July 22, 2021

Broker Dealer Settles FINRA Charges for Violating Private Placement Offering Rules

Commentary by Dorothy Mehta and Steven Lofchie

A broker-dealer settled FINRA charges for violating private placement offering rules. FINRA found that the firm did not establish pre-existing, substantive relationships with the investors needed to claim exemption from registration under the rules.

FINRA determined that the firm solicited 16 individuals to invest in eight private placement offerings under an exemption from registration pursuant to Rule 506(b) of Regulation D ("Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933"). FINRA stated that because the firm did not establish a pre-existing substantive relationship with the investors prior to the firm's participation in the offering, the sales to these investors constituted a general solicitation and thus the offering did not satisfy the private placement rules under Rule 506(b).

In addition, as a result of its improper sales activities, FINRA found that the firm violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the firm agreed to (i) a censure and (ii) a $25,000 fine.


This enforcement action is a must read for broker-dealers selling interests in traditional private placements under 506(b). FINRA makes clear that the "pre-existing, substantive relationship" with a potential investor must be established prior to the broker-dealer being involved with that offering - prior to signing a placement agreement or prior to any due diligence of that offering. This could result in 506(c) offerings being a more attractive option for broker-dealers engaged in private placements.

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