21 Apr Len Krick’s Proposal
Obviously I am trying to figure out how to defend myself in the asset sale conversion cases I face. Notwithstanding attaining the ultimate goal of having the SEC address the issue formally through either an exemption or special license, or both, I have an idea to propose for your consideration:
Here are the points:
1. The SEC is asking for actual cases where business brokers were harmed, etc. Based on Mike and John’s e-mails, it appears that they believe that the CBI No-Action Letter should provide sufficient protection.
2. The SEC still believes that any deal where the Seller receives a promissory note, secured by the assets or stock of the business, also should require the Broker to have a securities license. If the SEC actually “ruled” on that, it would have a disastrous effect on the profession of business brokerage, and thousands of business owners would not be able to sell their businesses.
3. I have an action (MSI Case) that alleges, in U.S. District Court, that I am in violation with Nevada State Securities Law.
4. I also am under investigation by the Nevada State Securities Division for possible violation with Nevada State Securities Law. As a result of that investigation, the State is going to uncover at least 8-10 additional transactions that, for different reasons, ended up as a stock sale.
5. Both of these actions are based on “State” law, not Federal.
6. The Civil case could easily be expanded to include violation of Federal Securities law. The longer the case goes, the higher the likelihood is that the attorney for my old client will expand it.
7. I have tried to protect myself by having the parties sign a Stock Sale Acknowledgement, Notification, and Disclaimer Agreement, which was based either on the IBEC no-action letter or CBI no-action letter, depending on the date of the transaction.
8. My attorney pointed out that the MSI Case (August 2006 transaction) does not conform with the IBEC no-action letter because:
a. 100% Was Not Sold: The Seller decided to keep a 25% interest in one of the entities, with a mandatory buy/sell at the end of the 2 years. Note that the Seller did this because he thought that his 25% would worth a lot more after two years than if the Buyer bought 100% at closing.
b. The Seller Remained Associated with the Business Post-transaction: The Seller stayed as the President of the operating entity (the one he kept 25% interest in) for 2 years after the close of escrow, under an employment agreement, to help the new owner grow the company, to train the new owner’s son, and to ensure that his remaining 25% interest was worth a lot more.
c. The Broker Didn’t Step Away From the Deal Completely: I was not really able to “step away” from the deal immediately. While I had nothing to do with valuing the stock or drafting stock sale documents, I did assist my client in reviewing the terms of his Employment Agreement.
d. There was a Promissory Note: The Seller accepted a promissory note for part of the price of his equity. This was secured by the stock of the business.
9. I believe that the State of Nevada would take the SEC’s opinion very seriously, if the SEC were to issue a no-action letter on the MSI deal. I don’t know if this is possible since the transaction was consummated in 2006.
A new “Sunbelt Business Brokers of Las Vegas” no-action letter would have the following benefits:
1. It would definitely show the SEC that the IBEC and CBI no-action letters are no sufficient, since each deal has different issues.
2. It would help to give us all assurances that every deal in which there is seller carry, is not potentially in violation with Federal Laws.
3. It would give business brokers everywhere even more clarity and guidelines as to deal structures that are probably not potential violations.
4. I would use it in my defense in the MSI civil suit.
5. It would probably convince the State to drop its investigation.
6. It would allow us time and ammunition to first obtain a no-action letter from the State of Nevada’s Securities division, and then, next year, help us pass the South Dakota Law in Nevada (assuming the SEC hasn’t already adopted an exemption and the states also recognize/adopt the same exemption).
Is here something wrong with that logic? I guess the only issue is whether a request for a “no-action” letter has to be done before the transaction is concluded.
What does everyone think?
Len Krick, MBA, SBA, CMEA