Earlier this month, FINRA proposed new Rule 5123 to regulate private offerings. Proposed Rule 5123 is a second attempt by FINRA this year to expand the regulatory process on private offerings. In January, FINRA had proposed a much more comprehensive set of changes, including proposed regulations affecting private placements not involving a FINRA member firm. See Gunster’s April Blog for a description of the earlier proposal. After much criticism of the originally proposed rules, FINRA agreed to repropose rules.
Under the reproposed new Rule 5123, FINRA member firms would be prohibited from participating in a private offering unless a private placement memorandum, term sheet, or other disclosure document is provided to each investor prior to sale that includes detailed information on the intended use of the proceeds and the amount and type of offering expenses and compensation. The rule would also require notice filings by member firms by requiring member firms to file the private placement memorandum, term sheet, or other disclosure document with FINRA no later than 15 days after the date of first sale. Certain exemptions to Rule 5123 are available when the offering is made solely to certain qualified investors or when the offering is of certain types of securities.
New Rule 5123 is a significant improvement over the January proposal to amend Rule 5122 because it poses a significantly smaller burden on the capital raising process. For example, the original proposal required 85% of the proceeds to be used for business purposes as described in the offering document. In addition, the proposed notice filing is now due no later than 15 days after the date of first sale rather than before commencement of the offering. Because most offerings involving FINRA member firms already disclose the intended use of proceeds and the amount and type of offering expenses and compensation, we think that the new proposal will not cause any major obstacles to the offering process.