• Update on FINRA Rule 5123 Related to Private Placements
  • January 30, 2013 | Authors: Thomas M. Rose; Shona Smith
  • Law Firms: Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Atlanta Office
  • The new FINRA Rule 5123 became effective on December 3, 2012 and requires each FINRA member firm that sells securities in certain private placements to make a notice filing with FINRA via the Private Placement Filing System through FINRA Firm Gateway within 15 days after the date of the first sale of securities by that member firm.

    For Which Private Placements Must a Filing Be Made?

    The requirements of the Rule apply to all non-exempt private placements in which a member firm participates. The Rule sets out certain types of offerings and offerings to certain types of investors that are exempt from the requirements of the Rule. Rule 144A offerings to qualified institutional buyers and offshore Regulation S offerings are exempt from the requirements of the Rule, but many Regulation D offerings are not exempt from the requirements of the Rule. Sales solely to entities that satisfy the definition of “accredited investor” under Rule 501(a)(1), (2), (3), or (7) of Regulation D (commonly referred to as institutional accredited investors) are exempt from the requirements of the Rule; however, sales to accredited investors that are natural persons are not exempt from the requirements of the Rule.

    Who Must Make the Filing?

    Each member firm involved in the offering must ensure that either the offering is exempt or a notice filing is made.

    Certain exemptions in the Rule apply to specific types of offerings (such as offerings solely to qualified institutional buyers under Rule 144A and/or offshore Regulation S offerings). For those exemptions, if the offering satisfies the exemption then all firms selling securities in the offering are exempt from the filing requirements of the Rule. Other exemptions apply to sales to certain types of investors (such as sales to qualified institutional buyers and institutional accredited investors). For these, each member firm must ensure that sales by that member firm are made to an investor that is covered by an available exemption. For example, in the same offering, one member firm could sell solely to qualified institutional buyers and/or institutional accredited investors and be exempt from the requirements of the Rule. Another member firm in the same offering may sell to non-accredited investors and/or non-institutional accredited investors and must fulfill the requirements of the Rule.

    Each member firm that participates in the offering is responsible for making any required filing under the Rule, but one member firm may be designated to file on behalf of the other participating member firms so long as all participating member firms are listed in the filing. Only the designated firm will be able to access the filing. If a designated firm fails to file the offering documents, none of the selling firms will have complied with the Rule’s filing requirements. As a result, each firm relying on a designated filer should receive confirmation of the filing from the designated filer to satisfy its own filing obligation.

    What Must Be Included in the Filing?

    The notice filing must include the offering documents (which may include a private placement memorandum, term sheet or other document that sets forth the terms of the offering) used in connection with the sale and any material amendments to the offering documents, or a confirmation that no offering documents were used. The Rule requires that firms file materially amended versions of the offering documents that were originally filed. FINRA has noted that the issuer will typically offer rescission rights to investors if there is a material change in the offering document.

    Offering documents must be filed in searchable PDF format. Each document must not exceed 50 megabytes. Multiple documents may be submitted in one filing.

    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.

    When Must the Filing Be Made?

    A member firm must make any required notice filing with FINRA within 15 days after the date of the first sale of securities by that member firm. The date of first sale is the date on which the investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor's completed subscription agreement or the investor’s payment.

    Where Must the Filing Be Made?

    Firms must make any required filing of the offering documents through the Private Placement Filing System in FINRA Firm Gateway. Most member firms will already have entitlement rights to the Private Placement Filing System through FINRA Firm Gateway. Member firms can assign user access rights to the Private Placement Filing System through the firm's Super Account Administrator to employees at the member firm or to consultants, law firms or other third parties to make such filings on behalf of the member firm.

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    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 offering and investor qualifications, and budget some additional expense.