Sale of Private Placements Frequently Asked Questions (FAQ)


Filing Requirements

  1. How do member firms file with FINRA?
  2. How does a firm gain access to the Private Placement Filing System?
  3. Can a third party file offering documents on behalf of member firms?
  4. Does each member firm selling securities in a private placement have to file the offering documents?
  5. What are responsibilities of the other selling member firms to confirm that a filing has been made when one firm is designated to make a filing with FINRA?
  6. What documents are member firms required to file?
  7. How can member firms comply with their filing requirements under Rule 5123 for private placements when no offering document is used?
  8. In what format should the documents be submitted?
  9. Is there a size limit (megabytes) on the documents that are filed?
  10. Rule 5123 requires member firms to file the "private placement memorandum, term sheet or other offering document." What are examples of other types of offering documents?
  11. If an offering document has material changes after the member firm has filed the documents, does the firm have to file the amended document?
  12. When does the 15-day period commence for filing with FINRA?
  13. For a contingency offering, does the "date of first sale" pertain to when investors submit their money or when escrow is broken?

 

Disclosure

  1. What are the disclosure requirements for private placements in Rule 5123?

 

Exemptions

  1. Are private placements sold to institutional accounts exempt from the filing requirements of Rule 5123?
  2. Which private placements sold to accredited investors must firms file under Rule 5123?
  3. Which private placements sold to accredited investors are not required to be filed under Rule 5123?
  4. Are the exemptions of Rule 5123(b) applied on a firm-by-firm basis? For example, if one member firm is exempt from the filing requirements because it meets one of the filing exemptions of Rule 5123(b) but another firm does not meet any of the filing exemptions, do all firms have a filing obligation?
  5. Does a member firm that introduces a prospective investor to an issuer for a fee need to file the private placement under Rule 5123?
  6. Are crowdfunding offerings required to be filed pursuant to Rule 5123?

 

Filing Form

  1. The form asks whether the offering being filed is a contingency offering. What is a "contingency offering?"
  2. When a firm completes the form and files offering documents on behalf of itself and other firms that are participating in the same offering, must the answers to the form's questions be based on the knowledge of all the firms or only the firm filing the form?
  3. Is the firm making the filing required to obtain sufficient information so that it can answer "yes" or "no" to the questions instead of "unknown?"
  4. The form asks whether the issuer is "able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates." If the offering documents do not address such use, but the issuer makes representations to the firm that such use of proceeds is impermissible, should the firm answer "no?"
  5. Why is the form's question regarding the issuer's disciplinary history different than the SEC's Rule 506 disqualification ("Bad Actor") provision?
  6. What are "independently audited financial statements" for purposes of the form?
  7. Can a firm explain why a question in the form was answered in a particular way, or provide additional information not requested in the form?
  8. Do the SEC's recent amendments that permit general solicitation for certain offerings under Rule 506 of Regulation D eliminate the filing requirements of Rule 5122 or 5123 for these offerings?
  9. How will FINRA use the answer to the question about whether a Form D has been filed?

 

Contact Information

  1. Who should member firms contact regarding general inquiries and questions?

 

Filing Requirements

 

1. How do member firms file with FINRA?
Effective December 3, 2012, in order to satisfy filing requirements under Rules 5122 and 5123, firms must file the offering documents used in connection with the sale of an applicable private placement via the Private Placement Filing System in FINRA Firm Gateway unless the offering meets one of the enumerated exemptions under the applicable rule.
2. How does a firm gain access to the Private Placement Filing System?
Most firms will already have entitlement rights to the Private Placement Filing System through Firm Gateway. For an individual to gain access he should contact the firm's Super Account Administrator (SAA) who can assign user access rights to the Private Placement Filing System for themselves, employees at the firm and third parties who file on behalf of the firm.

To determine whether your firm has an SAA, log in to the Firm Gateway, click on "My Account" and view information from the "Applications & Administrators" link. If a firm does not have an SAA, the firm can request one by completing and submitting the SAA Entitlement Form.

Firms that need assistance with Firm Gateway may call FINRA at (301) 869-6699.
3. Can a third party file offering documents on behalf of member firms?
Yes. Firms can provide access to the Private Placement Filing System to consultants, law firms or other third parties through the firm's Super Account Administrator. Third parties can then file offering documents on behalf of the firms.
4. Does each member firm selling securities in a private placement have to file the offering documents?
Firms can individually file the offering documents with FINRA or designate a firm to file the offering documents on their behalf.
5. What are responsibilities of the other selling member firms to confirm that a filing has been made when one firm is designated to make a filing with FINRA?
Each selling firm that sells the private placement has a responsibility to ensure that the offering documents are filed with FINRA. Only the designated firm will be able to access the filing through Firm Gateway. If a designated firm fails to file the offering documents, none of the selling firms will have complied with Rule 5123's filing requirements. Selling firms should arrange to receive confirmation from the designated filer to ensure that the filing was made.
6. What documents are member firms required to file?
Rule 5123 requires firms to file offering documents that were used to sell the private placement, which can include the private placement memorandum, term sheet or other offering documents.
7. How can member firms comply with their filing requirements under Rule 5123 for private placements when no offering document is used?
Firms must make a filing with the Private Placement Filing System and indicate that no offering documents were used.
8. In what format should the documents be submitted?
Offering documents that firms submit must be in a searchable PDF format.
9. Is there a size limit (megabytes) on the documents that are filed?
Yes. The maximum size limit for one document submission is 50 megabytes. Member firms can submit multiple documents in a filing.
10. Rule 5123 requires member firms to file the "private placement memorandum, term sheet or other offering document." What are examples of other types of offering documents?
Any other type of document that sets forth the terms of the offering.
11. If an offering document has material changes after the member firm has filed the documents, does the firm have to file the amended document?
Yes. Rule 5123 requires that firms file materially amended versions of the offering documents that were originally filed. Typically the issuer will offer rescission rights to investors if there is a material change in the offering document.
12. When does the 15-day period commence for filing with FINRA?
Member firms must make a filing with FINRA within 15 days from the date the firm makes the first sale of securities in the private placement.
13. For a contingency offering, does the "date of first sale" pertain to when investors submit their money or when escrow is broken?
The SEC discusses the date of first sale in the context of the filing of Form D. The SEC states "that the date of first sale is the date on which the investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor's subscription agreement or check." (See SEC Release 33-8891 (February 6, 2008). See also SEC Release No. 33-6455, at Question 82 (March 4, 1983)).

FINRA will apply the same standard in determining the date of first sale for purposes of the rule's filing requirements.

Disclosure

 

1. What are the disclosure requirements for private placements in Rule 5123?
Rule 5123 has no specific disclosure requirements. Firms should comply with the disclosure requirements in the exemption that they are relying upon from the registration requirements of the Securities Act of 1933. Any material misstatement or omission in offering documents for private placements is subject to the antifraud provisions of the federal securities laws.

Exemptions

 

1. Are private placements sold to institutional accounts exempt from the filing requirements of Rule 5123?
Private placements sold solely to institutional accounts (as defined in Rule 4512(c)) are exempt from the filing requirements of the rule (see Rule 5123(b)(1)(A)).
2. Which private placements sold to accredited investors must firms file under Rule 5123?
FINRA Rule 5123 requires that firms file private placements that are sold to accredited investors who are natural persons as defined by Regulation D Rule 501(a)(5) and (6), which include different income and asset requirements for natural persons:
  • Rule 501(a)(5) defines an accredited investor as a natural person whose individual net worth or joint net worth with a spouse exceeds a million dollars; and
  • Rule 501(a)(6) defines an accredited investor as a natural person with income exceeding $200,000 or joint income with a spouse of $300,000 in each of the two most recent years (and reasonably expects the same income level in the current year).
In addition, Rule 501(a)(4) defines accredited investor to include officers, directors and general partners of the issuer and Rule 501(a)(8) defines accredited investors to include entities in which all the equity owners are accredited investors. Therefore, private placements to investors or entities that meet the Rule 501(a)(4) and (8) definitions also must be filed.

Posted: 1/7/13

3. Which private placements sold to accredited investors are not required to be filed under Rule 5123?
Regulation D includes four categories of accredited investors that are not natural persons (Rule 501(a)(1), (2), (3) and (7)). Private placements sold solely to accredited investors defined in those categories are exempt from the Rule 5123 filing requirements. Those categories include the following:
  • a bank, insurance company, registered investment company, employee benefit plan or small business investment company;
  • a private business development company;
  • a charitable organization, corporation or partnership with assets exceeding $5 million; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Posted: 1/7/13

4. Are the exemptions of Rule 5123(b) applied on a firm-by-firm basis? For example, if one member firm is exempt from the filing requirements because it meets one of the filing exemptions of Rule 5123(b) but another firm does not meet any of the filing exemptions, do all firms have a filing obligation?
Certain exemptions in Rule 5123 apply to specific types of offerings. For those exemptions, if the offering satisfies the exemption then all firms selling securities in the offering are exempt from the filing requirements of Rule 5123. Other exemptions, principally in Rule 5123(b)(1), apply to sales to certain types of investors. For these, each firm must ensure that the sales transaction is made to an investor that is covered by an available exemption. For example, in the same offering, one firm could sell solely to a qualified institutional buyer (see Rule 5123(b)(1)(C)) and be exempt from the filing requirements of Rule 5123. Another firm may sell to non-accredited investors and must fulfill the filing requirements of Rule 5123.
5. Does a member firm that introduces a prospective investor to an issuer for a fee need to file the private placement under Rule 5123?
A firm that introduces a prospective investor to the issuer and receives a fee may be required to file the private placement with FINRA depending on the facts and circumstances. Rule 5123 requires that any firm that sells a private placement has a filing responsibility. Depending on the facts and circumstances, a firm that receives compensation and participates in a sales transaction may have a filing requirement under the rule.
6. Are crowdfunding offerings required to be filed pursuant to Rule 5123?
FINRA will not require member firms that participate in crowdfunding offerings (under the JOBS Act) to make a filing pursuant to Rule 5123.

Filing Form

 

1. The form asks whether the offering being filed is a contingency offering. What is a "contingency offering?"
For purposes of the form, a contingency offering is a private placement in which the actual closing or sale of securities in the private placement is contingent on an event, typically the receipt of orders for a minimum aggregate amount of securities by an expiration date. Filers participating in contingency offerings must familiarize themselves with, and follow, the relevant SEC rules, including Rules15c2-4 and 10b-9 under the Securities Exchange Act of 1934.
2. When a firm completes the form and files offering documents on behalf of itself and other firms that are participating in the same offering, must the answers to the form's questions be based on the knowledge of all the firms or only the firm filing the form?
The form provides that the firm submitting the filing must answer the questions "[b]ased on the information contained in the offering document (or if otherwise known by your firm)." The firm submitting the form must review the offering document in order to answer the questions. Firms participating in a private placement are required to conduct a reasonable investigation of the private placement issuer. The requirement to answer the form's questions imposes no new requirement on the filing firm to obtain information, beyond those responsibilities discussed in Regulatory Notice 10-22. Information about the issuer or the offering may have been be obtained by the filing firm from several sources. If information that can be used to answer the questions is known by the filing firm, it should be used to answer the questions regardless of whether it originated with another participating firm or any other entity.
3. Is the firm making the filing required to obtain sufficient information so that it can answer "yes" or "no" to the questions instead of "unknown?"
The form itself does not require firms to obtain information sufficient to answer questions yes or no. The scope of a firm's obligations to conduct a reasonable due diligence investigation of a private placement issuer is addressed in Regulatory Notice 10-22. Neither FINRA Rule 5123 nor the form imposes any additional requirement of investigation beyond what is discussed in that Notice.
4. The form asks whether the issuer is "able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates." If the offering documents do not address such use, but the issuer makes representations to the firm that such use of proceeds is impermissible, should the firm answer "no?"
Firms participating in private placements often obtain information beyond what is disclosed in offering documents as a result of their own reviews and reasonable investigations. If the firm has information, including representations from the issuer, from which it concludes there are limits in place against such use of proceeds, the firm should answer "no."
5. Why is the form's question regarding the issuer's disciplinary history different than the SEC's Rule 506 disqualification ("Bad Actor") provision?
The SEC recently adopted amendments to Regulation D under the Securities Act of 1933 that require specific disclosure or make the exemption under Rule 506 unavailable if a "Covered Person" is subject to a "Disqualifying Event." The amendments provide nine types of Covered Persons and 18 separate Disqualifying Events. Disqualifying Events that occur before September 23, 2013, the effective date of the SEC's "Bad Actor" provision, must be disclosed to investors, and Disqualifying Events that occur on or after the effective date result in the offering being ineligible to rely on SEC Rule 506.

The form asks whether the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates has been the subject of SEC, FINRA or state disciplinary actions or proceedings or criminal complaints within the last 10 years. The criteria of Covered Persons or Disqualifying Events that the SEC adopted in its Bad Actor provision are not relevant to the disciplinary history question on the form, which is used to assist FINRA in prioritizing the reviews of private placements, not to screen offerings for compliance with SEC requirements.
6. What are "independently audited financial statements" for purposes of the form?
Independently audited financial statements are financial statements prepared in accordance with generally accepted accounting principles, or GAAP, and audited by an independent certified public accountant in accordance with generally accepted auditing standards.
7. Can a firm explain why a question in the form was answered in a particular way, or provide additional information not requested in the form?
FINRA encourages firms to provide explanations or additional information, as appropriate, in the text box at the end of the form.
8. Do the SEC's recent amendments that permit general solicitation for certain offerings under Rule 506 of Regulation D eliminate the filing requirements of Rule 5122 or 5123 for these offerings?
No. Whether general solicitation is used to market a private placement is irrelevant to whether the offering must be filed pursuant to FINRA Rule 5122 or 5123.
9. How will FINRA use the answer to the question about whether a Form D has been filed?
The answer to the question assists FINRA in deciding whether to access the EDGAR database to review Form Ds.

Contact Information

 

1. Who should member firms contact regarding general inquiries and questions?
For general questions, please call the Corporate Financing Department at (240) 386-5520 or email.

For interpretative questions, please email the Corporate Financing Department.

For entitlement or system-related issues, please contact Firm Gateway at (301) 869-6699.