Tag: FINRA Rule 5123

Private Placement of Fund Interests and Rule 5123 Filings

Under the new FINRA rule 5123, FINRA member firms that sell securities in certain private placements to submit a notice filing with FINRA.  That means your placement will likely have to file a fund’s private placement memorandum with FINRA. FINRA recently released FAQs and a user guide related to Rule 5123 filings. The notice filing must include a copy of any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale.

Submissions must be made within 15 calendar days of the first sale.

The FAQs answer practical questions regarding filing requirements, such as:

  • how members file a notice with FINRA
  • when does the 15-day period commence for filing with FINRA
  • What exemptions are there to form Rule 5123

Exemptions

1. Are private placements sold to institutional accounts exempt from the filing requirements of Rule 5123?

Private placements sold solely to institutional accounts (as defined in Rule 4512(c)) are exempt from the filing requirements of the rule (see Rule 5123(b)(1)(A)).

2. Are private placements sold to accredited investors exempt from the filing requirements of Rule 5123?

No, unless the sales are solely to entities that satisfy the definition of accredited investor under Rule 501(b)(1), (2), (3), or (7). Sales to accredited investors that are natural persons are not exempt from the filing requirements of the rule (see Rule 5123(b)(1)(J)).

If your fund uses a placement agent and is marketing to high-net worth individuals, it looks like the marketing materials will end up being filed with FINRA.

Filing Private Fund Private Placement Memoranda with FINRA

Starting on December 3, 2012, FINRA members must file a copy of any private placement memorandum, term sheet or other offering document the firm used within 15 calendar days of the date of the sale. Placement agents for private funds will likely be FINRA members and subject to this rule.

FINRA Rule 5123 is part of FINRA’s approach to increase oversight and investor protection in private placements. FINRA established standards on disclosure, use of proceeds and a filing requirement for private placements issued by a member firm or a control entity in Rule 5122. FINRA also has previously provided guidance on the scope of a firm’s responsibility to conduct a reasonable investigation of private placement issuers in Regulatory Notice 10-22.

However, the rule has some big exemptions. The following private placements are exempt from the requirements of this Rule:

(1) offerings sold by the member or person associated with the member solely
to any one or more of the following:

(A) institutional accounts, as defined in Rule 4512(c);
(B) qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;
(C) qualified institutional buyers, as defined in Securities Act Rule 144A;
(D) investment companies, as defined in Section 3 of the Investment Company Act;
(E) an entity composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A;
(F) banks, as defined in Section 3(a)(2) of the Securities Act;
(G) employees and affiliates, as defined in Rule 5121, of the issuer;
(H) knowledgeable employees as defined in Investment Company Act Rule 3c-5;
(I) eligible contract participants, as defined in Section 3(a)(65) of the Exchange Act; and
(J) accredited investors described in Securities Act Rule 501(a)(1), (2), (3) or (7).

That list is likely going to mean that private fund offering will not be subject to the rule as long as they exclude non-accredited investors from the offering. Or at least exclude the placement agent from soliciting non-accredited investors. Given the likely lifting of the ban on general solicitation for private funds that exclude non-accredited investors this rule is likely to further limit the access of non-accredited investors to private funds.

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