The Financial Industry Regulatory Authority (FINRA) has adopted regulations1 (Rule) requiring each member firm2 that sells securities3 in a private placement4 to file with FINRA a copy of the private placement memorandum, term sheet or other offering document, including any materially amended versions, the firm used in connection with the sale of the securities;5 or the firm must indicate that it did not use any such offering documents. The filing6 must be made within 15 calendar days following the date of the first sale.7 The Rule is effective as of December 3, 2012, for all private placements that begin selling efforts on or after that date.8
Although FINRA's original proposal included a definition of "private placement,"9 the final version of the Rule does not provide any such definition. The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) provides that the SEC by regulation10 must amend Rule 506 under Regulation D of the Securities Act of 1933 to eliminate the restrictions against general advertising and general solicitation in the sale of securities in certain private placements under Rule 506.11 Therefore, despite the perhaps public nature of general solicitation and public solicitation, Congress has deemed such an offering to be a non-public offering of securities and, thus, a "private placement." At such time as the SEC issues final regulations amending Rule 506 in accordance with the congressional mandate, member firms participating in such private placements will be bound by the Rule to provide a notice filing with FINRA reporting their private placement participation.
The Rule exempts from the reporting requirements offerings sold by the member (or a person associated with the member) solely to any one or more of the following:
- institutional accounts
- qualified purchasers, as defined by the Investment Company Act (ICA)
- qualified institutional buyers (QIBs), as defined in Securities Act Rule 144A
- investment companies, as defined in the ICA
- banks, as defined in the Securities Act
- employees and affiliates of the issuer
- certain accredited investors, as defined in Regulation D, but persons other than natural persons.
The Rule also exempts offerings made under Rule 144A and Regulation S under the Securities Act, and other specified offerings and transactions. Because most Rule 506 private placements involve securities being purchased by individuals other than QIBs, the exemption from the notice filing requirement provided by the Rule will not be available for participating member firms in those circumstances. However, for purely institutional "private placements" there may be no FINRA filing requirement.