Private Placement Filing Requirements under FINRA Rule 5123

In recent years, FINRA has enacted new rules regarding private placement transactions of FINRA member firms – FINRA Rule 5122 (Private Placements of Securities Issued by Members) and FINRA Rule 5123 (Private Placement of Securities).  Each of these rules has its own filing requirements, as well as specified exemptions from such filings.  We previously touched on FINRA Rule 5122 and member private offerings.  In this entry, we will focus on FINRA Rule 5123 and the filing requirements of private placement offerings in general.

FINRA Rule 5123

Under Rule 5123, each firm that sells a security in a private placement offering, subject to certain exemptions, must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale. If a firm participates in a private placement offering without using any term sheet, PPM or other such documents, then the firm indicates to FINRA that it did not use any such offering documents. In addition, the rule requires firms to file any materially amended versions of the documents originally filed.

Exemptions from Filing Requirement

As with Rule 5122, the rule exempts certain private placement offerings from the filing requirements noted above.  More specifically, the following private placements are exempt from the filing requirements:

  1. offerings sold by the member or person associated with the member solely to any one or more of the following:
    1. institutional accounts, as defined in Rule 4512(c);
    2. qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;
    3. qualified institutional buyers, as defined in Securities Act Rule 144A;
    4. investment companies, as defined in Section 3 of the Investment Company Act;
    5. an entity composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A;
    6. banks, as defined in Section 3(a)(2) of the Securities Act;
    7. employees and affiliates, as defined in Rule 5121, of the issuer;
    8. knowledgeable employees as defined in Investment Company Act Rule 3c-5;
    9. eligible contract participants, as defined in Section 3(a)(65) of the Exchange Act; and
    10. accredited investors described in Securities Act Rule 501(a)(1), (2), (3) or (7) (See below for noted accredited investor exemption categories).
  2. offerings of exempted securities, as defined in Section 3(a)(12) of the Exchange Act;
  3. offerings made pursuant to Securities Act Rule 144A or SEC Regulation S;
  4. 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);
  5. offerings of subordinated loans under SEA Rule 15c3-1, Appendix D (see NASD Notice to Members 02-32(June 2002));
  6. offerings of “variable contracts,” as defined in Rule 2320(b)(2);
  7. offerings of modified guaranteed annuity contracts and modified guaranteed life insurance policies, as referenced in Rule 5110(b)(8)(E);
  8. 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;
  9. 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;
  10. offerings of securities of a commodity pool operated by a commodity pool operator, as defined under Section 1a(11) of the Commodity Exchange Act;
  11. business combination transactions as defined in Securities Act Rule 165(f);
  12. offerings of registered investment companies;
  13. standardized options, as defined in Securities Act Rule 238; and
  14. offerings filed with FINRA under Rules 231051105121and 5122, or exempt from filing thereunder in accordance with Rule 5110(b)(7).

Exempted Accredited Investor Categories

As noted above, FINRA Rule 5123 exempts offerings sold solely to certain categories of “accredited investors” as defined by Rule 501(a) of Regulation D.  The specific categories are the following:

  • Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
  • Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
  • Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; and,
  • Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in §230.506(b)(2)(ii).

It should be noted, no other categories of accredited investors (including natural persons whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000 or who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year) are exempted from the filing requirements.

Further, as with FINRA Rule 5122, a firm can be exempt from the filing requirements of FINRA Rule 5123 by meeting multiple of the categories for exemption; however, the flip side is also true.  If a firm does not meet the exemptions from filing for the full offering, a filing must be made.

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