Broker-dealers that are active in the sale or solicitation of private placement offerings have additional requirements under FINRA and SEC rules. These requirements include filing certain offering documents with reference to any investments solicited and/or sold to clients of the firm.
Filing Requirements
Under FINRA Rules 5122 and 5123, firms must file the offering documents used in connection with the sale or solicitation of an applicable private placement offering via the Private Placement Filing System in the FINRA Firm Gateway system.
- Rule 5122 (Private Placements of Securities Issued by Members) requires firms that offer or sell their own securities or those of a control entity to file a private placement memorandum, term sheet, or other such offering documents with FINRA’s Corporate Financing Department. Furthermore, Rule 5122 requires this documentation to be filed at or prior to the first time the documents are provided to any prospective investor. For a more in-depth exploration of FINRA Rule 5122 and possible exemptions to the applicable filing requirements of the rule, see our previous blog, “Private Placement Filing Requirements Under FINRA Rule 5122.”
- Rule 5123 (Private Placement of Securities) requires firms to file with FINRA’s Corporate Financing Department within 15 calendar days of the date of first sale of a private placement, a private placement memorandum, term sheet, or other such offering documents. Alternatively, the firm must indicate that no such offering documents were used. For a more in-depth exploration of FINRA Rule 5123 and possible exemptions to the applicable filing requirements of the rule, see our previous blog, “Private Placement Filing Requirements Under FINRA Rule 5123.”
Within the Private Placement Filing System, firms may file the “5122/5123 Notification Form” (the “Form”) to meet their obligations under Rules 5122 and 5123. It is important to note, there is a distinction in the applicable filing dates between FINRA Rules 5122 and 5123. This is a common area missed by firms when making the applicable filings.
Filing System
Most firms should already have entitlement rights to the Private Placement Filing System through the FINRA WebCRD Firm Gateway. Individual users may need to speak with their Super Account Administrator (SAA) to gain access to the Private Placement Filing System. The firm’s SAA may assign access for themselves, firm employees, and third parties who may make such filings on behalf of the firm.
Third Party Filing
Firms can provide access to the Private Placement Filing System to outside consultants, law firms, or other third parties who can then make the applicable filings on behalf of the firm. A selling firm may also designate another FINRA member firm involved in the offering to file the offering documents on their behalf. However, the filing obligation remains on the selling firm to confirm with their designated filer that the offering documents were filed and to ensure that documentation of such filing is maintained within the firm’s books and records.
Answering Questions
If a firm is completing the filing form and filing the offering documents on behalf of itself and other firms that are participating in the same offering, the firm submitting the form should answer the questions based upon the information contained within the offering documents. Firms participating in private placements must conduct reasonable investigations of the private placement issuer, but the requirement to answer the form’s questions imposes no new requirement on the filing firm to obtain additional information. However, if, during the diligence investigation the filing firm gained information about the issuer that can be used to answer the form’s questions, the filing firm should use that information in addition to the information contained within the offering documents.
Lastly, The scope of a firm’s obligations to conduct a reasonable due diligence investigation of a private placement is outlined in FINRA Regulatory Notice 10-22. Neither FINRA Rule 5123 nor the Form require any additional investigation beyond what is mentioned in Notice 10-22.
Additional Links
The Financial Industry Regulatory Authority (FINRA) has released new guidance on filing under FINRA Rule 5123 in the form of a frequently asked questions (FAQs) page and user guide, which are both available on FINRA’s website.
FINRA Overview of Private Placements
[Continued in Private Placement Basics – Part II]
