FINRA Rule 5122: Disclosures, 85% Use of Proceeds, and Filing

FINRA Rule 5122 governs private placements in which a FINRA member firm sells securities issued by itself or by an entity it controls. The rule requires the firm to give every prospective investor written disclosure of how the offering proceeds will be used and how much selling compensation the firm and its associated persons will receive, to spend at least 85 percent of the money raised on business purposes rather than offering costs, and to file the offering document with FINRA’s Corporate Financing Department at or before the first time it is shown to any prospective investor. Several categories of offerings are exempt.1FINRA. Private Placements of Securities Issued by Members

Which Offerings the Rule Covers

A “member private offering” is any private placement of unregistered securities issued by a FINRA member firm or by a control entity of that firm. The securities are typically sold under an exemption from SEC registration such as Regulation D.1FINRA. Private Placements of Securities Issued by Members

A control entity is anything that controls, is controlled by, or is under common control with the member firm. Control means owning more than 50 percent of a corporation’s outstanding voting securities, or having rights to more than 50 percent of the distributable profits or losses of a non-corporate entity such as a partnership or LLC. The determination is made immediately after the offering closes; if the offering has multiple closings, it is recalculated after each one.1FINRA. Private Placements of Securities Issued by Members

What distinguishes 5122 from other private-placement rules is the relationship between issuer and seller. When a broker-dealer sells securities issued by a completely unrelated company, Rule 5123 applies instead. The stricter 5122 regime kicks in only because the firm has an interest on both sides of the transaction.

Required Investor Disclosures

If the offering already has a private placement memorandum or term sheet, the firm must provide that document to every prospective investor, and it must include two specific items: the intended use of the offering proceeds, and the total offering expenses along with the exact selling compensation that will be paid to the member firm and its associated persons.1FINRA. Private Placements of Securities Issued by Members

If no memorandum or term sheet exists, the firm cannot skip the disclosures. It must prepare its own offering document containing the same two categories of information and provide it to every prospective investor.1FINRA. Private Placements of Securities Issued by Members

Rule 5122 itself does not require a discussion of material investment risks. That obligation comes from antifraud rules and general suitability requirements. Most private placement memoranda include risk disclosures because other regulations demand it, but the two items 5122 specifically mandates are narrow: where the money goes, and how much the firm gets paid.

The 85 Percent Use-of-Proceeds Requirement

At least 85 percent of the money raised in a member private offering must be used for business purposes. The remaining 15 percent or less can cover offering costs, discounts, commissions, and any other cash or non-cash sales incentives, but those items are excluded from the 85 percent threshold.1FINRA. Private Placements of Securities Issued by Members

A firm cannot structure an offering in which the bulk of investor dollars are consumed by fees, compensation, and overhead. Actual use of the proceeds must also match the disclosures. If the offering document says the money will fund equipment and working capital, the firm cannot quietly redirect those funds without updating the disclosures.2FINRA. Regulatory Notice 09-27 – FINRA Rule 5122 Requirements for Member Private Offerings

Filing with FINRA

The offering document must be filed with FINRA’s Corporate Financing Department at or before the first time it is provided to any prospective investor. Any retail communication under FINRA Rule 2210 that promotes or recommends the offering must be filed at the same time. Amendments and exhibits must be filed within ten days of being provided to investors or prospective investors.1FINRA. Private Placements of Securities Issued by Members

This is a notice filing. FINRA does not review the materials and issue an approval or no-objections letter before the offering can proceed; the firm does not need to wait for a green light. The filing exists so FINRA can monitor the offering, not to gate it.

How to File

Filings go through the Private Placement Filing System inside FINRA’s Firm Gateway. The firm selects the Private Placement form, indicates whether the filing is under Rule 5122 or Rule 5123, and uploads the offering documents in searchable PDF format along with a completed Filer Form covering participating member information, issuer details, and offering terms. If multiple member firms are selling the same offering, one can file on behalf of the others by adding participating members to the Filer Form.3FINRA. Firm Guidance – Private Placement Filings

Filing Fees

Through December 31, 2026, the initial filing fee is $500 plus 0.015 percent of the proposed maximum aggregate offering price, capped at $225,500. Amendments that increase the offering size carry an additional fee of 0.015 percent on the net increase. The total of all fees paid on a single offering cannot exceed $225,500.4FINRA. Section 7 – Fees for Filing Documents Pursuant to the Securities Offerings Rules

Exemptions

Not every private offering by a member firm triggers Rule 5122. Identifying whether an exemption applies is usually the first compliance question. The commonly relevant carve-outs include:

  • Offerings sold exclusively to institutional accounts as defined in FINRA Rule 4512(c), qualified purchasers, qualified institutional buyers under Rule 144A, investment companies, or banks
  • Unregistered offerings of debt or preferred stock carrying an investment grade rating
  • Offerings under SEC Rule 144A (resales to qualified institutional buyers) or Regulation S (offshore transactions)
  • Securities offered to employees and affiliates of the issuer or its control entities
  • Offerings in which the member acts primarily as a wholesaler, intending to sell less than 20 percent of the securities directly, with the rest distributed through affiliate broker-dealers under a selling agreement
  • Offerings already filed with FINRA’s Corporate Financing Department under Rules 2310, 5110, or 5121
  • Securities issued in conversions, stock splits, or restructurings where existing investors receive new securities without additional investment
  • Variable contracts under FINRA Rule 2320(b), along with modified guaranteed annuity contracts and modified guaranteed life insurance policies
  • Securities of a commodity pool operated by a commodity pool operator under the Commodity Exchange Act
  • Equity and credit derivatives, including OTC options, provided the derivative is not based principally on the member or any of its control entities1FINRA. Private Placements of Securities Issued by Members

The institutional-only exemption is the one firms rely on most often. If every investor in the offering qualifies as an institutional account, qualified purchaser, or qualified institutional buyer, the disclosure and filing requirements drop away entirely. Let a single non-institutional investor into the offering, and the exemption is lost for the whole deal.

Rule 5122 vs. Rule 5123

Rule 5122 and Rule 5123 both govern private placement filings, but they apply in different situations and on different timelines. Rule 5122 covers offerings where the member firm or a control entity is the issuer. Rule 5123 covers private placements of securities issued by unrelated third parties in which a member firm participates.5FINRA. Private Placements of Securities

Timing is the sharpest difference. Under 5122, the offering document must be filed at or before the first time it is shown to any prospective investor. Under 5123, the firm has 15 calendar days after the date of first sale. Rule 5122 also imposes the 85 percent use-of-proceeds cap and the mandatory disclosures about proceeds and compensation. Rule 5123 is primarily a filing obligation; Rule 5122 layers substantive restrictions on top of the filing requirement.5FINRA. Private Placements of Securities

If Something Was Missed

If a firm or associated person discovers after the fact that any of Rule 5122’s conditions were not met, the firm must promptly bring the offering into compliance.6FINRA. Regulatory Notice 09-27 This is not a safe harbor. Self-correction does not erase the initial violation, but failing to act once the problem is known compounds the exposure.

FINRA Rule 4511 requires firms to keep books and records for at least six years when no other FINRA or Exchange Act rule sets a different period. For records tied to a specific account, the six-year clock starts when the account is closed; for other records, it runs from the date the records are created. Records must be preserved as legible, accurate, and complete copies throughout the retention period.7FINRA. Books and Records For a member private offering, that means the offering document, the filing confirmation, and the supporting materials should be held for at least six years, with the clock on account-linked records running from account closure rather than from the offering’s original close.