Stop The Presses! No, Really, Stop Them. FINRA Wants To Review That Document.

FINRA has submitted to the SEC proposed amendments to FINRA 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. The filing occurred on October 28, 2020.

FINRA proposes to amend both rules to now include “any retail communication (as defined under Rule 2210)” to the list of documents that must be filed with Advertising Regulation. This would be in addition to the current filing requirement. Please note, these new requirements would not affect private placements that are otherwise exempt from filing under Rules 5122 and 5123.

If your firm sells private placements to retail investors, you may need to incorporate the potential additional review time into your processes. Advertising Regulation may take up four (4) weeks to respond to a filing, and if additional changes are necessary to a document after their review, a second submission may be required. FINRA does offer a path for expedited processing, though for an additional cost as well. Overall, firms who sell private placements to natural persons in general should review their previous communications and target audience in order to determine how this amendment will impact them. We would be happy to assist in this review.

Why the change?

FINRA conducted research into Private Placements, reviewing enforcement action statistics, reviews from Advertising Regulation (AdReg), and other information related to Private Placements. They found significant, recurring problems with Private Placement communications. According to the Staff:

“In 2018, AdReg conducted a spot check of the private placement retail communications provided to Corp Fin in connection with filings under Rules 5122 and 5123 during the second and third quarters of 2018. The review revealed significant and pervasive violations of Rule 2210; overall, 806 of the 1,062 retail communications reviewed (76%) did not comply with Rule 2210. Between January 1, 2017, and March 31, 2020, AdReg reviewed 1,726 new member and voluntary filings of private placement retail communications. Of these filings, 41% required revisions to comply with applicable standards, and 4% were so noncompliant with the rules that FINRA issued “do not use” (DNU) review letters. In comparison, during this same period, only 8% of overall AdReg filings reviewed required revisions, and only 0.1% received a DNU letter.”

Rule 5122 applies to private placements of unregistered securities issued by a member or a control entity. The rule requires a member to file the PPM, term sheet or other offering document with the FINRA Corporate Financing Department at or prior to the first time the document is provided to any prospective investor. Many member private offerings are exempt from the rule’s requirements, including among others, offerings sold only to institutional accounts, as defined in FINRA Rule 4512(c), qualified purchasers, as defined in the Investment Company Act of 1940, and qualified institutional buyers, as defined in Rule 144A under the Securities Act of 1933 (“Securities Act”).

Rule 5123 requires members to file with FINRA any PPM, term sheet or other offering document, including any material amended versions thereof, used in connection with a private placement of securities within 15 calendar days of the date of first sale. Rule 5123 exempts private placements that are filed under other FINRA Corporate Financing Rules, as well as most of the same categories of private placements that are exempt from filing under Rule 5122. As a result of these exemptions, both rules apply predominately to private placements sold to retail investors.

The SEC is accepting commentary on the proposed amendments until November 27, 2020.

You can review the FINRA filing with the SEC here