On July 1, 2020, FINRA issued guidance to member firms on compliance with FINRA Rule 2210 (“Rule 2210”)) on the marketing of private placements to retail investors. These private placements are typically conducted under Rules 504, 506(b) or 506(c) of Regulation D under the Securities Act of 1933, as amended, as “safe harbors” that permit unregistered, non-public offerings of securities.
As stated by FINRA in its guidance, the elimination of the general solicitation prohibition for offerings conducted under Rule 506(c) has resulted in member firms becoming much more involved in the distribution of private placement securities through widely disseminated communications, such as digital advertisements and online platforms. As these communications frequently include sales and marketing materials that meet the definition of “retail communications” under Rule 2210, this involvement heightens the importance of compliance by member firms involved in such offerings with the requirements of Rule 2210, including the general standards thereof.
The guidance reflects deficiencies that FINRA saw in its review of retail communications concerning private placements. While some of the key guidance is provided below, member firms that participate in retail private placements should measure their current practices against a careful review of FINRA’s detailed guidance.
Pursuant to Rule 2210, communications from member firms must:
- be fair, balanced and not misleading;
- disclose both the risks and potential rewards of an investment in a balanced manner; and
- be accurate and provide a “sound basis” for potential investors to properly analyze the products or services
In addition, with respect to each retail communication, member firms must obtain approval from a registered principal prior to issuing or, if required, filing the communication with FINRA’s Advertising Regulation Department.
FINRA also reminded member firms of their obligations with respect to third-party offering materials. When a member firm assists in preparing a private placement memorandum or similar offering document, that member firm must understand that it will constitute a communication with the public by that member firm for purposes of Rule 2210. Further, any sales literature distributed by the member firm, even if bound or presented as part of the private placement memorandum, also will likely constitute a communication with the public by that member firm, regardless of whether the member firm assisted in the preparation of such communication.
In addition, when providing forecasts of issuer operating metrics (such as forecasted sales) in retail communications, FINRA noted that member firms should consider:
- the time period forecasted (generally in excess of five years would be unreasonable);
- whether growth rate assumptions are proportionate to the nature and scale of the business;
- whether forecasted gross margins are proportionate to industry average; and
- whether sales and customer acquisition forecasts reasonably relate to the overall market for the issuer’s products or services.
FINRA further stated that private placements that are designed to provide distributions to investors should comply with the principles on distribution rates set forth in Regulatory Notice 13-18, which relates to communications for registered and unregistered real estate investment programs.
Lastly, FINRA clarified that Rule 2210 permits retail communications to include Internal Rate of Return calculations for completed investments and as to ongoing operations, if they are calculated in a manner consistent with the Global Investment Performance Standards.