SEC Approves FINRA Rule 5123 Regarding Private Placements

News Brief

By Cydney Posner

The SEC has approved, on an accelerated basis, FINRA rule 5123, which imposes requirements on members and associated persons in connection with certain private placements (defined as non-public offerings of securities conducted in reliance on available exemptions from registration under the Securities Act.).  The rule is designed to enhance FINRA's regulatory oversight of broker-dealers that sell securities in the private placement market by providing FINRA with more timely and complete information about its members' private placement activities.

As originally proposed, the rule would have required members and associated persons that offer or sell any applicable private placement ("Covered Offering"), or participate in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with any Covered Offering, to disclose to each investor prior to sale the anticipated use of offering proceeds and the amount and type of offering expenses and offering compensation. If any issuer's disclosure documents did not contain the requisite information, the member would have been required to create a separate disclosure document containing this information and provide it to any potential investor. In addition, each participating member would have been required to file the PPM, term sheet or other disclosure document (exhibits) with FINRA no later than 15 calendar days after the date of the first sale. Similarly, any material amendments to the documents would have been required to be filed within 15 calendar days after the date provided to any prospective investor. The original proposal also exempted several types of private placements, including 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.

In this final rule, FINRA has made a number of changes in response to comments. Significantly, FINRA eliminated the requirement that firms create a new disclosure document or even provide specified disclosures to investors. As a result, paragraph (a) of Rule 5123 will require each member that sells a security in a Covered Offering to:

  • submit to FINRA, or have submitted on its behalf by a designated member, a copy of any PPM, term sheet, or other offering document used in connection with the sale within 15 calendar days of the date of first sale, as well as any material amended versions of a previously filed document within 15 calendar days of the date the document is provided to any investor; or
  • indicate to FINRA that no such offering documents were used.

The amendments also added a number of exemptions covering generally secondary offerings, offerings by banks, 3(a)(9) exchanges, 3(a)(10) offerings, bankruptcies and other specified offerings. Sales to institutional accounts as defined in FINRA Rule 4512(c), QIBs, and qualified purchasers would also be exempt. In addition, the amendments clarified that a member qualifies for an exemption based upon the sales it makes rather than those of all members participating in the offering, with the result that the actions of one member would not affect the availability of an exemption for another member.

Under paragraph (c) of Rule 5123, FINRA will accord confidential treatment to all documents and information filed pursuant to the Rule and will use the filed documents and information solely for the purpose of determining compliance with FINRA rules or other applicable regulatory purposes.

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