In January 2011, the Financial Industry Regulatory Association, or FINRA, proposed new amendments to its rules that would expand the reach of its current requirements for private placement offerings. FINRA Rule 5122 currently applies only to private placements of securities by member firms and their controlling entities. The proposed amendments would result in the rule applying to all private placements in which member firms participate, subject to certain exemptions.
The amended rule would restrict member firms from participating in any private placement subject to the rule unless the offering documents, such as a private placement memorandum or term sheet, disclose the intended use of proceeds, the offering expenses and the compensation to be paid to participating broker-dealers or associated persons, and any affiliation between the issuer and any participating broker-dealers. Participation includes participating in the preparation of the offering documents 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.
In addition, the offering documents must be submitted for review by FINRA on or prior to commencement of the offering. The offering is not contingent upon any FINRA approval of the offering documents, but FINRA may express comments or concerns if the offering documents present investor protection issues. For private placements subject to amended Rule 5122, issuers must also use at least 85 percent of the offering proceeds from a private placement for the business purposes disclosed in the offering document and not to pay for offering costs and compensation. Per FINRA, the intent of this provision is to ensure that the offering document discloses the business purposes of the offering, that investors’ money is dedicated to those business purposes and that no more than 15 percent of the proceeds is used to pay for offering costs and compensation.
Amended Rule 5122 exempts certain offerings from its provisions, including offerings made pursuant to Rule 144A or Regulation S of the Securities Act of 1933, offerings of unregistered investment grade rated debt and preferred securities, and offerings sold solely to institutional investors, qualified purchasers under the Investment Company Act of 1940, qualified institutional buyers under Rule 144A and banks.
The period for public comment on these amendments ends on March 14, 2011. Final rules will need to be approved by the SEC.