Changes To FINRA Rule 5123

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

On June 20, 2013, FINRA proposed changes to Rule 5123 that would require offering documents in connection with certain private placements to be filed electronically by FINRA members and would also expand the applicable form to include a number of substantive questions regarding the offering at issue.

New FINRA Rule 5123 became effective on December 3, 2012, and requires that FINRA members file with FINRA copies of private placement memoranda, term sheets, or other offering documents used in connection with certain types of private offerings in which the FINRA member participates (prior coverage here and here).  Rule 5123 requires that the offering materials be submitted to FINRA within fifteen calendar days of the first sale in the offering.  FINRA developed a form to facilitate the filing and processing of this information electronically in pdf format through FINRA’s Firm Gateway.

FINRA has now proposed changes to the text of Rule 5123 that codify the requirement that the offering documents be submitted via the online form through Firm Gateway and also expand the information required to be submitted with the form.  Specially, the form as proposed to be amended would now include the following questions about the offering:

  • Whether the offering is a contingency offering;
  • Whether independently audited financial statements are available for the issuer’s most recently completed fiscal year;
  • Whether the issuer is able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor, or any of the issuer’s affiliates;
  • Whether the issuer has a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm;
  • Whether the issuer has engaged, or the FINRA member anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the securities;
  • Whether the issuer, any officer, director, or executive management of the issuer, general partner, manager, advisor or any of the issuer’s affiliates has been the subject of SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last ten years; and
  • The industry category for the specified private placement.

FINRA emphasizes that if a FINRA member does not know the answer to one or more of these additional questions, it may respond “unknown.”  The rule change is not intended to impose any additional burden on the FINRA member to conduct inquiries into specific matters, but is only intended to gather information to the extent known by the FINRA member.  However, as a practical matter, it’s easy to see where an issue could arise if a FINRA member provides an “unknown” answer when the information in question is actually included within the private placement memorandum.  In other words, perhaps FINRA members will be imputed with knowledge of all matters disclosed in the offering documents that are filed with FINRA.

FINRA has requested that this rule change become effective immediately pursuant to Section 19(b)(3) of the Securities Act and Rule 19b-4 under the Securities Act (which allow for rules to become immediately effective upon filing if they meet certain requirements relating to not imposing additional substantive burdens). Normally, an immediately effective rule change under Section 19(b)(3) is not “operative” for at least thirty days after filing – in fact, this is one of the conditions of Rule 19b-4. However, in this instance FINRA has requested that the SEC waive the thirty day period and allow FINRA to begin implementation of the new rule immediately.

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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