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FINRA Adopts Rule 5123 Requiring the Filing of Offering Documents Used in Private Placements of Securities

A new rule requiring FINRA member firms to file copies of certain offering documents related to private placement transactions was approved by the SEC and was effective as of December 3, 2012. FINRA has published FAQs regarding the new rule which can be found here.

Overview

Under new Rule 5123, any FINRA member firm that sells an issuer’s securities in a non-public offering in reliance on an available exemption from registration under the Securities Act of 1933 (the “Securities Act”) is required to file with FINRA a copy of any private placement memorandum, term sheet, or other offering document the firm used within fifteen calendar days from the date of first sale. If no such offering documents were used, the member firm must indicate so.

Which private offerings are exempt from the new rule?

There are a number of exemptions and, in practice, new FINRA Rule 5123 will be limited primarily to private placements in Regulation D offerings made to natural persons who are not exempt persons under the rule or are not participating in transactions which are exempt from the rule’s requirements.

The exemptions include offerings sold by the member solely to any one or more of the following:

  • institutional accounts, as defined in FINRA Rule 4512(c);
  • qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;
  • qualified institutional buyers, as defined in Securities Act Rule 144A;
  • investment companies, as defined in Section 3 of the Investment Company Act;
  • an entity composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A;
  • banks, as defined in Section 3(a)(2) of the Securities Act;
  • employees and affiliates, as defined in FINRA Rule 5121, of the issuer;
  • knowledgeable employees as defined in Investment Company Act Rule 3c-5;
  • eligible contract participants, as defined in Section 3(a)(65) of the Securities Exchange Act of 1934 (the “Exchange Act”); and
  • accredited investors described in Securities Act Rule 501(a)(1), (2), (3) or (7).

In addition, the following additional types of offerings are exempt from the requirements of Rule 5123:

  • offerings of exempted securities, as defined in Section 3(a)(12) of the Exchange Act;
  • offerings made pursuant to Securities Act Rule 144A or SEC Regulation S;
  • offerings of exempt securities with short term maturities under Section 3(a)(3) of the Securities Act and debt securities sold by members pursuant to Section 4(2) of the Securities Act so long as the maturity does not exceed 397 days and the securities are issued in minimum denominations of $150,000 (or the equivalent thereof in another currency);
  • offerings of subordinated loans under SEA Rule 15c3-1, Appendix D (see NASD Notice to Members 02-32 (June 2002));
  • offerings of “variable contracts,” as defined in Rule 2320(b)(2);
  • offerings of modified guaranteed annuity contracts and modified guaranteed life insurance policies, as referenced in Rule 5110(b)(8)(E);
  • offerings of non-convertible debt or preferred securities that meet the transaction eligibility criteria for registering primary offerings of non-convertible securities on Forms S-3 and F-3;
  • offerings of securities issued in conversions, stock splits and restructuring transactions that are executed by an already existing investor without the need for additional consideration or investments on the part of the investor;
  • offerings of securities of a commodity pool operated by a commodity pool operator, as defined under Section 1a(11) of the Commodity Exchange Act;
  • business combination transactions as defined in Securities Act Rule 165(f);
  • offerings of registered investment companies;
  • standardized options, as defined in Securities Act Rule 238; and
  • offerings filed with FINRA under Rules 2310, 5110, 5121 and 5122, or exempt from filing thereunder in accordance with Rule 5110(b)(7).

How should the documents be uploaded?

Rule 5123 requires that firms submit their offering documents in searchable Portable Document Format (PDF). FINRA is developing a private placement filing system to receive Rule 5123 filings, which will require electronic filings through FINRA’s Firm Gateway electronic system.

How will these filings be treated?

Filings under both Rule 5122 and 5123 are treated as “notice” type filings, which means that FINRA will not respond to the filings with a comment letter of provide a clearance letter. FINRA will accord confidential treatment to all documents and information filed.

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Associate

Mr. Schendel is a senior attorney in the Corporate Practice Group in the firm's Palo Alto and San Francisco offices.

Mr. Schendel's practice focuses on advising public and private companies in mergers & acquisitions, securities offerings, corporate governance, SEC reporting, and general corporate matters.  Mr. Schendel also has extensive experience working with private equity funds in connection with fund formation, general fund operating matters, and buy-side M&A.

650-815-2621
Associate

Mr. Cazares is an associate in the Corporate Practice Group in the firm's San Francisco office.

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