FINRA Reminds Broker-Dealers of Contingency Offering Compliance Obligations (FINRA Reg. Notice 16-08)

Finding instances of noncompliance in its reviews of contingency offerings, FINRA reminded broker-dealers of their compliance obligations pursuant to Securities Exchange Act Rules 10b-9 and 15c2-4.

Specifically, FINRA reviewed the following compliance requirements:

• Best Efforts Contingency Offerings: "Under [Securities Exchange Act] Rule 10b-9, a best efforts offering subject to either an 'all-or-none' or 'part-or-none' contingency must provide for the prompt return of investor funds in the event the requisite contingency fails to be met by a specific date."

• Broker-Dealer Responsibilities in a Best Efforts Contingency Offering: "Broker-dealers must be aware of any attempt by the issuer to use non-bona fide sales in order to declare an offering sold for the purposes of an 'all-or-none' or 'part-or-none' offering."

• Requirements Concerning Manner of Handling Investor Funds: "[U]pon receiving money or other consideration from an investor in a contingency offering, a broker-dealer must promptly:

  • deposit those funds into 'a separate bank account' for which the broker-dealer is the account holder and is designated as agent or trustee 'for the persons who have the beneficial interests therein'; or

  • transmit those funds to a bank that has agreed in writing to act as the escrow agent for the offering."