• FINRA’s Private Placement Filing Rule Is Final
  • June 27, 2012 | Authors: David M. Carter; Timothy I. Kahler; David I. Meyers; Shona Smith
  • Law Firms: Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - New York Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Atlanta Office
  • On June 7, 2012, the SEC approved FINRA’s Rule 5123, which requires FINRA member firms to file offering materials used in private placements. Although the rule is subject to certain exceptions, FINRA members should be aware that private placements sold to natural-person-accredited investors will not be exempt from the filing requirements of the rule. 

    Rule 5123 requires FINRA member firms who sell securities in a “non-public offering” to file with FINRA any private placement memo, term sheet or other offering document, and any material amendments to such documents, or a statement that no such offering documents were used in the offering. The filings must be made within 15 days after the first sale by the member. Filings will be given confidential treatment and will be used by FINRA only to determine compliance with its rules or for other regulatory purposes.

    No filings will be required for an offering in which a member sells securities only to one or more of certain types of investors, including qualified institutional buyers, institutional accounts, qualified purchasers, investment companies, banks, and certain institutional accredited investors, as such terms are defined by applicable statute or regulation. The rule also provides exemptions for offerings under Rule 144A or Regulation S, offerings of certain short-term debt securities, non-convertible debt, preferred stock, commodity pool securities and standardized options, and offerings subject to certain other FINRA filing rules. Notably absent from the exemptions is any offering sold only to natural persons who are accredited investors. Thus, in practice the most common types of private placements will not be exempt from the filing requirement of Rule 5123.

    Rule 5123 as approved is narrower in scope than its prior versions, which were criticized as over-reaching and unclear. FINRA’s January 2011 proposal required offering materials to include specific disclosures, limited the use of offering proceeds, required filings before offering materials were provided to investors, and made member firms responsible for filings regardless of whether they made any sales. After re-filing its January 2011 proposal and making three amendments, FINRA settled on a rule that does not require specific disclosures, or any disclosures at all, requires filings only after a sale, and requires a member firm to make a filing only if the member makes a sale.

    Because the rule focuses on each member, FINRA may receive multiple filings for offerings in which more than one firm makes sales. In addition, the exemptions based on the types of purchasers depend on the sales made only by the member, and therefore an offering could be exempt for purposes of one member firm but not another.

    The implementation date of Rule 5123 should be no later than December 4, 2012 (180 days following SEC approval). FINRA will announce the implementation date by September 5, 2012. FINRA is developing a new electronic filing system to accommodate the filings to be required by Rule 5123; this new filing system will be separate from FINRA’s Public Offering System, which went into effect in June 2012.