Financial Industry Regulatory Association, or FINRA, Rule 5122 applies only to private placements of securities by member firms and their controlling entities. At the beginning of this year, FINRA proposed amendments to its Rule 5122 that would have expanded the reach of the rule. After receiving comments on the proposed amendments, FINRA proposed new Rule 5123 earlier this month. The proposed new rule has substantially the same scope as the proposed amendments to Rule 5122, with some important differences.
Rule 5123, as proposed, would restrict member firms from participating in any private placement subject to the rule unless the offering document, such as a private placement memorandum or term sheet, describes the intended use of proceeds and discloses the offering expenses, including the compensation to be paid to participating broker-dealers or associated persons. Participation includes participating in the preparation of the offering document or the distribution of the offering on any basis, furnishing customer or broker lists for solicitation, or otherwise advising or consulting with the issuer in connection with the private placement. Unlike the proposed amendments, Rule 5123 does not require that at least 85% of the proceeds raised be used for the business purposes described in the offering document.
In addition, Rule 5123 would require that the offering document and any exhibits be filed with FINRA no later than 15 calendar days after the date of the first sale. The proposed amendments would have required that the offering document be submitted on or prior to commencement of the offering. The filing requirement of Rule 5123 mirrors the filing requirement of Regulation D and provides significantly more flexibility with respect to timing an offering as compared to the proposed amendments. Also, Rule 5123 would require a filing by each and every FINRA member that participates in the offering.
Rule 5123 would exempt certain offerings from its provisions, including offerings made pursuant to Rule 144A or Regulation S of the Securities Act of 1933 and offerings sold solely to institutional investors, qualified purchasers under the Investment Company Act of 1940, qualified institutional buyers and/or banks.
The offering document, exhibits and any other information filed under Rule 5123 would receive confidential treatment and be used by FINRA only to ensure compliance with its rules and for other regulatory purposes.
Any final rule will need to be approved by the SEC.