• New FINRA Rule 5123 Requires a Post-Sale Filing for Certain Private Placements
  • September 19, 2012 | Authors: Coburn R. Beck; John Owen Gwathmey; David I. Meyers
  • Law Firm: Troutman Sanders LLP - Richmond Office
  • New FINRA Rule 5123 will require each FINRA member that sells a security in a private placement to make a notice filing within 15 days after the date of the first sale by that FINRA member.  Rule 5123 will make it more important for each of the issuer and the FINRA member to engage separate U.S. counsel for the offering to ensure compliance with the rule.

    While FINRA Rule 5122 seeks to protect investors and enhance oversight of FINRA members by setting forth disclosure, filing and use of proceeds requirements for FINRA members conducting private placements of their own securities, new FINRA Rule 5123 aims for the same goals in connection with private offerings in which the FINRA members undertake private placement activities on behalf of other issuers.

    Subject to certain exceptions, the new rule imposes a notice filing obligation for all private placements where a FINRA member firm makes sales.  Generally speaking, Rule 144A and offshore Regulation S offerings would be exempt from the rule, but many Regulation D offerings (including most Regulation D offerings made to natural persons) would not be exempt from the rule.

    The rule becomes effective December 3, 2012, and applies prospectively to private placements that begin selling efforts on or after that date.

    The following requirements under the rule apply to all non-exempt private placements in which a member firm participates.

    • The offering document and any material amendments to the offering document, or a confirmation that no offering document was used, will be required to be filed with FINRA by the FINRA member no later than 15 calendar days after the date of first sale using the applicable offering document.
    • Each member firm that participates in the offering (not the issuer) will have the obligation to ensure that an offering document is filed with FINRA. The filing requirement refers to the first sale by the member making the filing (or on whose behalf a designated member is filing), rather than the first sale by another member.
    • FINRA will accord confidential treatment to all documents and information filed pursuant to the rule, and will use the documents and information solely for the purpose of determining compliance with FINRA rules or other applicable regulatory purposes.

    Exemptions from the notice filing requirement are available for offerings to certain types of purchasers, as well as for certain types of offerings.  Generally speaking, Rule 144A and Regulation S offerings, offerings to employees and affiliates of the issuer, and offerings to existing securityholders of securities issued in conversions, stock splits and other types of restructuring transactions where there is no need for payment of additional consideration by the investor are exempt from the rule.  In addition, exemptions are available for private placements to “institutional accounts” (which differs from the definition of “institutional accredited investor” in Regulation D and generally exclude accredited investors that are natural persons), and for certain other offerings.  A member qualifies for an exemption based upon the sales it makes rather than those of all members participating in the offering.  Thus, the actions of one member would not affect the availability of an exemption for another member.

    The rule does not preclude sales of private placements in which no disclosure documents are used, and does not require the member to make any additional disclosure to investors in such offerings. The notice filing requirement does not establish any review and approval process by FINRA for private placements.

    FINRA is developing a private placement filing system, which member firms will access through the Firm Gateway, for purposes of receiving the offering documents that member firms are required to file under the new rule.  Filings under Rule 5122 also will be made through the Firm Gateway.

    Issuers and broker-dealers should be aware of the impact of the new rule on private placements in the U.S.  Issuers and broker-dealers should each engage separate U.S. counsel for the offering, be explicitly aware of prospective investor qualifications, and budget some additional expense.