In December 2025, the Financial Industry Regulatory Authority, Inc. (“FINRA”) published its 2026 Annual Regulatory Oversight Report (the “Report”). The Report includes a focused discussion of private placements, highlighting areas that continue to draw attention from FINRA’s Member Supervision, Market Oversight and Enforcement teams.
FINRA reiterates that recommendations of private placements to retail investors trigger Regulation Best Interest (“Reg BI”), while recommendations to non-retail customers are subject to FINRA Rule 2111 (Suitability). The Report notes that firms have incorrectly characterized their communications to customers as not involving a recommendation, or claimed that the issuer is making the recommendation, despite evidence that the firms’ communications were individually tailored to customers and operated as a “call to action.” The Report also notes that firms have failed to discharge their Reg BI obligations by not adequately identifying, disclosing and, where appropriate, mitigating conflicts of interest associated with recommendations of private placements.
FINRA emphasizes that recommendations of privately offered securities should be based on a reasonable investigation of the issuer and the offering, including the issuer’s management, business prospects, assets, claims being made and intended use of proceeds, as detailed in FINRA Regulatory Notice 23-08 (see our Legal Update for additional information). Consistent with last year’s report, FINRA identifies deficiencies relating to firms’ due diligence practices, including overreliance on prior issuer relationships, failure to identify or address red flags and failure to evidence a firm’s due diligence efforts.
Additionally, FINRA highlights risks associated with private placement offerings of “pre-IPO funds,” as to which FINRA notes certain firms have failed to verify access to the pre-IPO shares or understand the costs associated with acquiring the pre-IPO shares.
FINRA also reminds firms of their obligation under FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) to timely file with FINRA offering materials for the private placements they offer or sell, including retail communications, unless a filing exemption is available. FINRA cautions firms against purporting to rely on a filing exemption under FINRA Rule 5123(b) that is not applicable to the offering (e.g., the exemption for sales to certain institutional accredited investors, which generally is not applicable for sales to individual accredited investors).
Finally, FINRA highlights several effective practices, including tailoring due diligence checklists to the structure and risk profile of each offering, conducting “bad actor” diligence at both the issuer and placement agent levels, implementing independent reviews to verify key issuer claims and assess red flags and monitoring offerings for material changes, including changes in the issuer’s intended use of proceeds.
Access the full text of the Report and, for a full discussion and analysis of the Report, read our Legal Update.