Bowing to industry pressure, FINRA has adopted vastly scaled back private placement requirements under FINRA Rule 5123. Originally proposed in October 2011, the proposed rule was highly controversial because it significantly infringed on the capital raising process. In particular, the originally proposed rules would require each offering to have an offering document, which must include anticipated use of proceeds and the amount of expenses to be paid to the participating broker-dealer. The offering document would have had to be filed with FINRA and at least 85% of the proceeds must have been used for the business purposes required to be disclosed in the offering document. After receiving scathing criticism, FINRA proposed various amendments with each amendment softening the originally proposed rule.
The final Rule 5123, which the SEC has granted accelerated approval, now requires each FINRA member firm that participates in a private placement of securities to file a copy of any private placement memorandum (PPM), term sheet, or other offering document used in connection with a sale, within 15 days of the date of the first sale. Where no such documents are created or used in connection with a covered offering, the rule requires that the participating member provide FINRA with notice that no disclosure documents were used. I believe that this watered-down version of FINRA Rule 5123 is much more consistent with Congress’s intent in making capital raising not a burdensome process.
FINRA Rule 5123 does provide confidential treatment to the offering documents. In addition, FINRA has made it clear that the filing requirement is merely a notice filing and the offering is not subject to a review or approval process by FINRA. The filing obligations rest with each participating member in an offering and not with the issuer. Certain offerings are exempt from the notice filings, including offerings made of bank (not bank holding company) securities.
Generally, I strongly object to any obstacles to capital raising. While I do not agree with the addition of this notice filing, I applaud the industry’s collective effort to largely curtail the original burdensome requirements.