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.

Private placements and the due diligence obligations of broker-dealers in such transactions have recently come under increased scrutiny from FINRA as part of a broader trend reflected most notably in the filing requirements for private placements that went into effect on December 3, 2012 (FINRA Rule 5123). This trend of increased scrutiny also is likely to continue in light of the SEC’s recent adoption on July 10, 2013, pursuant to Section 201(a) of the JOBS Act, of final rules relaxing the prohibition on general solicitation and general advertising for certain private placements under Rule 506 of Regulation D. For more information, see our client alert, “FINRA Actions and the Due Diligence Obligations of Broker-Dealers in Private Placements,” available at

FINRA recently posted two updates to its Private Placement Filing Requirements FAQs.

In the first update, FINRA clarified that the Rule 5123 filing obligation applies to private placements to any individual accredited investor, which includes officers, directors and general partners of the issuer (Rule 510(a)(4)) and entities in which all the equity owners are individual accredited investors  (Rule 501(a)(8)).

In the other update, it stated that private placements sold solely to accredited investors that satisfy the Regulation D four categories of accredited investors that are not natural persons (Rule 501(a)(1), (2), (3) and (7) are exempt from the Rule 5123 filing requirements.  Those categories include the following:

  • a bank, insurance company, registered investment company, employee benefit plan or small business investment company;
  • a private business development company;
  • a charitable organization, corporation or partnership with assets exceeding $5 million; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Earlier this week, FINRA Rule 5123 relating to private placements became effective, and FINRA released a set of FAQs (see to provide market participants with additional guidance.  The FAQs clarify that only private placements that are made to institutional accredited investors are exempt from the filing requirements, while those made to accredited investors that are natural persons are not exempt.  FINRA notes that member firms will not be required to file pursuant to Rule 5123 if they participate in crowdfunding offerings.