SEC Approves FINRA Amendments to Underwriting-Compensation and Private-Placement Rules

The SEC approved FINRA rule amendments (see prior coverage) expanding private-placement notice-filing exemptions and revising how underwriting compensation is calculated, aiming to ease capital formation and compliance costs for broker-dealers.

Under amended FINRA Rule 5110 ("Corporate Financing Rule"): (i) where securities received as underwriting compensation have no public offering price, they must now be valued at their closing market price on a registered national securities exchange or a designated offshore securities market on the acquisition date, replacing the "bona fide public market" standard; (ii) new conditional exclusions from underwriting compensation apply to an underwriter affiliate's acquisitions in debt-for-equity exchanges and to capital investments in direct participation programs and unlisted REITs; (iii) non-convertible preferred securities acquired at a fair price are now treated the same as non-convertible debt securities, meaning they remain underwriting compensation but carry no compensation value; and (iv) "tail fees" for subsequent financings involving investors introduced by a broker-dealer are prohibited unless three conditions are met: the obligation ends if the issuer terminates the engagement for cause, the amount is reasonable in relation to the underwriting services contemplated in the agreement, and the later transaction closes within two years of the issuer's termination.

Exemptive relief remains available under Rule 5110(i) for transactions that fall outside the new conditions.

Under amended FINRA Rule 5123 ("Private Placements of Securities"), the notice-filing exemption for offerings sold exclusively to accredited investors now also covers family offices with more than $5 million in assets under management and entities owning more than $5 million in investments, in each case where the family office or entity was not formed for the specific purpose of acquiring the securities offered, and, for family offices, where the prospective investment is directed by a person capable of evaluating its merits and risks. Both categories were added to the accredited investor definition by the SEC's 2020 amendments to Securities Act Rule 501. FINRA extended the exemption to these two categories only.

FINRA will announce the effective date in a future Regulatory Notice.