In its continuing quest to improve member firm due diligence in private placements, thereby enhancing investor protections (See our posts on July 7, July 24 and August 6, 2013), on August 19, 2013, FINRA issued Regulatory Notice 13-26 about the updated Private Placement Form (a copy of which is attached to the Notice) that firms must file pursuant to Rule 5123 (Private Placements of Securities) and Rule 5122 (Private Placements of Securities Issued by Members). The Notice also announced that FINRA had updated the FAQs relating to the Private Placement Form. The updated Private Placement Form, which has been in effect since July 1, 2013 includes six new questions:
- Is this a contingency offering?
- Does the issuer have any independently audited financial statements for the issuer’s most recent fiscal year?
- Is the issuer able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer’s affiliates?
- Does the issuer have a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm?
- Has the issuer engaged, or does the member anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the securities?
- Has the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor, or any of the issuer’s affiliates been the subject of SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years?
FINRA states that the Form assists FINRA in prioritizing its review of private placement reviews. It notes that firms can respond “unknown” to any of the questions, although we believe answering “unknown” is likely to trigger heightened scrutiny by FINRA, particularly because the questions address basic diligence questions. FINRA’s statistics show that since July 1, 2013, on average, 18% of filers have answered “unknown” to at least one of the six questions: of these, approximately 28% have answered “unknown” to the question regarding SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years; and approximately 8% have answered “unknown” to the question whether the issuer has independently audited financial statements available for its most recent fiscal year.