Alert September 18, 2012

FINRA Announces Effective Date of Rule 5123 Regarding Member Participation in Private Placements of Securities

On September 5, 2012, FINRA posted Regulatory Notice 12-40 setting an effective date of December 3, 2012 for new Rule 5123, and providing information about the development of an electronic private placement filing system.  Proposed Rule 5123 was originally filed with the SEC on October 5, 2011 (see “FINRA Proposes New Rule 5123 Governing Private Placements of Securities by Member Firms” in the October 18, 2011 Financial Services Alert).  On January 19, 2012, FINRA filed Amendment No. 1 to the proposed rule change (see “FINRA Files Partial Amendment No. 1 to Proposed Rule 5123 Governing Private Placements of Securities by Member Firms” in the January 31, 2012 Financial Services Alert).  In response to further comments, FINRA filed Amendment No. 2 on March 12, 2012 and Amendment No. 3 on March 22, 2012.  The SEC approved the amended rule proposal on June 7, 2012, in Release No. 34-67157.  This article provides a brief summary of the Rule, describes changes from Amendment No. 1, and discusses FINRA’s proposed electronic filing system.

Regulation of Member Participation in Private Placements

Rule 5123 is a companion to Rule 5122, which regulates participation by FINRA member firms in offerings of their own securities or the securities of entities controlled by, controlling or under common control with the member (with “control” defined as an ownership interest of 50% or more).  Under those circumstances, unless an exemption is available, Rule 5122 requires a member to do the following:

  • Provide written disclosure of the intended use of proceeds of the offering, the amount of offering expenses and the amount of selling compensation that will be paid to the member and its associated persons;
  • File the private placement memorandum or other written document including the required disclosure with FINRA prior to the first time the document is provided to any prospective investor; and
  • Ensure that at least 85% of the offering proceeds raised are used for business purposes, not including offering costs, discounts, commissions or any other cash or non-cash sales incentives.

Rule 5123 applies to all private offerings except member private offerings and offerings exempt from the Rule.  Unlike Rule 5122, Rule 5123 requires only that the member cause the offering memorandum or other document used to make the offering be filed with FINRA within 15 days after the first sale in the offering.  If no offering document was used, the member must make a filing, by the same date, stating that no offering document was used.  The deadline of 15 calendar days after the date of first sale was chosen in response to comments and is intended to coordinate with the deadline for filing Form D with the SEC and state securities administrators.  Rule 5123 does not require disclosure of use of proceeds or mandate any minimum use of offering proceeds for business purposes.

Changes from Amendment No. 1

The final text of Rule 5123 contains the following changes from the proposal in Amendment No. 1:

  • The requirement to provide specific disclosure concerning the use of proceeds was deleted;
  • In the exemption in Paragraph (b)(1)(G) for offerings solely to (among others) employees and affiliates of the issuer, FINRA added a cross-reference to the definition of “affiliate” in Rule 5121 (Public Offerings of Securities with Conflicts of Interest); and
  • The filing requirement was amended to require not only that the original offering documents be filed but also that any “materially amended versions” of offering documents used in connection with a sale be filed within 15 calendar days of the date of first sale.

New Private Placement Filing System

In Regulatory Notice 12-40, FINRA stated that it is developing a private placement filing system to receive the offering documents that firms must file under the new rule.  Firms will access the filing system through the Firm Gateway and file documents in searchable Portable Document Format (PDF).  In response to comments, FINRA will allow a firm to submit a filing on behalf of other firms involved in the sale of the private placement.  A firm that makes a filing on behalf of itself and other firms must identify the other firms as part of its submission. FINRA expects that the new filing system will be operational by December 3, 2012, the effective date of the Rule.  FINRA reminded firms that filings under Rules 5122 and 5123 are “notice” type filings, and that FINRA does not respond to these filings with a comment letter or provide a clearance letter.

Paragraph (d) of the Rule provides that FINRA will accord confidential treatment to all documents and information filed pursuant to the Rule.