FINRA stated that it is proposing to adopt new Rule 5123 (Private Placements of Securities) to ensure that investors in private placements are provided with detailed information about the intended use of offering proceeds, the offering expenses and offering compensation. In addition, new Rule 5123 would provide FINRA, through a member “notice” filing requirement, with more timely and detailed information about the private placement activities of member firms. As a result, FINRA believes that the rule will provide important investor protections in connection with private placements without unduly restricting capital formation. In addition, FINRA believes that the proposed rule change will assist its efforts to identify problematic terms and conditions in private placements, thereby helping to detect and prevent fraud.

Rule 5123(a) would prohibit a member or person associated with a member from offering or selling any security conducted in reliance on an available exemption from registration under the Securities Act (“private placement”), or from participating in the preparation of a PPM, term sheet or other disclosure document for a private placement, unless the member or associated person provides a PPM or term sheet to each investor prior to sale. The information provided to the investor must describe the anticipated use of offering proceeds, the amount and type of offering expenses, and the amount and type of compensation provided or to be provided to sponsors, finders, consultants and members, and their associated persons in connection with the offering. In private placements without a PPM or term sheet, the member or associated person must prepare a document that contains these disclosures and provide it to each investor prior to sale.