The Financial Industry Regulatory Authority ("FINRA") recently released Regulatory Notice 09-27, announcing that FINRA Rule 5122 ("Rule 5122") will become effective on June 17, 2009. Rule 5122 will regulate private placements of unregistered securities issued by FINRA members or certain affiliates thereof.
Applicability of and Compliance with Rule 5122
Rule 5122 applies to broker-dealers selling their own securities (or those of certain affiliated entities) in private transactions. In order to satisfy the requirements of Rule 5122, an applicable broker-dealer must disclose to potential investors in a private placement memorandum, term sheet, or other offering document, the intended use of offering proceeds and any related offering expenses. Further, any such broker-dealer must file any offering documents, related documents, and amendments thereto with FINRA. Any such broker-dealer must also represent to investors that at least 85 percent of the offering proceeds will be used for business purposes, not including offering costs, discounts, commissions, and any other cash or non-cash incentives.
Exemptions Provided by Rule 5122
Rule 5122 provides several exemptions to compliance with the provisions described above. Such exemptions fall within two broad categories: (i) exemptions related to the type of investors participating in the private offering (e.g., institutional accounts, "qualified institutional buyers" and banks); and (ii) exemptions related to the type of offering (e.g., offerings of unregistered investment grade rated debt and preferred securities, offerings to employees and affiliates of the issuer, and offerings of certain equity and credit derivatives, including OTC options).
While FINRA Rule 5122 adds additional burdens on many broker-dealers selling their own unregistered securities or the unregistered securities of certain affiliates, there are numerous exemptions provided in Rule 5122 that narrow its scope. The ultimate effect of Rule 5122 on covered brokerdealers and the marketplace of unregistered offerings cannot be readily determined, although its effect on relatively smaller broker-dealers is likely to be far more apparent than its effect on larger broker-dealers or the marketplace as a whole.