FINRA Rule 5122

A firm prepares to sell a private placement of its own securities to customers. The offering document describes the security's terms but does not disclose the intended use of the proceeds from the offering. A principal reviewing the document under Rule 5122 questions this omission. What must be corrected?

1. A.The offering document must disclose the intended use of the offering's proceeds, which Rule 5122 specifically requires.Correct. Rule 5122 requires disclosure of the intended use of proceeds.
2. B.Nothing needs to be corrected, since Rule 5122 only requires that some form of offering document be provided to investors.Wrong. Rule 5122 requires specific content, including use of proceeds, not just any offering document.
3. C.The omission is only a concern if the proceeds will be used to repay existing firm debt.Wrong. The use of proceeds must be disclosed regardless of the particular intended use.
4. D.The omission is only a concern if the offering is oversubscribed.Wrong. The disclosure requirement doesn't depend on whether the offering is oversubscribed.

Why: Rule 5122 requires that the private placement memorandum or other offering document for a firm-issued private placement disclose the intended use of the offering's proceeds, among other required content; omitting this disclosure fails to satisfy that specific content requirement.

A firm is preparing to sell a private placement of its own securities (a firm-issued offering) to customers. What must the principal ensure occurs under Rule 5122?

1. A.Nothing, as long as the offering also qualifies for an exemption under Regulation DWrong. Qualifying for a Regulation D exemption from SEC registration does not eliminate the separate Rule 5122 requirements applicable to the firm's own issued securities.
2. B.Nothing, since Rule 5122 applies only to publicly registered offerings, not private placementsWrong. This mischaracterizes the rule; Rule 5122 specifically addresses private placements of the firm's own issued securities.
3. C.Nothing different from any other private placement, since Rule 5122 does not distinguish based on who the issuer isWrong. Rule 5122 specifically applies additional requirements to private placements of the firm's own issued securities, distinct from other private placements.
4. D.Ensure the specific disclosure and filing requirements under Rule 5122 are met, given the firm is selling its own securitiesCorrect. Rule 5122 imposes heightened disclosure and filing requirements specifically for private placements of securities issued by the member firm itself.

Why: Rule 5122 imposes specific disclosure and filing requirements on private placements of securities issued by the member firm itself, given the inherent conflict of a firm selling its own securities to its customers. The principal must ensure these specific requirements are met, treating this differently from a private placement of an unaffiliated issuer's securities.