Broker-dealers that recommend or sell private placements have additional requirements under FINRA and SEC rules. These requirements include:
- Filing certain offering documents
- Ensuring the suitability of any investments they recommend
Two FINRA rules require firms to file certain offering documents and information about the issuer, the offering terms, and the firms selling the private placement with FINRA.
- FINRA Rule 5122 (Member Private Offerings) requires firms that offer or sell their own securities or those of a control entity to file with the Corporate Financing Department a private placement memorandum, term sheet or other offering document at or prior to the first time the documents are provided to any prospective investor.
- FINRA Rule 5123 (Private Placements of Securities) requires firms to file with FINRA's Corporate Financing Department within 15 calendar days of the date of first sale of a private placement, a private placement memorandum, term sheet or other offering document, or indicate that no such offerings documents were used.
Firms also must file any amendments or exhibits to the offering document with the Corporate Financing Department within ten days of being provided to any investor. The information filed with the Corporate Financing Department is subject to confidential treatment. Firms should submit offering documents as searchable PDFs via the private placement filing system in the Firm Gateway. Please note, 5122/5123 Notifications are "notice" filings. As such, FINRA will not respond to the filings with a comment letter nor provide a clearance letter.
- Corporate Financing Private Placement Filing System User Guide
- Frequently Asked Questions regarding Private Placements
Due Diligence and Suitability of Private Placements
FINRA will examine firms’ private placement activity to ascertain whether firms are taking reasonable steps to validate that investors meet accredited investor standards.
Also, the recent Regulation D amendments do not diminish a firm's responsibility to conduct adequate due diligence on its offerings to ensure any recommendations to purchase securities in a private placement are suitable.
Registration with the SEC (and exemptions from registering)
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Issuers and broker-dealers most commonly conduct private placements under Regulation D of the Securities Act of 1933, which provides three exemptions from registration.
- Under Rule 504 of Regulation D, firms may sell up to $1,000,000 of securities to accredited investors within a 12-month period without restrictions on resale.
- Under Rule 505 of Regulation D, firms may sell up to $5,000,000 of securities to accredited investors and up to 35 unaccredited investors within a 12-month period with restrictions on resale.
- Under Rule 506 of Regulation D, firms may employ general solicitations and advertising when offering private placements, provided that all purchasers of the offering are accredited investors.
Firms may conduct other forms of private placements using exemptions other than those allowed by Regulation D. Please consult the Rules tab on this page for additional applicable rules and exemptions.
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see FINRA OGC Interpretative Guidance for more information.