FINRA Proposes New Private Placement Offering Rule 5123

In October of this year the Financial Industry Regulatory Authority (FINRA) submitted to the Securities and Exchange Commission (SEC) a proposal for a new rule, Rule 5123, which would have an impact on the offering of private placements.

FINRA’s proposed Rule 5123, according to SEC documents, “would require that members and associated persons that offer or sell applicable private placements (as described in the Rule), or participate in the preparation of private placement memoranda (“PPM”), term sheets or other disclosure documents in connection with such private placements, provide relevant disclosures to each investor prior to sale describing the anticipated use of offering proceeds, and the amount and type of offering expenses and offering compensation.” The documents associated with the disclosure of the relevant information would be required to “… be filed with FINRA no later than 15 calendar days after the date of the first sale…”

One of the main reasons for this proposed rule change is to protect investors in private placements. According to SEC documentation FINRA is looking to, “ensure that investors in private placements are provided detailed information about the intended use of offering proceeds, the offering expenses and offering compensation.” Investors should be able to know what their capital investment is being used for and how much of it is going into the investment itself versus how much goes to the commission for the financial professional and the fees to execute the transaction. The rule, like any regulation, does contain a laundry list of exemptions, but intends to protect everyday investors.

The North American Securities Administrators Association (NASAA) recently issued a letter to the SEC in which they commented on the proposed FINRA Rule 5123 related to Private Placements. While the NASAA is in support of FINRA’s goal to protect investors by way of better regulation of private placement offerings, they feel that FINRA’s rule does not go far enough. The NASAA “…continues to support a requirement that these securities be subject to substantive regulatory review” and feel that the FINRA proposal “stops short of addressing the issues inherent in unreviewed private placements.”

The NASAA made a series of regulation suggestions in their response to the FINRA Rule 5123 proposal. Among other things, they believe that investors will be inadequately protected until private placements are “substantively reviewed” by regulators. They also would like to require a firm 15% maximum of the offering proceeds that are able to go to costs and compensation for the brokers. This maximum exists in a limited capacity within FINRA Rule 5122, but the NASAA would like to see it expanded. Further, the NASAA also feels that the FINRA proposal does not adequately require those offering private placements to disclose the full risks associated with the investment and has concerns about the extent of the exceptions/exemptions within the proposed rule.

Both the NASAA and FINRA have as goals the protection of investors. It will be interesting to monitor the SEC’s response to both the FINRA proposal and the NASAA’s comments.

The White Law Group often represents investors who are struggling with investments in private placements. If you feel you may be the victim of investment fraud, or are just concerned about a private placement that you invested in, and would like to speak to a securities attorney about your potential to recovery your investment losses please call our Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at https://whitesecuritieslaw.com.