SEC Approves Revised FINRA Rule Requiring Filing of Private Placement Materials
By: Edward B. Whittemore
In October 2011, the Financial Regulatory Authority ("FINRA") proposed a new rule, Rule 5123 (Private Placement of Securities), to require that members and associated persons that offer or sell applicable private placements, or participate in the preparation of private placement memoranda, term sheets or other disclosure documents in connection with such private placements, provide relevant disclosures to each investor prior to sale describing the anticipated use of offering proceeds, and the amount and type of offering expenses and offering compensation. The proposed rule was published by the Securities and Exchange Commission ("SEC") for public comment on October 24, 2011 and was amended several times by FINRA, in response to input from the SEC and public comments.
In the SEC's January 26, 2012 notice and order, the SEC specifically sought comment on four aspects of the proposed rule: (1) the categories of offerings subject to the Rule; (2) the potential impact on investors purchasing private placement securities through a broker-dealer subject to the rule; (3) the potential impact on FINRA members regarding implementation and compliance; and (4) the potential impacts on competition and capital formation, including the costs of raising capital.
On June 7, 2012, the SEC issued an order approving FINRA's adoption of Rule 5123. The final approved version of the Rule marks a step back from the broader scope of the initial FINRA proposal. As approved by the SEC, Rule 5123 is essentially a "notice filing only" requirement for private placements in which FINRA member firms participate in sales activities. The required disclosures regarding use of proceeds, offering expenses and offering compensation were omitted from the Rule.