In our last edition of the Investment Management Update, we informed our readers that the SEC has approved Financial Industry Regulatory Authority, Inc.’s (FINRA) new Rule 5123. As we noted in that article, effective December 3, 2012, FINRA member firms that begin selling efforts related to private placement offerings are required to file the offering documents with FINRA or otherwise file a notice that no such documents were used. Recently, FINRA issued additional guidance regarding Rule 5123 in the form of frequently asked questions, discussed below.
Exemptions From Filing. FINRA addressed when offerings or sales were exempt from the filing requirements of Rule 5123. Specifically, sales of private placements sold solely to institutional accounts or solely to accredited investors that are not natural persons are exempt from the filing requirements. On the other hand, private placements that are sold to accredited investors who are natural persons are not exempt from the Rule’s filing requirements.
When Filing Requirements Begin. FINRA made clear that a member firm’s obligation to file offering documents begins on the first date of a sale of securities in the private placement. The member firm then has 15 days from the date of such sale to file the offering documents. Further, any document that sets forth the terms of the private placement, including a private placement memorandum, term sheet, or other document, must be filed. In addition, if there are any material changes to these documents, the member firm must file amended documents with FINRA.
Who Must File. In some cases, multiple firms may be required to file the offering documents for a private placement. Even if the firms have agreed that one party will be responsible for filing the requisite documents, each firm that is required to file such documents must confirm that the offering documents have been filed. Otherwise, the failure of the designated firm to file such documents will result in each of the firms being in violation of Rule 5123. Further, if a member firm is paid a fee for introducing a prospective investor to an issuer under a private placement, that member firm may have to file the offering documents with FINRA.
Finally, a member firm is entitled to engage legal counsel to assist with the review and filing of documents, and can even have legal counsel submit the documents on its behalf.