FINRA Proposal on Private Placements: FINRA Proposes Rule 5123 Requiring Investor Disclosure and Filings in Third-Party Private Placements

Sullivan & Cromwell LLP - October 31, 2011

In January 2011, FINRA proposed to amend Rule 5122 (“Private Placements of Securities Issued by Members”) so that its disclosure and filing requirements, which currently apply only to private placements of securities issued by a FINRA member or a “control entity” of a member, would apply to all private placements, including those of unaffiliated issuers, covered by the rule. On October 18, 2011 and in response to comments on the January proposal, FINRA withdrew its proposal to amend Rule 5122 and instead submitted new proposed Rule 5123 (“Private Placements of Securities”) to the Securities and Exchange Commission for adoption. Rule 5122 would remain unchanged.

Proposed Rule 5123 would prohibit members and persons associated with a member from offering or selling a security in reliance on an exemption from registration under the Securities Act of 1933 (which the proposed rule defines as a “private placement”), or from participating in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such a private placement, unless the member or associated person provides to each investor, prior to sale, information about the anticipated use of the offering proceeds and the amount and type of offering compensation and expenses.