Before You Start That General Solicitation…

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This week, the SEC approved long-awaited amendments relaxing the prohibition against general solicitation, as required under Title II of the JOBS Act.  These amendments will liberalize the ability of broker-dealers to advertise and market private placements by removing the prohibition against general solicitation in offerings conducted pursuant to new Rule 506(c).  However, following the effective date, broker-dealers looking to avail themselves of the new general solicitation rules should be mindful of existing FINRA rules that govern offering-related communications.

FINRA Rule 5123 establishes filing requirements for offering documents used in private placements. Under Rule 5123, FINRA members selling securities issued by non-members in a private placement must file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that no such offering documents were used. For more information on FINRA Rule 5123, see our related client alert.

FINRA Rule 2210 (FINRA’s communications rules) establishes pre-approval, filing, content and record retention requirements with respect to communications with retail investors, including certain accredited investors.  As such, materials relating to private placements that are distributed or made available to 25 or more retail investors in any 30 calendar-day period will be deemed retail communications that must comply with Rule 2210.  In particular:

  • Retail communications must be pre-approved by a registered principal.
  • The content of retail communications must be accurate, fair and balanced.  In FINRA’s view, robust risk factor disclosure is often required. (And, in addition, of course, these documents should meet a Rule 10b-5 standard.)

For more information on FINRA Rule 2210, see our related client alert.

Note that FINRA personnel will be able to obtain and review a variety of private placement marketing materials, both as a result of the filings described above, and through FINRA’s periodic inspection process.  Accordingly, FINRA will have the ability to comment on, and take any other actions within its powers, as to those offering materials which it finds are not “fair and balanced.”