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Corporate and Securities Law Alert

Investment Banks and Other Broker-Dealers Required to Make Private Placement Filings Under New FINRA Rule 5123

Monday, January 14, 2013

The Financial Industry Regulatory Authority (FINRA), the principal U.S. regulator of broker-dealers, has enacted a new rule, Rule 5123, requiring member firms (including most investment banks) participating in private placements of securities to file with FINRA any private placement memorandum, term sheet or other offering document a firm used in the transaction within 15 calendar days following the date of first sale, subject to important exclusions described below.1

Requirements of New FINRA Rule 5123

Under FINRA Rule 5123, which is effective for any transaction that began selling efforts on or after December 3, 2012, the member firm must comply by uploading any relevant disclosure documents or term sheets in searchable PDF format to FINRA through a new online Private Placement Filing System available through the FINRA Firm Gateway.

If no disclosure documents were used in the private placement, a statement must be uploaded on the Firm Gateway from the firm that no such documents were used. For transactions with multiple member firms, only one firm needs to submit the responsive documents on behalf of all firms in the transaction. However, failure by the designated firm to make the required filing will be considered a violation of Rule 5123 by all participating firms. If a submitted document undergoes material changes, a revised document must be filed. All filings will be afforded confidential treatment. Exemptions from filing are available for good cause.

Exclusions to Rule 5123 Filings and Practical Impact

Importantly, the following types of private placements, among others,2 are excluded from the filing requirements of Rule 5123:

  • placements of exempt securities under Section 3(a)(12) of the Securities Exchange Act of 1934, as amended
  • placements made pursuant to Rule 144A (among qualified institutional buyers or “QIBs”3) or Regulation S (offshore) under the Securities Act of 1933, as amended (Securities Act)
  • placements solely to:

    • institutional accounts (as defined in FINRA Rule 4512(c))
    • qualified purchasers (as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended (Investment Company Act))
    • investment companies
    • banks
    • employees and affiliates of the issuer
    • knowledgeable employees (under Rule 3c-5 of the Investment Company Act), and
    • institutional accredited investors under Rule 501 of Regulation D under the Securities Act.

In addition, FINRA noted in its “frequently asked questions” following the final rule release4 that firms participating in crowdfunding transactions under new Section 4(6) of the Securities Act enacted by the JOBS Act5 will not be required to make a Rule 5123 filing.

Pepper Points

  • Presumably, the crowdfunding exclusion is because crowdfunding transactions are already required to be pre-filed with the U.S. Securities and Exchange Commission (SEC) by a broker-dealer or funding portal.6
  • Most investment banks offer private placements solely to accounts that are either QIBs or institutional accredited investors, or in “offshore” transactions that are exempt from SEC registration under Regulation S. Therefore, Rule 5123 filings will only be needed for the somewhat infrequent private placement that is placed with individual investors, both accredited and non-accredited (other than "knowledgeable employees" of the issuer and individuals who meet the $50 million institutional account threshold of Rule 4512(c)). Still, it is important for investment bank legal and compliance departments to keep Rule 5123 on their radar for those instances when a filing is required. Moreover, in order to comply with Rule 5123, every private placement in which a broker-dealer participates will need to be reviewed for non-qualifying individual investors (accredited or not) for determination of whether a filing is required.

Changes to FINRA Rule 5122 Filing Process

In Regulatory Notice 12-40 announcing the implementation of Rule 5123, FINRA also noted that filings required by FINRA Rule 51227 must also be made by uploading documents to the new Private Placement Filing System. Rule 5122 was enacted in June 2009 and requires that FINRA members who undertake private placements of their own securities (called “member private offerings”) must provide prospective investors with either a private placement memorandum, term sheet or statement setting forth at a minimum the use of proceeds, offering expenses and selling compensation to be paid to the member or its affiliate. At least 85 percent of the proceeds must be used for business purposes, which does not include offering compensation, costs or expenses. Rule 5122 contains a list of excluded transactions similar (but not identical) to the excluded transactions list contained in Rule 5123.

Pepper Points

  • Since most member firms raise capital when needed through the registered issuance of medium-term investment-grade debt, member private offerings that would require Rule 5122 filing are rare; but, as with Rule 5123, it is important to keep on the legal and compliance radar in the event a filing is required.
  • Note that unlike Rule 5123, Rule 5122 affirmatively requires investor disclosure of use of proceeds and offering expenses of a member private offering, and caps total fees and expenses. FINRA confirmed in adopting Rule 5123, however, that it is not adopting enhanced disclosure beyond what would be required by the securities laws. Therefore, in many private placements a disclosure document will not be required, but still may be advisable. The original proposal of Rule 5123 would have required the delivery of a term sheet or use of proceeds statement to prospective investors.
  • Continued focus on private placements: Rule 5123 continues a focus FINRA has had on private placements. Private placements are largely unregulated provided they meet certain registration exemptions or safe harbors, and as such represent an opportunity for investor abuse and fraud. Moreover, in most private placement transactions, little or reduced disclosure is required in contrast to registered public offerings. In 2010, FINRA published Regulatory Notice 10-22,8 which admonished FINRA member firms of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in Regulation D private placements, where there is the greatest potential for retail (mom-and-pop) participation.
  • Both FINRA Rules 5122 and 5123 are post-closing notice filings, which will not be reviewed, commented on or approved by FINRA. Filings will also not be required for most private placements made to institutions. But the rules are an attempt to systematically track processes that were previously supervised on a one-off basis through complaint investigations and compliance examinations. Look for this trend to continue as regulators grapple with balancing efficient capital-raising with investor protection.


1 The text of Rule 5123 can be found by following this link: The adopting release from FINRA (Regulatory Notice 12-40) can be found by following this link: A helpful “frequently asked questions” relating to Rule 5123 can be found on the FINRA Web site by following this link:

2 For a complete list of transactions exempt from Rule 5123, please see the rule text by following this link:

3 Generally, a QIB is an institutional investor with at least $100 million of investment securities of non-affiliates, or an entity comprised solely of QIBs. For the complete definition of a QIB, please follow this link to Rule 144A(a)(1):

4 See

5 See

6 For more information about crowdfunding, please see the following slides:

7 See for the text of Rule 5122.

8 See

Brian Korn

Written by

Brian Korn

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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