The Financial Industry Regulatory Authority has filed a proposed rule change with the Securities and Exchange Commission to require broker-dealers to file retail communications relating to private placement offerings.
Retail communications can include web pages that promote the offering, slide presentations, pitch decks, one-page “teasers,” fact sheets, sales brochures, executive summaries, and investor packets.
The proposal would amend FINRA Rules 5122 (private placements of securities issued by members) and 5123 (private placements of securities). FINRA believes that requiring broker-dealers to file retail communications under those rules will “improve compliance” and “reduce the likelihood that retail investors would receive false or misleading sales material for private placements.”
“Given the comparatively high rate of non-compliance of private placement retail communications, and the increased risk of investor harm associated with those communications, FINRA proposes to amend Rules 5122 and 5123 to require such retail communications to be filed, in addition to the currently required PPMs, term sheets, and other offering documents,” FINRA’s proposal states. “Rules 5122 and 5123 focus on the private placements that raise the greatest concerns—those sold to retail investors, whether or not accredited.”
FINRA claims that it has seen “significant problems” with the retail communications that have been voluntarily filed under the two rules. A 2018 spot check revealed that 76 percent of retail communications involved significant violations of Rule 2210 (communications with the public).
The most common violation was prohibited projections of performance or unreasonable forecasts, e.g., “Return 4-6x invested capital net of fees” and “Management projects a $100 million revenue stream can be built in 5 years.” Numerous others contained false or misleading statements, the regulator said.
Another common issue was the failure to balance promotional content with the key risks associated with the investment, such as a real estate offering touting the benefit of purchasing properties leased by “investment grade” tenants without discussing that such holdings do not assure a profit or protect against loss.
Others failed to disclose general risks, such as the speculative nature of the securities and the lack of liquidity of the investment.
If the SEC approves the proposed rule change, FINRA will announce the effective date of the rule change in a regulatory notice to be published no later than 60 days following SEC approval. The effective date will be no later than 180 days following publication announcing SEC approval.