The 1, 2, 3′s of FINRA Rule 5123

by Brian Lebrecht on October 12, 2012

As part of an approach to increase oversight and investor protection, on June 7, 2012, the SEC approved new FINRA Rule 5123.  The Rule becomes effective December 2, 2012.  FINRA has released NTM 12-40 which is found here.

The general requirement of the Rule is for all FINRA members selling securities in a private placement to file with FINRA copies of any private placement memorandum (PPM), term sheet or other offering document, or to indicate to FINRA that no such document was used.  One practical impact of the Rule will be that the issuer and the FINRA member will each need to engage separate counsel for the offering to ensure compliance with the Rule.

To assist in the process of filing the required documents, FINRA has developed a system accessible through a member firm’s Firm Gateway.  This system will allow member firms to submit the filings as searchable PDF documents to FINRA.  The filings must be filed within 15 days after the date of the first sale.

Under the Rule, the filings will be confidential. The filings will be reviewed to identify potential problems with the offering in an effort to detect and prevent fraud.  FINRA will not review the filings for approval.  The filings will be considered “notice” type filings, so responses, comment letters or clearance letters will not be provided.

The Rule has various exemptions based on the type of investor and the type of offering.  A few of the exemptions likely to be used the most are offerings sold to employees and affiliates of the issuer, offerings of non-convertible debt and offerings of securities issued in conversions, stock splits and restructuring transactions that are executed by an already existing investor.  As noted by other firms, the exemption for accredited investor will not apply to natural persons who are accredited investors.  These individuals will have to meet a different exemption in order to avoid the requirements of the Rule.

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