Private Placements: Will FINRA Sink in the Sea Change?

Document Type

Article

Publication Title

University of Cincinnati Law Review

Version

pre-publication

Journal Abbreviation

U. Cin. L. Rev.

Abstract

Private placements take place when a company sells securities outside of the public securities markets. Stockbrokers, regulated by the self-regulatory organization known as FINRA, play a major role in facilitating private placement sales to retail investors. Under recent Congressional and SEC mandates, FINRA now occupies a central role in policing non-public securities offerings. Indeed, as events have unfolded, FINRA regulations and enforcement procedures provide the only real protection to investors who purchase these securities through their broker/dealers. FINRA will soon take on additional responsibilities in policing advertised private placements and regulating brokers/dealers and “funding portals” under the Crowd Funding provisions of the JOBS Act. In addition, FINRA is lobbying for the authority to regulate Registered Investment Advisors.

This paper examines the regulatory and enforcement prowess of FINRA with regards to non public offerings. It presents empirical data on the size and scope of the private placement market, particularly as it impacts retail investors. This data clearly demonstrates that private offerings have become the predominant method of capital formation in the U.S. both in terms of raw numbers of offerings and total dollar volume. The paper next examines FINRA’s new private placement rules and presents enforcement statistics. Both suggest that FINRA may be awakening from a rather deep sleep and may be stepping up its oversight and enforcement activities over brokers who operate in this arena. Industry pressures, however, have prevented FINRA from realizing its full potential to protect investors. These findings have serious implications for the organization’s capacity and willingness to effectively regulate an expanding universe of financial intermediaries.

First Page

465

Last Page

490

Publication Date

Winter 2013

Comments

Page numbers in the recommended citation are from the final published journal article. The PDF of the article linked here is a pre-publication version that does not contain page numbers.

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