Does a business broker need a financial services licence to sell shares in a private company?

No, providing the transaction is simply a sale of a business through a share sale.

Business brokers engaged to sell a business will usually do so through a sale of the business assets.  However, it is sometimes better to sell the company (i.e. the shares) that owns the business.  So some business brokers have queried whether they need to be careful to ensure they are not doing anything involving shares that might require a financial services licence.

In this regard, the Corporations Act licenses the financial services industry by regulating financial services, most financial products and the providers of financial products and services.  Under the Corporations Act, shares of a company are included in the definition of a “security”, which in turn is included in the general definition “financial products”.  The Corporations Act states that a person who (amongst other things not relevant to typical business brokers) deals in a financial product or provides financial product advice is required to have a financial services license.

So if a business broker is selling a business through a share sale, is there a risk that they might be dealing in a financial product or giving advice about shares by selling the shares on behalf of the seller?  It basically comes down to whether the shares could be considered a “financial product”, which is a facility through which, or through the acquisition of which, a person:

  • makes a financial investment;
  • manages a financial risk; or
  • makes non-cash payments.

The only category relevant to business brokers would be for the purpose of making a financial investment, which the Corporations Act classifies as one where the investor does not have any “day-to-day control” over the use of the investment to generate a return or benefit.  The Corporations Act gives the following example of an action that constitutes making a financial investment:

A person pays money to a company for the issue to the person of shares in the company and the company uses the money to generate dividends for the person and the person, as a shareholder, does not have any control over the day-to-day affairs of the company.

So shares of a company transferred as part of a business sale would not ordinarily fall within the definition of a “financial product” as it is not a facility where the investor (i.e. buyer) has no control over the day-to-day affairs of the company.  This makes sense as the shares in a business sale context are not in the same category as typical “financial products” necessitating the need for regulation, for example: managed investments schemes, derivatives and contracts of insurance.

It is difficult to envisage a situation where a business broker might require a financial services license, given that the intent of the Corporations Act is to regulate the financial services industry and the dealings in financial products.  Providing the share sale is simply an alternative method for the sale of a business and the broker is only doing what they would normally do in acting for the seller of a business, the transaction will not be caught by the Corporations Act and a business broker will not require a financial services licence.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

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