Securities and Futures Regulatory Update
FINRA Rule 5123, which was approved by the SEC in June 2012 and became effective on December 3, 2012,1 requires any FINRA member that “sells” an issuer’s securities in a “private placement”2 to, in the absence of an available exemption, perfect a filing with FINRA that consists of a copy of any private placement memorandum, term sheet or other offering document, as well as any material amendments thereof, that the firm used in connection with such sale (or indicate in the filing that no such offering documents were used). In either case, the filing must be made within 15 calendar days after the date of the first sale.
FINRA Rule 5122, a counterpart rule to FINRA Rule 5123 that was adopted in 2009,3 requires a filing of offering documents, and imposes certain other requirements, with respect to “member private offerings” (i.e., private placements of unregistered securities issued by FINRA member firms or certain affiliated parties of such member).
Filings under Rules 5122 and 5123 are deemed to be “notice” filings. FINRA has indicated that there is no formal review of the filings and it will not respond to a filing, or issue a “no-objections” or similar “clearance” letter, as it does in the case of filings under FINRA’s Corporate Financing rules for public offerings.4 All filings under Rules 5122 and 5123 are afforded confidential treatment. As noted above, a Rule 5123 filing is required to be perfected no later than 15 calendar days after the commencement of sales in the private placement, so that there is no “waiting” or cooling-off period between the filing and when sales can commence.5
To assist with the implementation and interpretation of the two Rules, FINRA recently issued a set of FAQs concerning the sale of private placements.6 While the FAQs focus primarily on the requirements of, and exemptions from, new Rule 5123, certain of the FAQs are equally applicable to Rule 5122.
Filing Requirements FAQ 1 explains that, effective December 3, 2012, to satisfy the filing requirements under FINRA Rules 5122 and 5123, member firms must file the required offering documents via FINRA’s new Private Placement Filing System, accessible through the FINRA Firm Gateway, unless the offering meets one of the enumerated exemptions under the Rules. Filing Requirements FAQ 2 provides fairly detailed procedures for how to access the Private Placement Filing System. According to Filing Requirements FAQ 3, member firms can provide third-parties, such as consultants or law firms, access to the Private Placement Filing System so that the third-parties can file offering documents on behalf of the member firm. There is no filing fee for submitting a notice filing under either FINRA Rule 5122 or 5123.
The filing obligation applies to each selling member firm. Firms are permitted to file individually, but the Private Placement Filing System also allows a member firm (the “designated filer”) to file the offering documents on behalf of other selling member firms involved in the sale of the private placement. A designated filer must identify the other selling member firms as part of the submission.7 Filing Requirements FAQ 5 emphasizes that if the designated filer fails to file the requisite offering documents, none of the selling firms that are required to file (i.e., those that are not eligible for an exemption) will have complied with Rule 5123’s filing requirements. Given that only the designated filer would have access to the filing through the FINRA Firm Gateway, Filing Requirements FAQ 5 states that the other selling member firms “should arrange to receive confirmation from the designated filer to ensure the filing was made.”
As previously noted, Rule 5123 requires member firms to file offering documents used to sell the private placement, including any private placement memorandum, term sheet, and any other type of document that sets forth the terms of the offering. The documents must be submitted in searchable PDF format. The maximum size limit for a single document is 50 MB, but member firms can submit multiple documents in connection with a single filing.8
According to Filing Requirements FAQ 11, firms are required by Rule 5123 to file “materially amended versions” of any offering documents originally filed in connection with a private placement. However, such FAQ, which does not reference any time limit, does not appear to be consistent with Rule 5123(a), which requires a member to submit to FINRA a copy of “any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale within 15 calendar days of the date of first sale.” The Rule does not otherwise provide for an ongoing requirement or obligation to file updated or amended offering documents, or to file new offering documents that were not originally filed, after the initial 15-day period following the first sale in the private placement. In this regard, in Amendment No. 3 to the FINRA rule proposal on Rule 5123,9 FINRA noted that it had revised the Rule language in response to comments in order to avoid an open-ended filing obligation for a continuous offering. Accordingly, any material amended versions of an offering document that arise after the 15-day period following the initial sale in the private placement should not need to be filed under Rule 5123. By contrast, FINRA Rule 5122(b)(2) provides that members have an ongoing obligation to file any amendment(s) or exhibit(s) to the applicable private placement memorandum, term sheet or other offering document with FINRA thereunder “within ten days of being provided to any investor or prospective investor.”
Filing Requirements FAQ 12 notes that Rule 5123’s 15-day period commences on the date the member firm makes the first sale of securities in the private placement. Filing Requirements FAQ 13 provides that, for purposes of determining the “date of first sale” in the case of a contingency offering, FINRA will apply the standard used by the SEC for purposes of Form D, used for offerings under SEC Regulation D, such as the private placement “safe harbor” exemption via Rule 506 (i.e., “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 subscription agreement or check”).10
The Disclosure FAQ notes that, while Rule 5123 has no specific disclosure requirements, firms should comply with the disclosure requirements in the exemption that they are relying upon from the registration requirements of the Securities Act of 1933 (further reminding members that “[a]ny material misstatement or omission in offering documents for private placements is subject to the antifraud provisions of the federal securities laws”).
Although not addressed by the Disclosure FAQ, member firms are reminded that Rule 5122 does impose specific disclosure requirements, among other things.
Exemptions FAQs 1 and 2 distinguish between private placements sold to “institutional accounts,” defined in FINRA Rule 4512(c),11 which are exempt from the Rule 5123 filing requirements pursuant to paragraph (b)(1)(A) of the Rule, and private placements sold to “accredited investors,” which are not necessarily exempt from the filing requirements unless the sales are solely to entities that satisfy the definition of accredited investor under Rule 501(a)(1), (2), (3) or (7) of Regulation D,12 or to an individual accredited investor with total assets of at least $50 million who accordingly meets the definition of “institutional account” under FINRA Rule 4512(c)(3).
In Exemptions FAQ 3, FINRA distinguishes between the Rule 5123 exemptions that apply to specific types of offerings and those that apply to sales to certain types of investors, noting that, for the latter, each individual firm’s eligibility for the exemption will depend upon that firm ensuring that its sales transactions are made only to those categories of investors covered by an available exemption. Although a single member firm can be designated to file for all participating firms, eligibility for an exemption continues to be determined on a firm-by-firm basis. Accordingly, if five firms are participating in selling a private placement, and three of the firms, including the designated filing firm, are exempt from filing, but the other two firms are required to file, a filing would be required for the two non-exempt firms (in such case, the filing would presumably be made by the designated filing firm, even though the designated filing firm is not itself required to make a filing).
In Exemptions FAQ 4, FINRA notes that whether a firm that introduces a prospective investor to the issuer and receives a fee is “selling” and, thus, is required to file the private placement pursuant to Rule 5123, “depends on the facts and circumstances.” Although FINRA does not elaborate in the FAQs as to what types of facts or circumstances may trigger a filing requirement, this FAQ seems to suggest that, in order to trigger a filing requirement, a member must “sell” a private placement – i.e., at least introduce a prospective investor to the issuer and receive a fee for such introduction.
Finally, Exemptions FAQ 5 notes that firms participating in crowdfunding offerings under the JOBS Act will not be required to make a filing under Rule 5123 (once the crowdfunding rules are implemented by the SEC).
The Contact Information FAQ provides that member firms with general and interpretive questions concerning Rules 5122 and 5123 should contact the FINRA Corporate Financing Department, at (240) 386-5520 or via an electronic email form linked to the FAQ. Member firms with entitlement or system-related issues are instructed to contact Firm Gateway at (301) 869-6699.
Unlike FINRA Rule 5122, FINRA Rule 5123 does not impose any specific disclosure or other obligations in connection with private placements.13 Rather, Rule 5123 only imposes the obligation to file a copy of any offering document used to sell the private placement (although there is no requirement to use or have any offering document(s)), if the offering is not subject to one of many exemptions set forth in Rule 5123(b). All filings under FINRA Rules 5122 and 5123 for a private placement are deemed by FINRA to be “notice” filings whereby FINRA will not immediately review the submission and will not issue any “no-objections” or similar “clearance” letter. Nonetheless, FINRA has informally stated that if a filing under Rule 5123 is made for a selling member, it intends to access information available to FINRA with respect to each such selling member, including disciplinary information, and has indicated that FINRA may potentially request additional information in the future from such selling member (for example, pursuant to FINRA Rule 8210, which gives FINRA broad investigatory authority over members), particularly if a member participates in subsequent offerings for a single issuer and the disclosures in the issuer’s offering documents, if any, differ materially across offerings, such as with respect to the intended use of proceeds.
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If you have any questions regarding FINRA Rules 5122 and 5123, or the related FAQs concerning private placements, please contact any of the Sidley lawyers identified below or the Sidley lawyer with whom you usually work.
Barbara J. Endres +1.202.736.8287
email@example.comDavid M. Katz +1.212.839.7386
firstname.lastname@example.orgKathleen M. Klaben
1See SEC Release 34-67157, Notice of Filing and Accelerated Approval of FINRA Rule 5123, SR-FINRA-2011-057 (June 7, 2012), available athttp://www.sec.gov/rules/sro/finra/2012/34-67157.pdf. See also FINRA Regulatory Notice 12-40 (September 2012), available athttp://www.finra.org/Industry/Regulation/Notices/2012/P163710 (announcing the effective date of Rule 5123). Pursuant to FINRA Regulatory Notice 12-40, FINRA Rule 5123 became effective December 3, 2012 and applies “prospectively to private placements that begin selling efforts on or after that date.”
2 A “private placement” means a non-public offering of securities conducted in reliance upon an available exemption from registration under the Securities Act of 1933. See FINRA Rule 5123(a)(4).
3See FINRA Regulatory Notice 09-27 (May 2009), available athttp://www.finra.org/Industry/Regulation/Notices/2009/P118738.
4See FINRA Regulatory Notice 12-40.
5 A Rule 5122 filing must be made “at or prior to the first time the [offering] document is provided to any prospective investor,” and any amendment or exhibit to the offering documents must be filed “within ten days of being provided to any investor or prospective investor.” See FINRA Rule 5122(b)(2).
6 The FAQs are available on the FINRA website at http://www.finra.org/Industry/Compliance/RegulatoryFilings/PrivatePlacements/FAQ/index.htm.
7See FINRA Regulatory Notice 12-40.
8See Filing Requirements FAQs 6, 8, 9 and 10.
9See Amendment No. 3 to SR-FINRA-2011-057 (June 7, 2012), available at
10See SEC Release 33-8891 (February 6, 2008), available athttp://www.sec.gov/rules/final/2008/33-8891.pdf; see also SEC Release 33-6455, at Question 82 (March 4, 1983).
11 FINRA Rule 4512(c) defines an “institutional account” to mean the account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser, or any person, including natural person, with total assets of at least $50 million.
12 In the FAQs, FINRA cites to “Rule 501(b)(1), (2), (3), or (7)” in describing the types of accredited investors to whom a member firm could sell private placements and qualify for the exemption from the Rule 5123 filing requirements. However, because the definition of “accredited investor” is in paragraph (a) of Rule 501, we believe that the reference to Rule 501(b) in the FAQs is a typo, and that FINRA intended to refer to Rule 501(a)(1), (2), (3), or (7).
13 FINRA Rule 5122 also imposes a minimum use of proceeds requirement. Specifically, FINRA Rule 5122(b)(3) provides that “[f]or each Member Private Offering, at least 85% of the offering proceeds raised must be used for business purposes, which shall not include offering costs, discounts, commissions or any other cash or non-cash sales incentives. The use of the offering proceeds also must be consistent with the disclosures required in paragraph (b)(1) [of the Rule].”
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