On October 28, 2020, FINRA filed a proposed rule change to amend Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) that would require members to file retail communications concerning Private Placement offerings. Previously, Rules 5122 and 5123 required all offering documents to be filed with FINRA. However, they weren’t specific enough to include all documents that should have been considered offering documents, such as retail communications.

While FINRA did not require retail communications be filed, many members filed them voluntarily. After reviewing the voluntary submissions, FINRA found they raised more compliance issues than those for other products. Of the 1,726 retail communications received, 41% required revisions to comply with applicable standards. There were also 4% that were so non compliant with the rules that FINRA issued “do not use” review letters.

FINRA stated that many of these retail communications included violations such as the inclusion of prohibited projections of performance or unreasonable forecasts like, “Return 4-6x invested capital net of fees” as well as false or misleading statements, like “Safety of Principle”.

After discovering the comparatively high rate of non-compliance of Private Placement retail communications and the clear and present risk to investors who received them, FINRA proposed to amend Rules 5122 and 5123 to make filing retail communications for Private Placements a requirement.

Firms Engaged in Private Placement Offerings

If this rule change goes into effect and your firm engages in Private Placement offers:

  • Make sure to review the rules for retail communications. Remember a retail communication includes web pages that promote the offering, slide presentations, pitch decks, one-page teasers, fact sheets, sales brochures, executive summaries, and investor packets.
  • Review your communications to check that they are compliant.
    • Providing a basis for evaluating investments, being fair and balanced, and being based on fair dealing and good faith.
    • Not containing false, exaggerated, or misleading claims.
    • Being clear and balanced as to the risks and potential benefits.
    • Being considerate of the audience to which the communication is directed.
    • Not predicting or projecting performance, or implying that past performance will be repeated.
  • Remember to file all retail communications with FINRA going forward, unless it’s an offering that is currently exempt from filing, in which case you will not have to file. If the offering is not exempt from the filing requirements, you will be required to file with FINRA no later than the date on which a filing is required under Rules 5122 and 5123.
  • There are also no additional fees that go along with this filing.
  • You will be required to file any additional retail communications that promote the offering at the time they file the PPM or term sheet.
  • You will also be required to file retail communications subsequent to the initial filing if they distribute new retail communications promoting the offering or make material changes to any previously filed retail communications.

If your firm needs help meeting the compliance standards for Private Placements, Contact us and our expert team of consultants can help reduce regulatory disciplinary actions using our compliance program designed to identify and resolve issues.