The Member Private Offering Rule

What Does the Member Private Offering Rule Cover?

• Member private offering: a private placement of unregistered securities issued by the member firm itself, or by a control entity.
• Control entity: an entity that controls, or is under common control with, the member, or that is controlled by the member or its associated persons.
• Control: beneficial interest of more than 50% of an entity's outstanding voting securities, or the right to more than 50% of a partnership's or other non-corporate entity's distributable profits or losses. Control is measured immediately after the offering closes, and after each closing if the offering has more than one intended closing.
• No member or associated person may offer or sell a security in a member private offering unless the offering meets the rule's disclosure, filing, and use-of-proceeds conditions.

Exam Tip: Gotchas

• The member private offering rule applies only when the member firm, or its own control entity, is the issuer of the securities being placed.
• The separate filing rule covered in an earlier unit has no issuer limit. It reaches any private placement a member sells, including the member's own, then exempts an offering already filed under this rule. Ask who issued the security to pick whose conditions apply, not which rule's text reaches the offering.

What Must the Offering Disclose, File, and Use Its Proceeds For?

• Disclosure: the disclosure condition carries two duties, not one. The offering document must be provided to each prospective investor, and it must carry the required disclosures.
  • If the offering has a private placement memorandum or term sheet, that document must be provided to each prospective investor and must disclose the intended use of the offering proceeds and the offering expenses and selling compensation paid to the member and its associated persons.
  • If there is no memorandum or term sheet, the member must prepare an offering document carrying those same disclosures and provide that document to each prospective investor.
  • Preparing a compliant document and keeping it on file does not satisfy the condition.
• Filing: the member must file the offering document, and any retail communication promoting or recommending the offering, with FINRA's Corporate Financing Department at or before the first time it is provided to a prospective investor. Any amendment or exhibit must be filed within 10 days of being provided to an investor or prospective investor.
• Use of proceeds: at least 85% of the offering proceeds must be used for business purposes. Offering costs, discounts, commissions, and other sales incentives do not count toward that 85%. The use must also match what the offering document disclosed.
• If a condition was missed: a member or associated person who finds out afterwards that the offering did not meet one of these conditions must promptly bring the offering into compliance with the rule. The duty is to fix the offering, not to unwind it.

Exam Tip: Gotchas

• The disclosure condition is two duties, not one. A member that prepares a fully compliant offering document and keeps it in its files has met the content duty and failed the delivery duty, so the condition is not met.
• The 10-day clock belongs to an amendment or an exhibit. The offering document itself is filed at or before the first time it reaches a prospective investor, not 10 days after.

What Else Does the Rule Provide?

• Confidential treatment: FINRA treats every document and every piece of information filed under this rule as confidential, and uses it only to review compliance with applicable FINRA rules or for another regulatory purpose it considers appropriate.
• Individual relief: FINRA may exempt a member or an associated person from this rule for good cause shown, under the rule series that governs exemption applications.
• The separate filing rule covered in an earlier unit carries both of these provisions too, so the two rules do not differ here.

Which Offerings Are Exempt From the Member Private Offering Rule?

• The rule sets out a closed list of fourteen exempt categories. The exam-relevant ones are:
  • Offerings sold solely to institutional accounts, qualified purchasers, qualified institutional buyers (QIBs), investment companies, an entity composed exclusively of QIBs, or banks.
  • Offerings made under the QIB private resale safe harbor covered in an earlier unit, or under Regulation S.
  • Offerings where the member acts primarily as a wholesaler, selling, under a selling agreement, less than 20% of the offering through its affiliate broker-dealers.
  • Offerings to employees and affiliates of the issuer or its control entities.
  • Offerings already filed with FINRA under another applicable FINRA filing requirement, so the same offering is not filed twice.
• The remaining exempt categories are product-specific and rarely tested: certain exempted or short-term securities, subordinated loans, variable and modified guaranteed insurance contracts, unregistered investment grade debt and preferred securities, conversions and stock splits that need no further investor money, commodity pool interests, and equity or credit derivatives not based principally on the member or its control entities.

What Should You Check on Exam Day?

• Identify who issued the security first. The member private offering rule applies only when the member or its own control entity is the issuer.
• Check both halves of the disclosure condition: the document must carry the two disclosures AND be provided to each prospective investor.
• Confirm at least 85% of proceeds go to business purposes, with offering costs and sales compensation excluded from that figure.
• Match an exempt fact pattern to one of the five exam-relevant categories before assuming no exemption applies.
• Do not confuse this rule's conditions with the separate private-placement filing rule covered in an earlier unit. That rule reaches any private placement a member sells, including the member's own, then exempts an offering already filed under this rule. The issuer test tells you whose conditions apply, not which rule's text reaches the offering.