Alerts and Updates

FINRA Adopts Regulations Requiring Notice of Participation in Private Placements

September 19, 2012

Under new FINRA regulations, member firms must file notice with FINRA as to their participation in certain private placements.

The Financial Industry Regulatory Authority (FINRA) has adopted regulations1 (Rule) requiring each member firm2 that sells securities3 in a private placement4 to file with FINRA a copy of the private placement memorandum, term sheet or other offering document, including any materially amended versions, the firm used in connection with the sale of the securities;5 or the firm must indicate that it did not use any such offering documents. The filing6 must be made within 15 calendar days following the date of the first sale.7 The Rule is effective as of December 3, 2012, for all private placements that begin selling efforts on or after that date.8

Although FINRA's original proposal included a definition of "private placement,"9 the final version of the Rule does not provide any such definition. The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) provides that the SEC by regulation10 must amend Rule 506 under Regulation D of the Securities Act of 1933 to eliminate the restrictions against general advertising and general solicitation in the sale of securities in certain private placements under Rule 506.11 Therefore, despite the perhaps public nature of general solicitation and public solicitation, Congress has deemed such an offering to be a non-public offering of securities and, thus, a "private placement." At such time as the SEC issues final regulations amending Rule 506 in accordance with the congressional mandate, member firms participating in such private placements will be bound by the Rule to provide a notice filing with FINRA reporting their private placement participation.

The Rule exempts from the reporting requirements offerings sold by the member (or a person associated with the member) solely to any one or more of the following:

  • institutional accounts
  • qualified purchasers, as defined by the Investment Company Act (ICA)
  • qualified institutional buyers (QIBs), as defined in Securities Act Rule 144A
  • investment companies, as defined in the ICA
  • banks, as defined in the Securities Act
  • employees and affiliates of the issuer
  • certain accredited investors, as defined in Regulation D, but persons other than natural persons.

The Rule also exempts offerings made under Rule 144A and Regulation S under the Securities Act, and other specified offerings and transactions. Because most Rule 506 private placements involve securities being purchased by individuals other than QIBs, the exemption from the notice filing requirement provided by the Rule will not be available for participating member firms in those circumstances. However, for purely institutional "private placements" there may be no FINRA filing requirement.

For Further Information

If you would like more information about this Alert, please contact Robert P. Bramnik, Loren Schechter, Laurence S. Lese, any member of the Broker-Dealer & Securities Regulation Practice Group, any member of the Financial Markets Practice Group or the attorney in the firm with whom you are regularly in contact.


  1. FINRA Rule 5123; FINRA Regulatory Notice 12-40, September 2012.
  2. The Rule, while requiring each member that sells the subject securities to make the requisite submission to FINRA, allows a member on its behalf to have a designated member complete the requisite filing.
  3. Rule 5123 is distinguishable from existing FINRA Rule 5122, which establishes standards on disclosure, use of proceeds and a filing requirement for private placements issued by a member firm (of its own securities) or the securities of a control entity.
  4. The original FINRA proposal defined "private placement" to mean "a non-public offering of securities conducted in reliance on an available exemption from registration under the Securities Act."
  5. The original FINRA proposal required members to disclose to each investor prior to sale the anticipated use of offering proceeds and the amount and type of offering expenses and offering compensation. Additionally, if any of the issuer’s documents did not contain the requisite information, the member firm would have been required to create and provide to any potential investor a separate disclosure document containing this information. During the comment process, FINRA eliminated these requirements. Like the effective regulations, the original proposal would have required each participating member to file the offering documents with FINRA.
  6. FINRA Regulatory Notice 12-40 indicates that the requisite filing is merely a "notice filing," and that FINRA will not respond to the filings with a comment letter or provide a clearance letter.
  7. Member firms must file the required notice and offering documents electronically with FINRA through the FINRA Firm Gateway, which is an online compliance tool that provides consolidated access to FINRA applications and allows firms to submit required filings electronically to meet their compliance and regulatory obligations.
  8. FINRA members also are subject to a number of other regulations when participating in private placements; for example, see Regulatory Notice 10-22 dated April 2010.
  9. See Note 4 above.
  10. The SEC issued proposed regulations so amending Rule 506 in Securities Act Release No. 33-9354, dated August 29, 2012.
  11. The JOBS Act amends section 4 of the Securities Act by adding new subsection (b), which provides, as relevant, that "Offers and sales exempt under [Rule 506 as amended pursuant to Section 201 of the JOBS Act] shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation." Under the conforming SEC rules, the elimination of the prohibition against general advertising or general solicitation would apply only to private offerings under Rule 506 under which sales are made solely to "accredited investors." The SEC has proposed a conforming Rule which would allow an issuer to employ general solicitation and general advertising in private placements as long as the securities are sold solely to accredited investors.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.