D.H. Hill Securities got hit with a FINRA penalty for violating the private placement offering rules. FINRA concluded that D.H. Hill did not have a pre-existing, substantive relationships with several investors in an offering. This was a breach of the Rule 502(c)
The key point from the settlement was that the D.H. Hill began participating in the private placement offerings before creating a substantive relationship with the individuals. The “pre-existing” standard was not there because D.H. Hill started selling to them without establishing the relationship.
FINRA cites two ways for a broker-dealer to create a pre-existing, substantive relationship:
- through a previous investment in securities offered through the broker-dealer
- through submission and approval of an investor qualification questionnaire
FINRA is making it clear that its easier to sell private placements to the existing client base than reaching out for new investors.
Question 256.29 makes this even clearer:
Question: What makes a relationship “pre-existing” for purposes of demonstrating the absence of a general solicitation under Rule 502(c)?
Answer: A “pre-existing” relationship is one that the issuer has formed with an offeree prior to the commencement of the securities offering or, alternatively, that was established through either a registered broker-dealer or investment adviser prior to the registered broker-dealer or investment adviser participation in the offering. See, e.g., the E.F. Hutton & Co. letter (Dec. 3, 1985). [August 6, 2015]
Of course, the big question is long between the initial contact and screening before a relationship becomes pre-existing?
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