Effective June 17, 2009, the Financial Industry Regulatory Authority ("FINRA") Rule 5122 requires FINRA member firms, and associated persons that engage in a private placement of such firm's securities or those of a control entity, to comply with certain disclosure and filing requirements and limitations on the use of proceeds.
Rule 5122 requires such members or associated persons to:
(1) disclose to investors in a private placement memorandum, term sheet or other offering document the intended use of offering proceeds and offering expenses;
(2) file the offering document with FINRA; and
(3) commit that at least 85 percent of the offering proceeds will be used for business purposes, that will not include offering costs, discounts, commissions and any other cash or non-cash sales incentives.
Rule 5122 provides a number of exemptions to the rule, including private offerings sold only to the following:
(1) institutional accounts, as defined in NASD Rule 3110(c)(4);
(2) qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940;
(3) qualified institutional buyers, as defined in Rule 144A of the Securities Act of 1933;
(4) investment companies, as defined in Section 3 of the Investment Company Act of 1940;
(5) an entity composed exclusively of qualified institutional buyers, as defined in Rule 144A of the Securities Act of 1933;
(6) banks, as defined in Section 3(a)(2) of the Securities Act of 1933; or
(7) employees and affiliates of the issuer or its control entities.
Rule 5122 also excludes a variety of offerings from the rule, including offerings of exempted securities, as defined by Section 3(a)(12) of the Securities Exchange Act of 1934, offerings made pursuant to Rule 144A or Regulation S, offerings in which the member acts primarily in a wholesaling capacity, and offerings of equity and credit derivatives, including OTC options, provided that the derivative is not based principally on the member or any of its control entities.
The rule will not apply retroactively to any offerings that have already commenced selling efforts as of the effective date, June 17, 2009.
FINRA Regulatory Notice: available here (PDF)