FINRA Rule Goes into Effect: Member Firms Must Disclose Private Placement Documents

Client Advisory

December 14, 2012
On December 3, 2012, FINRA Rule 5123 went into effect, imposing new disclosure requirements on FINRA member firms that sell securities in private placements. 
This rule is part of the wider attempt by regulators to enhance oversight and investor protection in private placements. It is interesting that FINRA is increasing its surveillance of marketing material in a wide range of private placements just as the SEC is considering rules to implement the JOBS Act mandate to permit general solicitation for some private placements under Regulation D. In Rule 5122, FINRA established procedures for private placements by a member firm of its own securities or the securities of a control affiliate.  FINRA also has previously provided guidance on the scope of a firm’s responsibility to conduct a reasonable investigation of private placement issuers in Regulatory Notice 10-22. Rule 5123 is the latest addition to this trend. As such, it is FINRA’s hope that these filings will provide FINRA with more timely and complete information about the private placement activities of its members.
It should be noted that the final Rule 5123 is significantly narrower in scope than FINRA’s original proposal. Most notably, gone from the final rule is the obligation of FINRA members to disclosure certain items to investors in connection with the private placement. The final rule aims to reach a more modest goal – submitting information to FINRA to assist in its oversight activities.
The Disclosure Requirements of Rule 5123
Under the rule, each FINRA member firm that sells a security in a private placement (a non-public offering), subject to certain exemptions (see below), must file a copy of any private placement memorandum, term sheet or other offering document with FINRA. If a firm sells a private placement without using any offering documents, this should be noted in the filing.  The rule also requires firms to file any materially amended versions of the documents originally filed.
Rule 5123 does not specify information that should be disclosed. Further, the rule does not state any specific requirements regarding what the offering documents should contain. However, as clarified in the FAQ published by FINRA, firms should comply with the disclosure requirements in the applicable exemption from the registration requirements of the Securities Act of 1933. Importantly, any material misstatement or omission in offering documents for private placements is subject to the antifraud provisions of the federal securities laws.
FINRA will accord confidential treatment to all documents and information filed pursuant to Rule 5123.  The rule also provides firms with a method to apply for an exemption from its provisions for good cause pursuant to the Rule 9600 Series.
Timing of Disclosure
The filing of the offering documents with FINRA should be made within 15 calendar days of the date of the first sale. In the FAQ, FINRA clarifies that in contingent offerings, when payment has not yet been made, the date of the first sale means 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.
As noted, the rule became effective December 3, 2012, and applies prospectively to private placements that begin selling efforts on or after that date.
Electronic Filing
Firms must file the required offering documents electronically with FINRA through the FINRA Firm Gateway. The filing system provides a way for firms to submit the filings electronically to FINRA in searchable .PDF documents.  These are “notice” filings, to which FINRA will not respond with a comment letter or provide a clearance letter.
In response to comments during the rulemaking process, the filing system will allow a firm to submit a filing on behalf of other firms involved in the sale of the private placement.  It should be noted though, as FINRA clarified in the recently published FAQ, that designating another member firm to file on one’s behalf will not release the non-filing member from liability if the designated firm does not file the necessary documents. Each firm that sells the private placement has the responsibility to ensure that the offering documents are filed with FINRA. Therefore, we would recommend that any firm that will designate another to file on its behalf enter into a written agreement for such services. 
A firm can also use its consultants, law firms or other third parties to file offering documents on behalf of the member firms. Selling firms should arrange to receive confirmation from the designated filer to ensure that the filing was made.
Exemptions for Certain Offerings
FINRA member firms may be exempt from the filing requirements of Rule 5123 based on either the identity of the purchaser or the type of the offering. For instance, the rule exempts private placements sold solely to institutional accredited investors, qualified purchasers, institutional purchasers, employees, affiliates of the issuer and other very sophisticated investors as detailed in Rule 5123.   
In addition, certain types of private offerings are exempt from the filing requirements regardless of the type of the purchasers. These offerings include, among others, Rule 144A and offshore Regulation S offerings, offerings of exempted securities and offerings of securities of registered investment companies.  All of these exemptions are self-executing so there are no filing obligations to denote a firm’s reliance. Notably, FINRA clarified in the FAQ that member firms will not be required to make a filing pursuant to Rule 5123 for crowdfunding offerings as defined in the JOBS Act.
Importantly, in exemptions that apply to sales to certain types of investors, a member qualifies for the exemption based upon the sales it makes rather than those of all members participating in the offering.  Thus, the actions of one member would not affect the availability of an exemption for another member. 
Even though the disclosure obligation is limited in scope and relatively simple, member firms should be adopting procedures designed to identify private placements covered by FINRA Rule 5123 and to comply with the notice filing requirement. Member firms, as well as issuers, should be familiar with the impact of the new oversight of private placements in the U.S. and should also be aware of prospective investor qualifications and budget to cover some potential additional expense.
For more information concerning the matters discussed in this publication, please contact the authors, Faith Colish (212-238-8873,, Ethan L. Silver (212-238-8687, ), Gideon Even-Or (212-238-8658,, or your regular CL&M attorney.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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