On October 4, 2011, the Financial Industry Regulatory Association (FINRA) filed a proposal with the SEC to adopt new Rule 5123. Proposed Rule 5123 would prohibit member firms and their associated persons from being involved in a private placement unless written information about the private placement is provided to investors and filed with FINRA. Proposed Rule 5123 will apply when a FINRA member or a person associated with a FINRA member offers or sells a security in a private placement or participates in the preparation of a private placement, memorandum, term sheet, or other disclosure document in connection with a private placement. Currently, FINRA existing Rule 5122, which has been in effect since March 2009, imposes similar requirements on FINRA members conducting private placements of their own securities or those of a control entity. Proposed Rule 5123 would be a separate rule from Rule 5122.

Under the proposed rule, member firms and their associated persons will be required to provide each investor, prior to any sale, a private placement memorandum or term sheet that discloses:  

  • the anticipated use of offering proceeds
  • the amount and type of offering expenses
  • the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering

In addition, proposed Rule 5123 will require the private placement memorandum, term sheet, or other disclosure document to be filed with FINRA no later than 15 days after the first sale. Proposed Rule 5213 includes exemptions for private placements to certain types of investors, including qualified institutional buyers, investment companies and banks, and of certain types of securities.

However, private placements offered only to accredited investors are not automatically exempt from Rule 5123 unless it otherwise fits within one of the above exemptions. Under proposed Rule 5123, FINRA may also exempt a member or associated person from Rule 5123 "for good cause shown."

The proposed rule is a "notice" filing. FINRA staff will not provide comments on the filing, and filing with FINRA will not be a precondition to commencing an offering. Moreover, members need not expect to receive any FINRA staff input before proceeding with an offering. The proposed rule simply provides FINRA staff with timely access to information about the private placement business of FINRA members.  

Proposed Rule 5123 provides that the information will be kept confidential and that FINRA will only utilize the information to determine compliance with FINRA rules and for other regulatory purposes. FINRA's basis for proposing Rule 5123 is to ensure that investors in private placements are provided detailed information about the intended use of offering proceeds, the offering expenses and offering compensation.