Client Alert

FINRA Proposes Additional Filing Requirements for Private Placements

09 Nov 2020

In October 2020, the Financial Industry Regulatory Authority (FINRA) proposed a rule amendment that would expand its filing requirements relating to private placements. Under the proposal, FINRA would amend its Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) to require members to file “retail communications” concerning private placement offerings that are subject to the filing requirements under those rules.

FINRA’s full proposal may be found in the following filing with the U.S. Securities and Exchange Commission (SEC):

Current Rules and FINRA Practice

Rule 5123 requires FINRA member firms to file with FINRA any private placement memorandum (PPM), term sheet or other offering document used in connection with a private placement of securities within 15 calendar days of the date of first sale (unless an exemption is available.)[1]

Rule 5122 applies to private placements of securities that are issued by a FINRA member or one of its affiliates. Unless an exemption from filing is available, the rule requires the member or affiliate to provide prospective investors with a PPM, term sheet, or other offering document that sets forth the expected use of the offering’s proceeds, the offering expenses and the amount of selling compensation that will be paid to the member and its associated persons. Rule 5122 also requires a member to file the PPM, term sheet, or other offering document with the FINRA’s Corporate Financing Department at or prior to the first time that the document is provided to investors.

FINRA personnel review a significant number of these filings. The review process helps FINRA to determine if the relevant documents comply with FINRA’s requirements, and to potentially identify any other areas of regulatory concern.

Concerns Relating to Other Offering Communications

FINRA proposed the amendments due to its concern that the current rules do not fully identify the “offering documents” that are subject to the filing requirements. Because FINRA members may use a variety of written materials in connection with a private placement, the current rules may not clearly require filing of materials that would be of interest or of concern to FINRA. These materials could include, for example, web pages that promote the offering, slide presentations, pitch decks, one-page “teasers,” fact sheets, sales brochures, executive summaries, and investor packets. All of these types of documents could contain information that might be problematic, such as prohibited projections of performance, or false or misleading statements about the offerings. Accordingly, the proposal is designed to ensure that all of the key private placement materials that are furnished to retail investors are furnished to FINRA.

Under the rule proposal, any “retail communication” (as defined in Rule 2210)[2] used in connection with the offering would be subject to the filing requirements. FINRA anticipates that members would be able to file most retail communications at the same time and in the same manner that they file their PPMs, term sheets, and other offering documents. With this information being filed, FINRA believes that it will have a more complete picture of the information and documents that have been furnished to retail investors.

Next Steps

If the SEC approves the proposed rule change, FINRA will announce the effective date of the amendment in a Regulatory Notice, which will published no later than 60 days after the SEC approval. The effective date will be no later than 180 days following publication of that Regulatory Notice.

[1] Offerings made solely to institutional accounts or to certain other categories of sophisticated investors, as well as offerings of certain types of securities, are exempt from the requirements of Rules 5122 and 5123.

[2] FINRA defines “retail communications” as any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.



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