On January 11, 2011, FINRA published a regulatory notice, FRN 11-04, requesting comment on proposed amendments to Rule 5122, currently entitled “Private Placements of Securities Issued by Members.” The rule would be amended to apply to all private offerings in which a FINRA member firm participates. With one exception, the exemptions now available under the rule would be available under the amended rule. The exemption for an offering by a control person of a member acting solely in a wholesaling capacity would be deleted.
Rule 5122 has three basic requirements:
The member firm must provide a disclosure document or term sheet to each prospective investor disclosing the intended use of proceeds, the offering expenses and compensation to be paid to participating broker-dealers;
The disclosure document must be filed with the FINRA Corporate Financing Department within ten days after first use; and
No more than 15% of the offering proceeds may be used to pay offering expenses and commissions, with the remainder to be used for the business purposes disclosed in the offering material.
FINRA proposes to amend the rule to require that the offering material also disclose, if applicable, the nature of any affiliation between the issuer and any participating broker‑dealer. The definition of “affiliate” in Rule 5122 would adopt the definition of “control” as used in Rule 5121 (Public Offerings of Securities with Conflicts of Interest). That definition is much broader than the definition of “control” currently used in Rule 5122 or elsewhere, and includes beneficial ownership by one person of 10% or more of the outstanding common equity, preferred equity or subordinated debt of another person.
Comments on this proposal are due by March 14, 2011. If FINRA decides to go forward with the rule amendment, its next step will be to make a rule filing with the SEC, at which time there will be a second opportunity to comment.