FINRA Rule 5123 Explained: Private Placements of Securities

What Is FINRA Rule 5123?

FINRA Rule 5123 governs broker-dealer participation in private placements, which are securities offerings that are exempt from SEC registration and not available to the general public. It specifically requires member firms to file offering documents, such as private placement memoranda (PPMs), term sheets, or other marketing materials, with FINRA within 15 calendar days of the first sale. 

If no offering documents or retail communications were used, the firm must notify FINRA accordingly. Here are the key components of Rule 5123:

Filing Requirements and Timelines

At the heart of Rule 5123 is the requirement for the timely filing of private placement materials with FINRA. This obligation requires that regulators be able to review the terms, disclosures, and marketing of offerings that are not subject to SEC registration.

Member firms must:

• Submit documents within 15 days of first sale: Firms are required to file a copy of any private placement memorandum, term sheet, or other offering document used in connection with the offering no later than 15 calendar days after the date of the first sale.
  
  

• Include all retail communications: Any retail communication that promotes or recommends the private placement to potential investors must also be filed. This includes pitch decks, brochures, or other materials distributed to retail audiences.
  
  

• File amended versions: If an offering document or retail communication is materially revised, the updated version must be submitted promptly.
  
  

• Notify if no documents exist: If the firm did not use a PPM, term sheet, or retail communication, it must notify FINRA that no such materials were used.
  
  

• Use FINRA’s electronic form: All filings must be made through FINRA’s designated electronic system in the format it prescribes.

These requirements help FINRA catch potential compliance problems early in the fundraising process. They also give regulators a clearer picture of how the market really works, shining a light on practices that might otherwise stay hidden.

Scope of Covered Offerings

Rule 5123 applies to private placements, and unlike public offerings, these deals are not registered with the SEC and often come with fewer disclosure requirements. That makes the market harder to see from the outside. To bring some oversight, FINRA uses Rule 5123 to keep an eye on broker-dealer activity.

This rule is triggered whenever a broker-dealer or an associated person is involved in selling securities through a non-public offering that is exempt from registration, unless an exemption applies. Covered offerings may include:

• Debt or equity securities sold in non-public transactions

• Interests in private funds or pooled investment vehicles marketed by broker-dealers

• Structured products or other alternative investments distributed outside of public channels

It is important to note that the scope is broad and goes beyond traditional hedge fund or venture capital fundraising. By requiring filings across many types of exempt transactions, Rule 5123 gives FINRA a clearer view of parts of the market where investor risks are higher and disclosure is more limited.

Retail Communication Obligations

Rule 5123 does not stop at offering documents. It also extends to retail communications that promote or recommend a private placement. Under FINRA Rule 2210, retail communications include any written or electronic message sent to more than 25 retail investors within a 30-day period. In practice, this can capture a wide variety of materials, from investor pitch decks and brochures to slide presentations, websites, or even digital content used to attract potential participants.

If these materials are used in connection with a private placement, they must be filed with FINRA within the 15-day window. Firms also need to file updated versions whenever the content changes, such as when financial projections are revised or marketing messages are refreshed. This filing requirement gives FINRA visibility not only into the main deal documents but also into how the offering is being presented to investors.

Confidential Treatment of Filings

One common worry with private placements is how sensitive the information in offering documents and marketing materials can be. Rule 5123 addresses this by requiring filings while making clear that FINRA treats these materials as confidential. They are not shared publicly and are used only for regulatory purposes, like checking compliance with FINRA rules or reviewing broader market practices.

This confidentiality rule matters because it lets broker-dealers and issuers meet the filing requirement without worrying that their strategies, deal structures, or financial terms will be exposed to competitors. At the same time, it gives FINRA the oversight it needs to monitor private placement activity and spot potential risks to investors.

Exemptions from Filing

Rule 5123 does not apply to every private placement. The rule contains a broad set of exemptions that remove filing requirements when the transaction already involves investors or products that benefit from other layers of protection.

1. Sophisticated or institutional investors: Offerings that are limited to large institutional investors, such as banks, investment companies, and other financial institutions, are exempt from the filing requirement. This also applies to qualified institutional buyers, qualified purchasers, and certain accredited investors.
   
   

2. Established regulatory frameworks: Some transactions are already covered by other securities rules and do not require a separate filing under Rule 5123. Examples include private offerings under Rule 144A or Regulation S, securities of registered investment companies, standardized options, and offerings that have already been filed under other FINRA rules like Rules 2310, 5110, 5121, or 5122.
   
   

3. Specific product types and structures: Some securities products are also exempt. These include short-term debt securities with maturities of 397 days or less and minimum denominations of $150,000, as well as subordinated loans made under SEC Rule 15c3-1, Appendix D. Other exemptions cover products like variable contracts, modified guaranteed annuities, modified guaranteed life insurance policies, and particular non-convertible debt or preferred securities that qualify for streamlined SEC registration.
   
   

4. Corporate actions and restructuring: Finally, some corporate events are exempt from the rule. These include conversions, stock splits, and transactions where investors receive securities without putting in new funds. Business combination transactions, as defined by the SEC, are also excluded.

Together, these exemptions narrow the focus of Rule 5123 to private placements where investor protection matters most, especially those involving retail investors or less experienced participants.

Applications for Exemption

In addition to the automatic exemptions, Rule 5123 allows firms to apply for relief on a case-by-case basis. Under the Rule 9600 Series, a broker-dealer or associated person may request an exemption from some or all of the filing requirements if there is good cause.

These exemptions are not granted automatically. FINRA reviews each request individually, taking into account the nature of the offering, the types of investors involved, and whether investor protection would be compromised by granting the relief. These applications are used sparingly and are generally approved only when strict compliance would be impractical or unnecessary.