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New FINRA Rule 5123 Takes Effect Requiring Notice of Private Placements by Member Firms

The Financial Industry Regulatory Authority has adopted new Rule 5123 requiring members to file notice of their participation in private placements.  The Rule took effect on December 3rd 2012.  The new rule does not contain a definition of “private placements” and accordingly is presumed to cover all private placements including those involving general solicitation and advertising under the new Rule 506(c) created by the JOBS Act.

Rule 5123 requires member firms to file a copy of the private placement memorandum, term sheet or other disclosure document with FINRA, for all offering in which they sell securities, within 15 calendar days of the first sale.

FINRA enacted the rule in an effort to further police the private placement market and to ensure that members participating in these private offerings conduct sufficient due diligence on the securities and its issuer

In filings with the SEC, FINRA expressed its position that Rule 5123 is consistent with the JOBS Act in that a post-sale notice filing will not unnecessarily burden members or capital formation in light of the intended regulatory benefits to investors of the resulting enhanced oversight. FINRA suggested that investor confidence would be fostered by the enhanced oversight resulting from Rule 5123 and that it would thereby facilitate capital formation.

However, not all private placement participants will be members of FINRA and therefore subject to the new rule.  As previously blogged about, Title II of the JOBS Act requires the SEC to amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors.  On August 29, 2012, the SEC published proposed rules enacting this provision.

Title II of the JOBS Act also specifically allows third parties to maintain platforms or mechanisms (such as websites) that permit “the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means” without being registered as a broker dealer or a member of FINRA.

Moreover, these platforms may co-invest in private placement offerings and offer ancillary services such as due diligence services and standardized document production.  A platform may not collect a transaction based commission or offer investment advice such as a FINRA member firm could, but are expected to be an integral part of placing generally solicited private placements.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Merger and Corporate Attorneys

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public companies as well as private companies intending to go public on the over-the-counter market, including the OTCBB and OTCQB. For nearly two decades, Ms. Anthony has dedicated her securities law practice to being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes, but is not limited to, crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934, including Forms 10-Q, 10-K and 8-K, as well as the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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© Legal & Compliance, LLC 2012

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