Recently, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a proposed amendment to Rule 5122 to further regulate nonpublic offerings. The proposed amendment would cause significant changes in the nonpublic offering process including the following:

  • Disclosure Requirements – All offerings must have an offering document. The offering document would be required to disclose (i) the intended use of the offering proceeds, (ii) amount and type of compensation to be paid to participating broker-dealers or associated persons thereof, and (iii) if applicable, the nature of any affiliation between the issuer and any participating broker.
  • Filing Requirements – the offering document (and any amendment) would be required to be filed with FINRA. FINRA would review the filed offering document for compliance with Rule 5122.
  • Use of Proceeds – a maximum of 15% of the proceeds may be used to pay for offering costs, discounts, commissions, and any other compensation to participating broker-dealers. At least 85% of the proceeds must be used for the business purposes required to be disclosed in the offering document.
  • Exemptions – certain private placements would be exempt including those offerings sold solely to institutional purchasers, qualified purchasers, banks, as well as certain transactions such as offerings made pursuant to Rule 144A or Regulation S. However, the wholesaling exemption pursuant to FINRA Rule 5122(c), as currently enacted, would be eliminated.

FINRA had requested comments to the proposed rule. In response to this request, the Federal Regulation of Securities Committee of the Business Law Section of American Bar Association (the “Committee”) issued an unofficial comment letter, dated as of March 14, 2011 (the “Comment Letter”), which strongly opposed the amendments. Among other things, the Comment Letter expressed the opinion that the expansion of FINRA’s regulatory authority into the realm of private placements would create an undue burden on the private offering process, impede the capital formation process, as well as would be inconsistent with the Congressional mandates and public policies.

The Committee argues that the amendments create a “merit-like” regulatory system over non-member issuers akin to states’ “Blue-Sky” laws which would be inconsistent with  the statutory exemption of nonpublic offerings as well as the exemption from state regulation of “covered securities” which was codified with the enactment of the National Securities Market Improvement Act of 1996.

To review the proposed FINRA Rule 5122, click here.