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Proposed FINRA Rule 5123: Enhanced Investor Protection or Unnecessary Regulatory Burden?

Originally proposed on October 5, 2011, FINRA Rule 5123 (the “Rule”) would, if adopted, significantly increase the regulatory burden on certain issuers, such as private funds, and FINRA members involved in the private placement of securities such as third party marketers, placement agents, solicitors and finders and may encourage issuers to rely on the services of unregistered intermediaries to facilitate introductions to accredited investors. Additional, the Rule has been criticized on the basis that it departs from established practice in the realm of private placements by mandating the disclosure of specific information to investors. In particular, the Rule would require FINRA members who offer and sell private securities through the dissemination of a disclosure document, such as a private placement memoranda (“PPM”) or term sheet, to provide each solicited investor who is an accredited investor the following information prior to sale of such securities: (i) the anticipated use of the offering proceeds, (iii) the amount and type of offering expenses, and (iii) the amount and type of compensation provided to sponsors, finders, consultants and members and their associated persons in connection with the offering.  And within 15 calendar days of the date of first sale, each member would be required to file such PPM or term sheet with FINRA along with any material amendment to these documents within 15 days of such occurrence.
In response to comments submitted by various industry participants, on January 20, 2012, the SEC proposed a variety of amendments and clarifications to the draft Rule including: (i) removal of any reference implying that FINRA would review or sign-off on the offering documents before they are sold, (ii)  exemption of “institutional accounts”, “qualified purchasers”  and “investment companies”, among others, and (iii) exemption of certain offerings including those made under 4(1), 4(3) and 4(4) of the Securities Act of ‘33.
Despite the SEC’s attempt to address certain of these initial comments, the Rule continues to generate significant opposition from industry players on a number of grounds. Some of the most salient of these concerns are outlined below:

Read the full post on Evan Rapoport’s Capital Introduction Blog

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