FINRA Proposed Rule on Private Placements

The following post comes to us from Robert E. Buckholz, Jr., partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication.

In January 2011, FINRA proposed to amend Rule 5122 (“Private Placements of Securities Issued by Members”) so that its disclosure and filing requirements, which currently apply only to private placements of securities issued by a FINRA member or a “control entity” of a member, would apply to all private placements, including those of unaffiliated issuers, covered by the rule. [1] On October 18, 2011 and in response to comments on the January proposal, FINRA withdrew its proposal to amend Rule 5122 and instead submitted new proposed Rule 5123 (“Private Placements of Securities”) to the Securities and Exchange Commission for adoption. [2] Rule 5122 would remain unchanged.

Proposed Rule 5123 would prohibit members and persons associated with a member from offering or selling a security in reliance on an exemption from registration under the Securities Act of 1933 (which the proposed rule defines as a “private placement”), or from participating in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such a private placement, unless the member or associated person provides to each investor, prior to sale, information about the anticipated use of the offering proceeds and the amount and type of offering compensation and expenses. This required information must be included in a private placement memorandum or term sheet or, if none is prepared, in a separate disclosure document. Although the rule’s definition of “private placement” is literally quite broad, it is unclear whether FINRA intends the rule to apply outside the context of non-public offerings generally effected pursuant to Section 4(2) or Regulation D.

Proposed Rule 5123 would also require that the participating member or associated person file the document containing the required information with FINRA no later than 15 calendar days after the date of first sale. Any material amendments to those documents must also be filed within 15 calendar days after being provided to any investor or prospective investor. Documents filed pursuant to the proposed rule would be given confidential treatment by FINRA. [3] The rule as proposed has no provision for coordination of filings when more than one member may be involved in a private placement.

Proposed Rule 5123 would contain a number of important exemptions that largely mirror those in existing Rule 5122. [4] Under these exemptions, the filing and disclosure requirements would not apply to the following types of offerings, among others:

  • offerings sold to “institutional accounts” (as defined in NASD Rule 3110(c)(4) [5]), “qualified purchasers” (as defined in Investment Company Act Section 2(a)(51)(A)), “qualified institutional buyers” (as defined in Rule 144A), investment companies and banks,
  • offerings sold to employees and affiliates of the issuer,
  • offerings of “exempted securities” (as defined in Securities Act Section 3(a)(12)),
  • offerings of exempt securities with short-term maturities under Securities Act Section 3(a)(3),
  • offerings of non-convertible debt or preferred securities by issuers that “meet the eligibility criteria for incorporation by reference in Form S-3 and F-3”,
  • offerings made pursuant to SEC Rule 144A or Regulation S and
  • offerings filed with FINRA under Rules 2310 (“Direct Participation Programs”), 5110 (“Corporate Financing Rule – Underwriting Terms and Arrangements”), 5121 (“Public Offerings of Securities with Conflicts of Interest”) and 5122 (“Private Placements of Securities Issued by Members”).

Proposed Rule 5123 differs from the originally proposed amendments to Rule 5122 in two significant ways. First, the proposal does not include a requirement that 85% of the offering proceeds must be used for a disclosed business purpose (this requirement still applies to offerings subject to Rule 5122). Second, the proposal extends the time when the relevant disclosure document must be filed with FINRA from the time when the document is provided to an investor to no later than 15 calendar days after the date of first sale.

FINRA believes that Rule 5123 should extend the requirements of Rule 5122 to offerings by issuers not affiliated with members or associated persons, even when no conflict of interest exists, as a means to provide additional protections for investors from fraud and abuse. FINRA has established a brief comment period that ends on November 14, 2011.


[1] During the comment period, which expired last March, FINRA received 35 comment letters, including a comment letter submitted by Sullivan & Cromwell LLP. Our comment letter is available at:
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[2] See SEC Release No. 34-65585 available at:
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[3] Notwithstanding the confidential treatment granted by FINRA, the documents filed with FINRA would still be available to the public pursuant to a FOIA request.
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[4] Unlike existing Rule 5122, proposed Rule 5123 would not exempt (1) offerings in which a member acts in a wholesaling capacity and (2) offerings of certain credit derivatives.
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[5] Under NASD Rule 3110(c)(4), an “institutional account” is an account of (1) certain registered investment advisers, (2) banks, savings and loan associations, insurance companies or registered investment companies or (3) any other entity with total assets of at least $50 million.
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