In setting forth its rationale, FINRA observed that private placement retail communications reviewed by AdReg have “revealed significant and pervasive” violations of FINRA Rule 2210.

By Dana G. Fleischman, Stephen P. Wink, Naim Culhaci, and Deric Behar

On October 28, 2020, the Financial Industry Regulatory Authority, Inc. (FINRA) filed with the US Securities and Exchange Commission (SEC) proposed amendments (the Proposal) to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities). The proposed amendments would require FINRA members to file all retail communications used by members in connection with private placement offerings that are subject to those Rules’ filing requirements (Covered Private Placements).[1]

FINRA Rule 5122 currently requires that, in connection with a Covered Private Placement of unregistered securities issued by a FINRA member or one of its affiliates, the FINRA member must file with the FINRA Corporate Financing Department a “private placement memorandum, term sheet, or … other offering document” that discloses to prospective investors the intended use of the offering proceeds, the offering expenses, and the amount of selling compensation that will be paid to the member and its associated persons. Rule 5122 further requires such documentation to be filed with FINRA at or prior to the first time the document is provided to any prospective investor in connection with the Covered Private Placement.

FINRA Rule 5123 currently requires, in connection with a Covered Private Placement of securities issued by a third party that are sold by a FINRA member, that the FINRA member must file with the FINRA Corporate Financing Department any “private placement memorandum, term sheet, or other offering document” used in connection with the private placement within 15 calendar days of the date of first sale. If no such offering document was used in connection with the private placement, then the FINRA member must notify FINRA of that fact.

Certain types of private placement offerings are exempt from both Rules’ requirements, including those that are made pursuant to SEC Rule 144A or SEC Regulation S or that are sold solely to certain types of accounts, including qualified institutional buyers as defined in SEC Rule 144A, so-called “institutional accredited investors” described in SEC Rule 501(a)(1), (2), (3), or (7), qualified purchasers as defined in the Investment Company Act of 1940, and institutional accounts as defined in FINRA Rule 4512(c).[2]  Given the many exceptions, as a practical matter these Rules effectively require the filing with FINRA of information relating to private placements by FINRA members that include retail investors that do not meet certain specified high net worth thresholds.

At present, neither FINRA Rule 5122 nor FINRA Rule 5123 specifically requires filing in connection with a Covered Private Placement of member-prepared or distributed “retail communications” as defined in Rule 2210 (Communications with the Public).[3] However, FINRA stated in the Proposal that many members file these communications along with other required documents under the Rules, presumably because members believe such communications might be considered an “other offering document” as referred to in the Rules.[4] The FINRA Corporate Financing Department often subsequently forwards filed retail communications to the FINRA Advertising Regulation Department (AdReg), which then reviews the communications for compliance with the content and other requirements of FINRA Rule 2210.[5]

The Proposal would expand FINRA Rules 5122 and 5123 to expressly add “any retail communication (as defined under Rule 2210)” to the list of documents that must be filed in connection with Covered Private Placements.[6] The expanded filing requirements would not impact private placements by FINRA members that are otherwise exempt from filing under Rules 5122 and 5123.

In setting forth its rationale behind the Proposal, FINRA observed that private placement retail communications reviewed by AdReg have “revealed significant and pervasive” violations of FINRA Rule 2210 — more so than retail communications for non-private placement products[7] — and, as a result, Rule 2210 violations in connection with private placements to retail investors could be more prevalent than previously suspected. Thus, the proposed amendments to the Rules’ filing requirements are intended to “promote investor protection and market integrity by expanding FINRA’s oversight of high-risk retail communications concerning private placements.”[8]

The SEC published the Proposal on November 2, 2020, with a comment period open until November 27, 2020 (21 days from the Proposal’s publication in the Federal Register on November 6, 2020).


[1] See SEC Release No. 34-90302.(Nov. 2, 2020), available at

[2] Note that in addition to certain specified types of entities such as banks, registered investment advisers, and insurance companies, FINRA Rule 4512(c) defines the term “institutional account” to include any person (including an individual) with total assets of at least US$50 million.

[3] Rule 2210(c) defines a “retail communication” as “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.”

[4] The Proposal notes that “FINRA has stated previously that an example of an “‘other offering document’ is ‘[a]ny other type of document that sets forth the terms of the offering’” and that the “terms of an offering include facts such as the amount of proceeds that the issuer intends to raise, the type of security, descriptions or illustrations of the intended use of proceeds, and explanations of tax benefits or other information that would be relevant to an investor when deciding whether to make an investment.” Proposal at p. 5.

[5] See also FINRA Regulatory Notice 20-21 (FINRA Provides Guidance on Retail Communications Concerning Private Placement Offerings).

[6] SR-2020-038, Exhibit 5, available at

[7] According to the Proposal “[b]etween January 1, 2017, and March 31, 2020, AdReg reviewed 1,726 new member and voluntary filings of private placement retail communications. Of these filings, 41% required revisions to comply with applicable standards, and 4% were so noncompliant with the rules that FINRA issued “do not use” (DNU) review letters. In comparison, during this same period, only 8% of overall AdReg filings reviewed required revisions, and only 0.1% received a DNU letter.” Proposal at p. 6.

[8] Proposal at p. 10.