On December 3, 2012, Rule 51231 of the Financial Industry Regulatory Authority (“FINRA”) became effective. Rule 5123 requires FINRA members that participate in a private placement of securities of a nonmember, subject to certain exceptions, to submit a notice filing to FINRA within 15 calendar days of the first sale in the private placement. As a result of exemptions from the Rule relating to institutional investors, the Rule should primarily apply to private offerings to retail investors. Note that there is no exemption from Rule 5123 for private placements to accredited investors who are natural persons.
I. Filing Requirement
Rule 5123 requires, subject to the exemptions summarized below, that each member of FINRA that sells a security of an issuer in a private placement2, either (i) submit to FINRA, or have submitted on its behalf by a designated member of FINRA, a copy of any private placement memorandum, term sheet or other offering document, including any materially amended version thereof, used in connection with such sale within 15 days of the date of first sale or (ii) indicate to FINRA that no such offering documents were used.
All documents and information filed pursuant to Rule 5123 will be accorded confidential treatment by FINRA.
II. Purpose of Rule 5123
Rule 5123 provides that documents and information filed pursuant to Rule 5123 will be used by FINRA solely for the purpose of review to determine compliance with the provisions of applicable FINRA rules or for other regulatory purposes deemed appropriate by FINRA. Filings pursuant to Rule 5123 are notice filings and will not be subject to the approval of FINRA.
Exemptions from Rule 5123 include, among others:
- offerings to institutional accounts as defined in FINRA Rule 4512(c)3, qualified purchasers as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, qualified institutional buyers as defined in Rule 144A under the Securities Act and entities composed exclusively of qualified institutional buyers, investment companies as defined in Section 3 of the Investment Company Act, banks as defined in Section 3(a)(2) of the Securities Act, employees and affiliates of the issuer, and institutional accredited investors described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act;
- offerings made pursuant to Rule 144A and Regulation S under the Securities Act; and
- offerings filed with FINRA under other FINRA rules (including Rule 51224 which requires filings with respect to private placements by FINRA members of their own securities or securities of their affiliates).
A list of all the exemptions from Rule 5123 is set forth on Annex A to this memorandum.
IV. FINRA Guidance Regarding Rule 5123
FINRA has provided FAQs5 and a user guide6 relating to Rule 5123 filings. The FAQs provide practical guidance on how to make the filing and contact information at FINRA for filers who have interpretative questions or system-related issues.
The FAQs also provide the following interpretative guidance:
- For purposes of determining the “date of first sale,” FINRA will apply the same standard the SEC has stated for Form D filings: “the date of first sale is the date on which the investor is contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor’s subscription agreement or check”;
- Rule 5123 has no specific disclosure requirements;
- There is no exemption from Rule 5123 for private placements to accredited investors who are natural persons; and
- Crowdfunding offerings under the JOBS Act are not required to be filed pursuant to Rule 5123.
The user guide provides detailed instructions on how to access the FINRA Private Placement Filing System and on how to make a filing pursuant to Rule 5123. Third parties, including law firms, may make filings under Rule 5123 on behalf of FINRA member firms.