Capital Acquisition Brokers – A New Category Of Broker-Dealer
Capital Acquisition Brokers (or CABs) are broker-dealers that limit their business to corporate financing transactions.
A capital acquisition broker is defined in CAB Rule 016(c) as a firm that is solely engaged in a limited range of activities, including advising companies on mergers and acquisitions, advising issuers on raising debt and equity capital in private placements with institutional investors, as well as acting as placement agent, and providing strategic and financial advisory services.
Many of these services are currently provided to microcap companies by small registered broker dealers or unregistered finder/advisers.
CAB membership may be an attractive option for small firms that limit their activities to private placementsand M&A transactions. This would include persons who have previously been acting as unregistered finders or conducting business as M&A brokers under the SEC’s M&A Brokers no-action letter of January 31, 2014.
SEC staff members have indicated informally that there may be more enforcement activity against unregistered finders after the CAB rules go into effect, since there will be a somewhat less burdensome registration available to them. The M&A Brokers no-action letter is currently still in effect, so persons who act exclusively as M&A brokers in accordance with the conditions of that letter may continue to conduct business without registration.
FINRA first published proposed rules on CABs in December 2015 and on August 18, 2016, the SEC approved FINRA’s rules implementing a new category of broker-dealer. The CAB rules become effective on April 14, 2017. FINRA will accept applications for membership beginning January 3, 2017.
Firms applying to FINRA for membership as a CAB are required to follow the same procedures as any other FINRA applicant. Although CAB applicants may have an easier time drafting their policies and procedures, the CAB Rules do not establish a “fast track” process for CAB registration and the process is expected to take approximately 180 days.