Middle Market M & A, 2nd Edition

CHAPTER 19Regulation and Compliance ¹

Mergers and acquisitions, like all other business activities, take place in an environment shaped by laws and regulations. This chapter addresses those that are encountered fairly frequently in middle market M&A; it cannot possibly cover all of them. Nor can we give legal advice—that's the provenance of counsel.

Almost all businesses need to raise capital (debt, equity, or both) at one time or another.² It is the unusual situation in which a person or entity has sufficient ready capital to start a business; provide for its working capital and capital investment needs; provide for all future operations, contractions, expansions, and acquisitions; and sell to an entity sufficiently capitalized to do the same. Virtually all capital‐raising activities are subject to securities laws. Federal and state laws broadly define a “security” to include stocks, bonds, notes, options, warrants, and an extensive laundry list of investments commonly used to raise capital, with a few states adding to the definition the concept of “risk capital.”

Yet not all capital loaned to or invested in a business involves a security. The securities laws do not (usually) treat monies provided by banks and certain nonbank lenders that are professionally staffed and actively engaged in the business of lending as securities depending upon the terms, conditions, and attributes of that debt. Debt‐bearing equity‐like features such as profit sharing, options, or warrants are ...