Filing Private Fund Private Placement Memoranda with FINRA

Starting on December 3, 2012, FINRA members must file a copy of any private placement memorandum, term sheet or other offering document the firm used within 15 calendar days of the date of the sale. Placement agents for private funds will likely be FINRA members and subject to this rule.

FINRA Rule 5123 is part of FINRA’s approach to increase oversight and investor protection in private placements. FINRA established standards on disclosure, use of proceeds and a filing requirement for private placements issued by a member firm or a control entity in Rule 5122. FINRA also has previously provided guidance on the scope of a firm’s responsibility to conduct a reasonable investigation of private placement issuers in Regulatory Notice 10-22.

However, the rule has some big exemptions. The following private placements are exempt from the requirements of this Rule:

(1) offerings sold by the member or person associated with the member solely
to any one or more of the following:

(A) institutional accounts, as defined in Rule 4512(c);
(B) qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;
(C) qualified institutional buyers, as defined in Securities Act Rule 144A;
(D) investment companies, as defined in Section 3 of the Investment Company Act;
(E) an entity composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A;
(F) banks, as defined in Section 3(a)(2) of the Securities Act;
(G) employees and affiliates, as defined in Rule 5121, of the issuer;
(H) knowledgeable employees as defined in Investment Company Act Rule 3c-5;
(I) eligible contract participants, as defined in Section 3(a)(65) of the Exchange Act; and
(J) accredited investors described in Securities Act Rule 501(a)(1), (2), (3) or (7).

That list is likely going to mean that private fund offering will not be subject to the rule as long as they exclude non-accredited investors from the offering. Or at least exclude the placement agent from soliciting non-accredited investors. Given the likely lifting of the ban on general solicitation for private funds that exclude non-accredited investors this rule is likely to further limit the access of non-accredited investors to private funds.


One Response to Filing Private Fund Private Placement Memoranda with FINRA

  1. Brian Lebrecht October 29, 2012 at 1:37 pm #

    Doug, one narrow point of clarification. The exemption for accredited investors does NOT exclude natural persons (i.e. those with a net worth exceeding $1m or income exceeding $200). For those broker-dealers active in Reg D private placements to wealthy individuals, this filing will be required.