Broker-Dealers Must File Private Fund Offering Documents in Certain ESC and Section 3(C)(1) Fund Offerings

5 December 2012
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  • FINRA Rule 5123 became effective on December 3, 2012. Rule 5123 requires, subject to broad exceptions, FINRA member broker-dealers that sell securities in a private placement to file copies of private placement memoranda, term sheets and other disclosure documents used in the sale within 15 calendar days after the date of first sale.
  • Generally Rule 5123 will not apply to offerings by private equity or hedge funds to institutional investors, but may apply to (1) offerings of interests in "friends and family," employee and other funds that rely on Section 3(c)(1) of the Investment Company Act and (2) private offerings of interests in employees’ securities companies; but in each case only if the purchasers include persons who are not employees of the fund, affiliates of the fund, "qualified purchasers," legal entity "accredited investors" or "knowledgeable employees."
  • FINRA members, and private fund managers with affiliated broker-dealers that are FINRA members, should review their policies and procedures on private placements to ensure that written compliance and supervisory procedures covering Rule 5123 are in place designed to ensure that the broker-dealer will satisfy the Rule’s requirements.