Puzzling Private Placement Rule

SEC Approves New FINRA Rule 5123 Regarding Private Placements of Securities

Greetings from BD Exchange!

FINRA recently announced a new rule that would require all member firms to file electronically all offering material to FINRA within 15 days of the date of first sale. This has caused many members to go stir crazy about the intent of the new rule. Many fear that this will create an even larger burden on the struggling capital formation system. The amount of hoops and hurdles has increased immensely over the last several years and this is the last thing many small firms wanted to see. I on the other hand found this new rule puzzling because in the notice FINRA makes reference to enhancing oversight and investor protection of private placements. If that is the case, shouldn’t the rule be 15 days before the sale of any private offering?
There have been many cases over the years in which there have been horrible privates put together by snake oil salesmen that have burned investors. Wouldn’t it make sense to have this information submitted to FINRA 15 day prior to a sale so if a prospectus that’s only good for toilet paper is submitted they can possibly stop it before an investor gets bilked? In addition, there are many many quality offerings out there that I have seen over the years that have had minor errors or a mistaken omission of required information that trial lawyers turn into an arbitration nightmare. Wouldn’t it be great if this was submitted to FINRA 15 days prior and an examiner sent you notice that you failed to enclose certain information? Think about how many headaches could be solved if this was a proactive plan designed to protect not just investors but also brokers.
We believe that now is the wrong time to be scaring Firms that do private placements due to the fragile state of capital raising in America right now, however, we also believe that as long as there will be this submission requirement, they might as well make it truly proactive and protect investors from con artists and protect brokerage firms and brokers from omissions and wording that could wind up costing them down the road. FINRA of course can neither approve nor disapprove an offering or give it an implied blessing but they can give a heads up that an offering has some real issues.
Click here to read entire rule