On June 7, 2012, the SEC approved FINRA’s proposed FINRA Rule 5123, relating to private placements.16 As approved, FINRA Rule 5123 requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or to indicate to FINRA that there were no offering documents used.

The new rule will apply to a wide range of private placements, but will not apply to most non-registered structured note offerings. This is because Rule 5123 excludes from its scope, among other types of offerings:

  • Section 3(a)(2) offerings of “bank notes.”
  • Rule 144A and Regulation S offerings.
  • Offerings to “qualified purchasers” under the Investment Company Act, and to “institutional accounts” (as defined in FINRA Rule 4512(c).
  • Offerings to certain types of “institutional accredited investors” under Rule 501(a)(1), (2), (3) or (7).17
  • Offerings of non-convertible debt by issuers that meet the transaction eligibility criteria for registering primary offerings of non-convertible securities on Form S-3 or Form F-3.18

As to the fifth point above, an issuer will satisfy these requirements (a) if it has offered at least $1 billion in nonconvertible securities (other than common equity) in registered private offerings over the last three years, or (b) if it has at least $750 million in non-convertible securities (other than common equity) issued and outstanding that were registered under the 1933 Act. In addition, for an offering completed prior to September 2014, an issuer will satisfy this requirement if it has a reasonable belief that it would have been previously eligible to use Form S-3 for the offering because the offered security is a non-convertible, investment grade security.19

Accordingly, the principal type of unregistered offering that would be impacted by the new Rule would be a “Regulation D” or “Section 4(2)” offering to an individual investor, where the issuer did not have sufficient prior issuance volume to satisfy the Form S-3/F-3 eligibility requirements for non-convertible securities. However, through September 2014, an investment grade issuer may still receive the exemption, even if its prior issuances were not sufficient in amount to qualify.

For additional information about new Rule 5123, including the requirements for offerings that do not qualify for an exemption, please see our client alert. The alert may be found at the following link: http://www.mofo.com/files/Uploads/Images/120615-FINRA-Rule-5123.pdf.