July 30, 2026
Overview
On July 24, 2026, the SEC issued an order approving FINRA’s proposed amendments to FINRA Rules 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) and 5123 (Private Placements of Securities).
The amendments (among other things) simplify how FINRA member broker-dealers value securities received as underwriting compensation, codify new exclusions from the underwriting compensation definition for certain financing strategies, extend no-compensation-value treatment to non-convertible preferred securities acquired at a fair price, and expand private placement filing exemptions to cover private offerings to two additional accredited investor categories previously added to the SEC’s regulations.
These amendments are designed to reduce compliance burdens, reduce the need for costly one-off exemptive requests, and facilitate capital formation while maintaining investor and issuer protections.
As of the date of this client alert, FINRA has not yet announced a specific effective date for the amendments.
Summary of the Amendments
Modernized Restrictions on Underwriting Terms and Arrangements
FINRA Rule 5110 generally requires member firms participating in public offerings to file underwriting terms and compensation information with FINRA for pre-offering review, unless an exemption from filing applies, and a member may proceed with a public offering required to be filed only if FINRA has provided a no-objection opinion on the proposed underwriting terms and arrangements. The rule also imposes a 180-day lock-up on securities received as underwriting compensation, restricts termination fees and rights of first refusal, and provides detailed valuation methodologies for non-cash compensation items, such as securities.
- New Valuation Method for Securities Acquired as Underwriting Compensation. The amendments replace the existing “bona fide public market” valuation method (which is used when a security does not have a public offering price) with a valuation method based on the closing market price of a security traded on a U.S. registered national securities exchange or a “designated offshore securities market” (as defined under Securities Act Rule 902(b)) on the date of acquisition. This eliminates the requirement for trading volume and public float calculations, which have caused difficulty for participating FINRA members in determining whether a security has a “bona fide public market,” and provides greater predictability and certainty.
- New Exclusions from Underwriting Compensation and No-Compensation-Value Treatment for Certain Non-Convertible Preferred Securities. The amendments codify two new exclusions from the definition of underwriting compensation and extend no-compensation-value treatment to non-convertible preferred securities acquired at a fair price:
- (1) Securities Acquired by Participating Members in Debt-for-Equity Exchange Transactions may now be excluded from underwriting compensation, provided that: (a) the exchange is structured to provide economic and tax benefits to the issuer and not to the lender or affiliated member; (b) the affiliated member subsequently offers all of the equity securities acquired by the lender in a firm commitment offering following the exchange; (c) the terms of the exchange and subsequent equity issuance are determined through arm’s-length negotiations based on the market price of the equity; and (d) customary compensation is negotiated for the subsequent equity offering;
- (2) Capital Investments for Direct Participation Programs (DPPs) and Unlisted Real Estate Investment Trusts (REITs) may now be excluded from underwriting compensation, subject to certain conditions, including: (a) prospectus disclosure; (b) net asset value (NAV)-based valuations; (c) a requirement that the offering be subject to Rule 2310 (Direct Participation Programs); and (d) a 180-day resale restriction following commencement of sales for the securities acquired; and
- (3) Parallel Treatment for Non-Convertible Preferred Securities, which are now treated the same as non-convertible or non-exchangeable debt securities and derivative instruments. When acquired at a fair price, these securities are considered underwriting compensation but have no compensation value. To the extent they are acquired at a price other than a fair price, the value attributed as underwriting compensation is the difference between the fair price and actual price.
- Tail Fees Now Subject to the Same Conditions as Termination Fees. The amendments revise FINRA Rule 5110(g)(5)(B) to clarify that “tail fees” (compensation payable upon a subsequent financing from investors introduced by a member following termination of an engagement) are subject to the same conditions that apply to termination fees. Tail fees are subject to protective conditions: (1) the obligation must terminate if the issuer exercises its right to terminate for cause; (2) the amount must be reasonable in relation to the underwriting services contemplated in the agreement; and (3) the issuer is not responsible for paying the fee unless the offering or other type of transaction set forth in the agreement is consummated within two years of the date the engagement is terminated by the issuer. Tail fees that do not satisfy these conditions would constitute unreasonable arrangements under Rule 5110.
Expanded Exemptions to Private Placement Filing Requirements
FINRA Rule 5123 generally requires FINRA members to file with FINRA any private placement memorandum, term sheet, or other offering document, and any retail communication that promotes or recommends a private placement, including any material amended versions thereof, used in connection with a private placement of securities within 15 calendar days of the date of first sale, unless an exemption applies.The amendments expand the available filing exemption to include offerings sold to investors meeting two additional accredited investor categories: (1) entities not formed for the specific purpose of acquiring the offered securities, owning investments in excess of $5,000,000; and (2) family offices not formed for the specific purpose of acquiring the offered securities, with assets under management in excess of $5,000,000, whose prospective investment is directed by a person with sufficient financial knowledge and experience, consistent with the SEC’s 2020 accredited investor amendments.
Key Takeaways
- Simpler Valuation Standard for Underwriting Compensation: The replacement of the “bona fide public market” test with a closing-market-price standard provides FINRA members with a more predictable, readily verifiable method for valuing securities received as underwriting compensation, reducing the risk of securities being classified as prohibited indeterminate compensation.
- Additional Rule 5110 Flexibility Reduces Need for Exemptive Requests by Member Firms: By codifying exclusions for debt-for-equity exchanges and DPP/REIT capital investments, and by extending no-compensation-value treatment to non-convertible preferred securities acquired at a fair price, the amendments reduce the need for member firms to seek individual exemptive relief from FINRA for qualifying transactions, reducing cost and the likelihood of transaction delays. Member firms may still request exemptive relief for transactions that do not meet the codified conditions.
- Regulatory Clarity for Tail Fees in Member Firm Engagement Letters: The clarification that tail fees may be treated as permissible termination compensation if Rule 5110(g)(5)(B)’s conditions are satisfied provides regulatory clarity for a compensation structure that has become increasingly common in underwriter engagement letters, subject to defined protective conditions, including a two-year outside date by which the subsequent financing must be consummated for the issuer to be responsible for paying the fee.
- Reduced Need for FINRA Filings by Member Firms in Qualifying Private Placements: The expansion of Rule 5123’s filing exemption to include certain family offices with more than $5 million in assets under management and certain entities with more than $5 million in investments more closely aligns FINRA’s framework with the SEC’s 2020 accredited investor definition and reduces filing obligations for members conducting offerings to these categories of sophisticated institutional investors.
The SEC’s order can be found here.
If you have any questions regarding this client alert, please call or e-mail your SRFC attorney.
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