SEC Approves FINRA Amendments to Underwriting Comp and Private Placement Rules

The SEC approved FINRA amendments that change the valuation method for underwriting compensation and expand filing exemptions for private placements.

The SEC approved changes to FINRA Rule 5110 ("Corporate Financing Rule - Underwriting Terms and Arrangements") and FINRA Rule 5123 ("Private Placements of Securities") that replace the "bona fide public market" valuation method for securities acquired as underwriting compensation. Firms will instead value these securities based on their closing market price on a U.S. exchange or a designated foreign market on the date of acquisition.

The rule excludes from underwriting compensation securities acquired in debt-for-equity exchanges, capital investments in direct participation programs and unlisted real estate investment trusts, and non-convertible preferred securities. Non-convertible preferred securities will be treated the same as non-convertible debt and derivative instruments, meaning they are considered compensation without value when acquired at a fair price.

Amendmenets to FINRA Rule 5123 ("Private Placements of Securities") expands the filing exemption for sales to accredited investors to include entities owning more than $5 million in investments and family offices with more than $5 million in assets under management. This change aligns FINRA's exemptions with the SEC's 2020 amendments to the accredited investor definition.

The amendments also make non-substantive technical and cross-reference corrections.