10.4.5. Member Private Offerings
A broker-dealer is of course a business, and as such may conduct a private placement of its own shares. A member private offering (MPO) is a private placement of unregistered securities issued by a FINRA member or a control entity. A control entity is any entity that controls or is controlled by the member firm. In this case, control means a beneficial interest of 50% of the outstanding voting securities. (Note that this is a higher threshold than the common control standard discussed in Chapter 1.)
Because of the heightened conflict-of-interest concerns inherent in an MPO, the broker-dealer must follow additional rules above and beyond those that apply to other private placements. FINRA imposes the following requirements on MPOs:
• If an offering has a PPM or term sheet, it must be provided to each prospective investor and must contain disclosures addressing the intended use of the offering proceeds, the offering expenses, and the amount of selling compensation that will be paid to the member or its associated persons.
• If an offering does not have a PPM or term sheet, then the member must prepare an offering document that contains these required disclosures and must provide it to each prospective investor.
• A member must file the PPM or term sheet with FINRA prior to the time the document is first provided to any prospective investor. Any amendments or exhibits to the private placement memorandum or term sheet also must be filed within 10 days of being provided to any prospective investor.
• With any MPO, at least 85% of the offering proceeds must be used for business purposes, which do not include offering costs, discounts, commissions, or any other cash or non-cash sales incentives, and their use must be consistent with the PPM.
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