Beginning on Monday, December 3, 2012, members of Financial Industry Regulatory Authority (FINRA) must file a copy of any private placement memorandum, term sheet, or other offering document used within 15 calendar days from the date the sale took place; the filer will have a continuing obligation to file any materially amended versions of the offering documents; if no offering documents are used, it must indicate that it did not do so; and filings must be made electronically with FINRA through the FINRA Firm Gateway.
FINRA has taken active steps to increase transparency and investor protection in private placements. In addition to the Rule 5123 filing requirements, Rule 5122 establishes standards on disclosure, use of proceeds, and a filing requirement for private placements issued by members or a control entity. Furthermore, FINRA published Regulatory Notice 10-22 to provide guidance on the scope of a firm’s responsibility to conduct a reasonable investigation of private placement issuers.
As is the case with most securities offerings, there are exemptions to FINRA’s filing rule. The following private placements are exempt from this rule:
- Offerings sold by the FINRA member or person associated with the FINRA member solely
to any one or more of the following:
- Institutional accounts, as defined in 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 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 Exchange Act; and
- Accredited investors described in Securities Act Rule 501(a)(1), (2), (3) or (7).
As long as FINRA member funds exclude investments from non-accredited investors, they will be exempt from the new filing requirements. Together with the ban on general solicitation likely to be lifted by the end of the year for funds that secure investments solely from accredited investors, this rule will likely further limit non-accredited investors’ access to private fund investing, since these funds typically want to avoid the administrative hassle and costs associated with filing requirements.
If you’d like to learn more about FINRA rules or compliance issues for your private placement, please feel free to contact us today.