FINRA Releases FAQs On Private Placement Notice Filing Rule

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On December 3, 2012, FINRA released a set of FAQs relating to new Rule 5123 (our prior coverage here), which went into effect on December 3 and requires FINRA members to file with FINRA copies of the private placement memorandum, term sheet, or other offering documents used to sell a private placement within 15 days after the date of first sale. For additional background on Rule 5123, you can check out Regulatory Notice 12-40, which includes the full text of the rule.  Here are highlights from the FAQs:

  • Rule 5123 requires that material amendments to the offering documents must also be filed.  FINRA advises that amendments rising to this materiality standard will also typically trigger an offer of rescission to investors, indicating that rescission offers can perhaps be used as a guide to determine when amended offering documents must be filed with FINRA.
  • In a contingency offering, the date of first sale for purposes of computing the 15 day filing deadline will be determined based on the SEC’s guidance on this question (CD&I 257 Question 257.02), which basically states that the date of first sale is the date an investor is irrevocably committed to invest.  Depending on the terms of the offering, that could be the date a subscription agreement is received.
  • Rule 5123 has nothing to do with the content of offering documents, which must comply with the Securities Act and applicable rules – the FINRA rule only requires notice filing of copies of the offering documents used in the offering.
  • Although offerings solely to institutional investors and offerings solely to accredited investors that are entities are exempt from the requirements of Rule 5123, offerings that include sales to accredited investors who are natural persons are not exempt from the rule.
  • FINRA will not require member firms that participate in crowdfunding offerings (under the JOBS Act) to make a filing pursuant to Rule 5123.  Note that the SEC rules relating to crowdfunding are still mostly undeveloped.
  • There are two sets of exemptions from the notice filing requirement – one set, contained in Rule 5123(b)(1), contains exemptions based on the types of investors to whom sales are made and apply on a firm-by-firm basis; in other words, in the same offering, one member firm could escape the notice filing requirement by only selling to institutional investors, while another firm might also sell to a natural person and thereby trigger the filing requirement.  A second set of exemptions, contained in Rule 5123(b)(2), contains exemptions based on the types of securities being sold in the offering; these exemptions apply to all member firms involved in the offering (or none of them).
  • The new notice filings can only be made electronically through the FINRA Firm Gateway filing system.  FINRA has also released a user-guide for this system, and several of the questions in the FAQs relate to how a member firm can request and gain access to Firm Gateway for purposes of making filings.

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