Series 79: Private Placements Of Securities Issued By Members

Private Placements of Securities Issued by Members

FINRA Rule 5122 applies to private placements of securities issued by a FINRA member, or by any “control entity.” A control entity is any entity that controls, is controlled by, or is under common control with the member or its associated persons; to constitute “control,” the rule requires an ownership interest of more than 50%, or an entitlement to more than 50% of an entity’s profits or losses. Such private placements are deemed “member private offerings.”

Rule 5122 prohibits any member or associated person from offering or selling any security in a member private offering unless the following conditions are met:

• • Disclosure. Each investor must receive a private placement memorandum, term sheet, or other offering document that describes (1) the intended use of the offering proceeds and (2) the expenses and selling compensation for the offering.
• • Filing. The member must file the private placement memorandum, term sheet, or other offering document with FINRA’s Corporate Financing Department no later than the first time the document is given to any prospective investor. Amendments or exhibits must be filed within 10 days of being provided to any investor or prospective investor.
• • Use of offering proceeds. At least 85% of the offering proceeds must be used for business purposes and must be used in a way that is consistent with the disclosed intended use. “Business purposes” does not include offering expenses, commissions, or sales incentives.

Rule 5122 lists more than a dozen exemptions from its requirements. Broadly speaking, these exemptions apply to sales to institutional and sophisticated investors and to certain specialized transactions.

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