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Independent Broker Dealer Consortium

FINRA Issues New Regulatory Notice Regarding Private Placement Communications with the Public

FINRA has issued Regulatory Notice 20-21 which provides guidance to its member firms to help them comply with FINRA Rule 2201 pertaining to retail communications concerning private placement offerings.  FINRA Rule 2201 requires that all member firm communications be fair, balanced and not misleading.  Communications must disclose risks and be accurate in order to provide a sound basis to evaluate the facts with respect to the product being offered.  The communications may not contain any untrue statement of a material fact or be false or misleading.  FINRA states in the notice that most private placement investments are illiquid and speculative in nature and retail communications must balance claims of these investment benefits by also disclosing these risks. The notice also provides more specific examples of what should be disclosed and the nature of any such disclosures.

The retail communications should disclose that the private placement investment has the potential to lose value, it may not be able to be sold and may contain a high degree of risk.  If the issuer is a startup the risks to be disclosed may include that it has a limited track record; there are more experience or larger competitors; it has an overreliance on financing, reliance on a single supplier, customer or employee; or a lack of management experience.

Retail communications may not include any projections or predict returns to investors such as yields, income or dividends.  However, they may include forecasts of issuer operating metrics such as sales or revenues as long as any such permitted predictions do not state that they are guaranteed or certain.  Distributions and distribution rates for the investment must also be fair and balanced. They may not be false, exaggerated, unwarranted or misleading or promissory. They must disclose if the “dividend” is in fact a return of principal, if the distribution includes borrowed funds but may not state this it is comparable to a fixed income investment.

FINRA also included guidance on Internal Rate of Returns (IRR).  FINRA does permit the inclusion of IRR in retail communications for completed investment programs or in regards to a specific investment in a portfolio if the IRR represents the actual performance of that holding.  Where the investment program has ongoing operations, FINRA permits the inclusion of IRR if its calculated in a manner consistent with Global Portfolio Performance standards.

Should you have any additional questions regarding the recent FINRA guidance, please contact one of the following partners at Winget Spadafora & Schwartzberg, LLP who are leading the firm’s effort in the defense of broker-dealers, financial advisors and investment advisers across the United States.

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