer on the client's written instruction may be viewed differently, or may not. Counsel should be asked about the staffing model as well as the task list.
Questions about fees
The second group concerns compensation. Counsel should see the firm's proposed fee schedule and should be asked the following.
Does a fixed fee per phase, invoiced at the start of each phase and payable whether or not a transaction closes, raise any issue? Does an hourly fee? Does a monthly fee for the duration of the engagement? If the firm is considering any component that varies with the outcome, including a closing bonus, a percentage of price, or a rate reduction in exchange for a share of proceeds, how does that component change the analysis? The preceding article in this series explains why a fee tied to work is the better model on independence grounds; counsel should be asked about it on regulatory grounds as well.
The firm should also ask about the reverse direction: whether receiving anything from a buyer, a lender, or a platform provider in connection with a client's transaction would raise an issue. The answer should inform the engagement letter's statement that the firm receives no compensation from any third party.
Questions about the client and the transaction
The third group concerns the deal itself, because the federal M&A broker exemption has conditions that relate to the nature of the target and the buyer's intentions. The statute excludes, among other activities, transactions involving passive buyers, certain public-company or public-offering activity, and handling transaction funds or securities. [1] The SEC's earlier fact-specific staff letter likewise treated active operation, no custody of funds or securities, and limits on joint representation as material conditions, while stating that different facts could produce a different conclusion. [2] Counsel should be asked how the firm will confirm, for each engagement, that the applicable conditions are met and how it will document that confirmation.
Relevant questions include how the firm should handle a client whose size or characteristics fall outside the applicable exemption's parameters, a buyer that is acquiring a passive stake rather than control, a transaction structured as a sale of securities rather than assets, and a client that is itself a public company or has public debt. Counsel should also be asked whether the exemption's conditions on the firm's conduct, such as restrictions on handling funds or on representing both sides, require any change to the firm's trust account practices or its conflicts procedures. These are questions for the firm's counsel, not conclusions supplied by this article.
Each state adds its own layer. A firm practicing in multiple states should ask counsel about each one, and about the state where the client is located and the state where buyers are located, since those may differ.
Questions about the software
The fourth group concerns the platform. Counsel should understand what the software does and does not do, and should be asked whether its use changes anything.
The firm should describe the platform accurately: it generates draft materials from client inputs, identifies prospective buyers from a database for the client's review, and tracks pipeline status. It does not contact buyers, does not advise the client, does not negotiate, and receives no compensation tied to any transaction. Software prepares, organizes, matches, and tracks; the attorney and the client decide and act. Counsel should be asked whether this division holds up under the applicable rules and whether a hypothetical automated outreach feature, if ever enabled, would change the answer.
Counsel should also review the platform provider's own terms on data handling and confidentiality so that the firm's engagement letter can describe them accurately.
Turning the answers into procedure
The output of the review should be three documents: a memorandum from counsel, an engagement letter template that reflects it, and a one-page internal checklist that the partner runs on each new process engagement. The checklist confirms the applicable conditions for that client, records who will make buyer contact, and confirms the fee structure matches the template.
A firm can start this week by writing the question list above into a memo to its own counsel, attaching the phase description and the draft fee schedule, and asking for a written response. The review takes counsel's time and the firm's money. It is cheaper than designing the practice first and asking later.
How Acquivo Pro fits
Acquivo Pro is software the firm and the client operate. It prepares valuations across 21 industry verticals, generates teasers and CIMs from the client questionnaire and data room, builds a prospect list using documented buyer-matching criteria for the client's review, and tracks NDA, IOI, and LOI flow in one pipeline. It does not contact buyers, advise clients, or receive any success fee, commission, or referral fee. Pricing is a flat monthly subscription per seat. Client data is isolated and not used to train models for other customers, which the firm can describe to its counsel and in its engagement letter. To walk through a process on a client you have in mind, request a demo through the Contact page.
Key Points
- An M&A attorney should obtain a written review from the firm's own counsel on the federal M&A broker exemption and state rules before the first sale process engagement, not after a practice has formed.
- The regulatory review should cover four areas: the activities the firm performs, the fees it charges, the conditions of each client's transaction, and the role of the software.
- A firm should ask its counsel whether the answer on any activity changes depending on whether the client, a partner, or a paralegal performs it.
- The output of a regulatory review should be a memorandum from counsel, an engagement letter template, and an internal checklist run on every new engagement.
- Software in an attorney-run sale prepares, organizes, matches, and tracks; the attorney and the client decide and act.
Sources and references
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