FINRA Member Private Offerings

The member-private-offering rule is the only FINRA-specific rule the outline pulls into this unit. It addresses a narrow but high-risk situation: when the member firm is selling its own (or its affiliate's) unregistered securities.

Scope: When Does the Member-Private-Offering Rule Apply?

The rule applies to a Member Private Offering (MPO): a private placement of unregistered securities issued by a FINRA member or by an entity controlling, controlled by, or under common control with the member.

• The member is selling its OWN (or its affiliate's) securities.
• The rule does NOT apply to a member helping a third-party issuer sell that third-party's securities (a separate FINRA rule covers third-party private-placement participation).

Why a Separate Rule for Member-Issuer Offerings

When the member firm is also the issuer, the customer's representative (the broker) has a built-in conflict: every dollar the customer invests in the offering flows to the broker's own firm. The rule operationalizes the disclosure and use-of-proceeds discipline needed to manage that conflict.

Exam Tip: Gotchas

• The member-private-offering rule (issuer-side, member self-offering) is distinct from third-party private-placement participation. The MPO rule governs WHEN A MEMBER IS THE ISSUER; the third-party rule governs participation in someone else's private placement. The 85% use-of-proceeds rule is an MPO concept; the third-party rule has its own disclosure and filing requirements but no 85% cap.

Disclosure Document Requirement

The member or control entity must provide each prospective investor with a private placement memorandum (PPM), term sheet, or other offering document that discloses:

• Intended use of offering proceeds
• Offering expenses
• Amount of selling compensation that will be paid to the member and its associated persons

The disclosure document is what gives the investor enough information to evaluate whether the offering is a substantive capital raise or a self-dealing distribution of fees back to the broker.

Use-of-Proceeds Requirement (the 85% Rule)

The substantive cap is the use-of-proceeds requirement.

• At least 85% of offering proceeds raised must be used for business purposes.
• The 85% calculation EXCLUDES offering costs, discounts, commissions, and other cash or non-cash sales incentives.
• Practical effect: the member cannot run an MPO where most of the proceeds flow back to the member as fees.

Think of it this way: the 85% rule turns the MPO into a substantive financing rather than a fee extraction. If a member tried to raise $10 million but paid out $3 million in fees and commissions, only $7 million would reach the business, and the 85% calculation (against the $10 million gross) would show 70%, below the 85% floor. The deal would not comply.

Exam Tip: Gotchas

• The 85% threshold is calculated against the GROSS offering proceeds and excludes selling concessions, marketing costs, and other expenses. It is a substantive cap on how much a member-issuer can extract as fees, not just a disclosure rule.

Filing Requirement

The disclosure document must be filed with the FINRA Corporate Financing Department.

• Timing: At or prior to the first time the document is provided to any prospective investor.
• Amendments: Must be filed within 10 days of being provided to any investor.
• Nature of filing: Notice filings (they do not require FINRA approval or clearance).
• Any retail communication that promotes or recommends the MPO must also be filed.

The filing is the gate that gives FINRA visibility into member-issuer private offerings without slowing down a substantive deal with a pre-clearance regime.

Exam Tip: Gotchas

• The FINRA Corporate Financing Department filing is a NOTICE filing, not a clearance. The Corporate Financing Department does not "approve" the offering. The filing gives FINRA visibility for surveillance.

Exemptions from the Member-Private-Offering Rule

The rule carves out offerings sold only to certain sophisticated investor categories.

• Offerings sold only to institutional accounts
• Offerings sold only to QIBs
• Offerings sold only to qualified purchasers
• Offerings sold only to accredited investors that are not natural persons
• Various other carve-outs (crowdfunding exemption issuers, banks, certain pooled investment vehicles)

The exemptions reflect that the conflict and disclosure concerns are most acute when the member sells to retail accredited individuals; institutional buyers can fend for themselves under the broader Reg D framework.

Exam Tip: Gotchas

• The MPO rule has institutional-only carve-outs. Offerings sold solely to QIBs, institutional accounts, qualified purchasers, or non-natural-person accredited investors are exempt. Retail accredited individuals trigger the full MPO regime.

Member-Private-Offering Rule vs Third-Party Private-Placement Participation

Exam Tip: Gotchas

• The MPO rule and the third-party private-placement rule both exist because FINRA wants visibility into member firm private-placement activity. The split lets each side address its own conflict pattern: the MPO rule handles self-dealing, the third-party rule handles intermediation conflicts. Get the directionality right (who issues, who sells) and the right rule follows.