By Cydney Posner

Last month, the SEC posted proposed FINRA Rule 5123, , which would impose requirements on members and associated persons that participate in certain private placements. The purpose of the Rule is to ensure that investors in private placements are provided detailed information about the use of proceeds, offering expenses and offering compensation and to provide FINRA with more timely and detailed information about the private placement.

Rule 5123(a) would prohibit a member or person associated with a member from offering or selling any security in reliance on a Securities Act exemption, or participating in the preparation of a private placement memo, term sheet or other disclosure document for the private placement, unless certain conditions were met. These conditions would include providing to each investor, prior to sale, a PPM or term sheet that describes 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 in connection with the offering to sponsors, finders, consultants and members and their associated persons. In addition, if no PPM or term sheet is used, the member or associated person must prepare these disclosures and provide them to each investor prior to sale.

Under proposed Rule 5123(b), participating members would be required to file the PPM, term sheet or other disclosure document (including exhibits) with FINRA no later than 15 calendar days after the date of first sale, and to file with FINRA any material amendments to the PPM, or to the disclosures mandated by the Rule, no later than 15 calendar days after the date the document is provided to any investor or prospective investor.

Proposed Rule 5123(c) would exempt several types of private placements, similar to the exemptions under existing Rule 5122. Exemptions include offerings sold only to certain purchasers, such as QIBs, investment companies and employees and affiliates, and certain types of offerings, such as Reg S or 144A offerings and offerings of non-convertible debt or preferred securities by issuers eligible to incorporate by reference under Form S-3.

Proposed Rule 5123 contains provisions identical to those in current Rule 5122 regarding confidential treatment and applications for exemption.

FINRA will announce the implementation date of the proposed rule change no later than 90 days following SEC approval. The implementation date will be no more than 180 days following SEC approval.

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