SEC Approves New FINRA Rule 5123: Private Placement Of Securities

Author:Mr Elliott Curzon, Adam T. Teufel and Ross M. Oklewicz

The U.S. Securities and Exchange Commission ("SEC") recently approved a revised version of proposed FINRA Rule 5123 governing private placements of securities.1 The new rule requires Financial Industry Regulatory Authority ("FINRA") members to file certain information with the regulator regarding covered offerings, but exempts most types of offerings from its coverage.2 The practical effect of the new rule will be to marginally increase the burdens on FINRA members when selling private placements, such as private funds, to certain classes of accredited investors. FINRA has not yet established an effective date for the new rule.


As originally proposed, the rule was highly controversial and not only generated significant industry pushback, but caused the SEC to issue a rare "Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change" after initially publishing the proposed rule for comment in the Federal Register. FINRA avoided possible disapproval of the proposed rule by eliminating the most controversial elements and adding exemptions to limit the scope of the rule.

The original rule proposal published for comment by FINRA in January 2011 would have expanded a different FINRA rule, Rule 5122, governing member private placements.3 Currently, Rule 5122 applies only to private placements in which a member or control person of a member has more than a 50 percent beneficial interest in the issuer. The original rule proposal would have lowered the beneficial interest threshold to 10 percent, meaning the rule would cover private placements in which the member or control person of the member had a beneficial interest of 10 percent or more. But the most controversial portions of the original rule proposal would have required FINRA members participating in a covered offering to describe the anticipated use of offering proceeds, offering expenses, and compensation in private placement memoranda ("PPMs"), term sheets, or other disclosure documents provided to investors, even if the nature of the offering would not otherwise require the preparation of such disclosure documents.

Many offerings of private funds or alternative investment products, as well as private equity deals, would have been caught in the proposed amendments to Rule 5122 because private asset managers or private equity firms often take an ownership stake in a fund or portfolio company. The exemptions in the proposed amendments to Rule 5122 would have carved out sales to institutions, qualified purchasers ("QPs")...

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