FINRA Rule Change Relating to Private Placements of Securities


[authors: James Van De Graaff, Avi Badash]

The Financial Industry Regulatory Authority (FINRA) has issued Regulatory Notice 12-40 regarding the Securities and Exchange Commission’s approval of FINRA Rule 5123 relating to private placements of securities.

Currently, FINRA Rule 5122 generally requires, subject to certain exemptions, that a member firm or associated person engaging in a private placement of unregistered securities in which it (or a control entity of such member) is the issuer: (1) disclose in the offering documents the intended use of offering proceeds, offering expenses and the amount of selling compensation to be paid to the broker-dealer and its associated persons; (2) submit the offering documents to the FINRA Corporate Financing Department prior to or at the time such documents are provided to a prospective investor; and (3) comply with the requirement that at least 85% of the offering proceeds raised not be used to pay for offering costs, discounts, commissions or any other cash or non-cash sales incentives, and that such proceeds be used for the business purposes disclosed in the offering documents.

New FINRA Rule 5123 will require member firms to provide FINRA with information about the member firms’ activities with respect to private placements of securities by issuers that are non-FINRA members. Specifically, a member firm that sells a security in a private placement, subject to certain exemptions described below, must file a copy of the offering document, or any materially amended versions of the offering document, with FINRA within 15 calendar days of the date of first sale or indicate that it did not use any such offering document. The rule contains a list of private placements that are exempt from the above requirements, including an exemption for private placements sold solely to qualified purchasers under the Investment Company Act, qualified institutional buyers under the Securities Act of 1933 and other sophisticated investors. FINRA Rule 5123 includes all of the exemptions provided in FINRA Rule 5122 and also includes exemptions for certain sophisticated investors, such as employees and affiliates of the issuer, that are not included in FINRA Rule 5122.

Regulatory Notice 12-40 provides that FINRA Rule 5123 applies prospectively to private placements that begin selling efforts on or after December 3, 2012. In addition, effective December 3, 2012, members firms that file offering documents pursuant to FINRA Rule 5122 and FINRA Rule 5123 must use FINRA’s new private placement filing system on FINRA’s Firm Gateway system.

Click here to read Regulatory Notice 12-40.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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