On June 7, 2012, the Securities and Exchange Commission (the "SEC") approved on an accelerated basis the Financial Industry Regulatory Authority, Inc.'s ("FINRA") proposed FINRA Rule 5123 (Private Placement of Securities) (the "Approval Order").1 As approved, FINRA Rule 5123 ("FINRA Rule 5123") requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used.
As detailed below, FINRA Rule 5123 has undergone a significant transformation, including several rounds of comments and three amendments, in response to industry concerns that the proposed rule was too burdensome, resulting in the new notice filing requirement only.2
A Recap of the Background of FINRA Rule 5123
FINRA proposed new FINRA Rule 5123 (the "Proposed Rule") on October 5, 2011.3 The Proposed Rule proved to be controversial. After receiving 16 comment letters, FINRA filed Partial Amendment No. 1 on January 19, 2012 to address the industry comments that the Proposed Rule was too burdensome.4 On January 20, 2012, the SEC instituted proceedings pursuant to Section 19(b)(2)(B) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), to determine whether to approve or disapprove the Proposed Rule, as modified by the Partial Amendment No. 1, and sought additional comments (the "Notice and Proceedings Order").5 The SEC received 11 comment letters in response to the Notice and Proceedings Order.6 To address the additional comments, FINRA filed Partial Amendment No. 2 and a response letter on March 12, 2012,7 and Partial Amendment No. 3 to the Proposed Rule on March 22, 2012.8 In Partial Amendment No. 2, as further clarified by Partial Amendment No. 3, FINRA proposed to eliminate the Proposed Rule's requirement for members to disclose specified information to investors.
In the Approval Order,9 the SEC stated that FINRA had addressed capital formation, competitive and efficiency concerns, including by: (i) eliminating the disclosure requirements, (ii) narrowly tailoring the rule to require only a notice filing, and (iii) creating additional exemptions under the rule.10 As required by the Notice and Proceedings Order, the SEC found FINRA Rule 5123, as modified, consistent with Section 15A(b)(6) of the Exchange Act,11 noting that FINRA narrowly tailored the broker-dealer's obligations under FINRA Rule 5123, while enhancing its ability to carry out its statutory obligations to oversee member firms.12
FINRA Rule 5123 is significantly narrower in scope than FINRA's original proposal. Notably, gone from the final rule are the obligations for members to:
disclose to each investor the anticipated use of offering proceeds, the amount and type of offering expenses and offering compensation prior to sale of the securities, and create and provide to any...