SEC Approves New FINRA Rule 5123 Regarding Private Placements of Securities

Executive Summary

The SEC approved new FINRA Rule 5123 to require each FINRA member firm that sells an issuer’s securities in a private placement, subject to certain exemptions, to file with FINRA a copy of any private placement memorandum, term sheet or other offering document the firm used within 15 calendar days of the date of the sale, or indicate that it did not use any such offering documents.1 Firms must file the required offering documents electronically with FINRA through the FINRA Firm Gateway.2 The rule becomes effective December 3, 2012, and applies prospectively to private placements that begin selling efforts on or after that date.

In addition, effective December 3, 2012, firms must submit filings regarding member firm private offerings (MPOs), as required by FINRA Rule 5122 (Private Placements of Securities Issued By Members), through the Firm Gateway.3

The text of Rule 5123 is set forth in Attachment A.

Questions concerning this Notice should be directed to:

  • Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4623;
  • Paul Mathews, Director, Corporate Financing Department, at (240) 386-4623;
  • Lisa Jones Toms, Associate Director and Senior Counsel, Corporate Financing Department, at (240) 386-4661; or
  • Stan Macel, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-8056.

Background & Discussion

FINRA Rule 5123 is part of a multi-pronged approach to enhance oversight and investor protection in private placements. In Rule 5122, FINRA established standards on disclosure, use of proceeds and a filing requirement for private placements issued by a member firm or a control entity. FINRA also has previously provided guidance on the scope of a firm’s responsibility to conduct a reasonable investigation of private placement issuers in Regulatory Notice 10-22.

Rule 5123 will provide FINRA with more timely and complete information about the private placement activities of firms on behalf of other issuers. Under the rule, each firm that sells a security in a private placement, subject to certain exemptions, must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale.4 If a firm sells a private placement without using any offering documents, then the firm should indicate that it did not use any such offering documents. The rule requires firms to file any materially amended versions of the documents originally filed.

The rule exempts some private placements sold solely to qualified purchasers, institutional purchasers and other sophisticated investors.

Private Placement Filing System

FINRA is developing a private placement filing system to receive the offering documents that firms must file under the new rule. The filing system, which firms will access through the Firm Gateway, will provide an efficient way for firms to electronically submit the filings in searchable Portable Document Format (PDF) to FINRA. In response to comments during the rulemaking process, the filing system will allow a firm to submit a filing on behalf of other firms involved in the sale of the private placement. A firm that makes a filing on behalf of itself and other firms must identify the other firms as part of its submission.

Notice Filings

On December 3, 2012, when the new filing system becomes operational, firms that file offering documents pursuant to Rule 5122 must use the new filing system. Firms are reminded that filings under Rules 5123 and 5122 are “notice” type filings. As such, FINRA will not respond to the filings with a comment letter or provide a clearance letter.

Confidential Treatment and Exemptions

Similar to Rule 5122, FINRA will accord confidential treatment to all documents and information filed pursuant to Rule 5123. The rule also provides firms with a method to apply for an exemption from its provisions for good cause pursuant to the Rule 9600 Series.

Click here to see Attachment A.