Notice2026-01825
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rules 5110 (Corporate Financing Rule-Underwriting Terms and Arrangements) and 5123 (Private Placements of Securities)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 30, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 20 (Friday, January 30, 2026)</title>
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[Federal Register Volume 91, Number 20 (Friday, January 30, 2026)]
[Notices]
[Pages 4121-4128]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-01825]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104695; File No. SR-FINRA-2026-002]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rules 5110 (Corporate Financing Rule--Underwriting Terms and
Arrangements) and 5123 (Private Placements of Securities)
January 27, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 22, 2026, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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[[Page 4122]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rules 5110 (Corporate Financing
Rule--Underwriting Terms and Arrangements) and 5123 (Private Placements
of Securities). The proposed amendments to Rule 5110 would improve and
clarify the valuation method for securities considered underwriting
compensation, add new exclusions from underwriting compensation that
codify exemptions FINRA staff has issued, and include minor changes to
improve the operation of the rule. The proposed amendments to Rule 5123
would expand available exemptions to include offerings sold to
investors meeting the categories of accredited investor for certain
family offices and certain entities with assets under management in
excess of $5,000,000, consistent with the Commission's treatment of
those categories.
The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a> and at the principal office of FINRA.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The ability of small and large businesses to raise capital
efficiently is critical to job creation and economic growth. Rule 5110
has played an important role in the capital raising process by
prohibiting unfair underwriting terms and arrangements in connection
with the public offering of securities. Moreover, Rule 5110 continues
to be important to promoting investor protection and market integrity
through effective and efficient regulation that facilitates vibrant
capital markets.
Rule 5110 requires a member that participates in a public offering
to file documents and information with FINRA about the underwriting
terms and arrangements.\3\ FINRA's Corporate Financing Department
(``Department'') reviews this information prior to the commencement of
the offering to determine whether the underwriting compensation and
other terms and arrangements meet the requirements of the applicable
FINRA rules.\4\
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\3\ The following are examples of public offerings that are
routinely filed: (1) initial public offerings (``IPOs''); (2)
follow-on offerings; (3) shelf offerings; (4) rights offerings; (5)
offerings by direct participation programs as defined in FINRA Rule
2310(a)(4) (Direct Participation Programs); (6) exchange offers; (7)
offerings pursuant to SEC Regulation A; and (8) offerings by closed-
end funds.
\4\ FINRA does not approve or disapprove an offering; rather,
the review relates solely to the FINRA rules governing underwriting
terms and arrangements and does not purport to express any
determination of compliance with any federal or state laws, or other
regulatory or self-regulatory requirements regarding the offering. A
member may proceed with a public offering only if FINRA has provided
an opinion that it has no objection to the proposed underwriting
terms and arrangements. See Rule 5110(a)(1)(C)(ii).
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The unregistered offering market also is an important source of
capital for American businesses, including small and midsize companies.
Rule 5123 plays a critical role in providing information that assists
FINRA in the identification of potential trends and rule violations in
the private placement market.
In general, Rule 5123 requires 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 the member can rely on an
applicable exemption from the rule. Rule 5123 contains an exemption
from filing for offerings sold to certain types of sophisticated
institutional investors that qualify as ``accredited investors'' under
Rule 501 of the Securities Act of 1933 (``Securities Act'').\5\ These
institutional accredited investors have sufficient sophistication to
warrant an exemption from the rule.
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\5\ These ``institutional'' accredited investors are: banks and
savings and loan associations; registered broker-dealers; investment
advisers; insurance companies; investment companies; business
development companies; Small Business Investment Companies; Rural
Business Investment Companies; state employee benefit plans with
assets in excess of $5 million; or ERISA employee benefit plans, if
the investment decision is made by a plan fiduciary, which is either
a bank, savings and loan association, insurance company, or
registered investment adviser, or if the employee benefit plan has
total assets in excess of $5 million, or if a self-directed plan,
with investment decisions made solely by persons that are accredited
investors (see Rule 501(a)(1)); private business development
companies (see Rule 501(a)(2)); organizations described in Section
501(c)(3) of the Internal Revenue Code, corporation, Massachusetts
or similar business trust, partnership, or limited liability
company, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5 million (see
Rule 501(a)(3)); and trusts with total assets in excess of $5
million, not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a sophisticated
person as described in Rule 506(b)(2)(ii) (see Rule 501(a)(7)).
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In 2020, the SEC amended the definition of accredited investor to
include two additional types of institutional entities.\6\ The
amendments updated the definition of accredited investor to more
effectively identify institutional and individual investors that have
the knowledge and expertise to participate in private capital markets.
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\6\ See Accredited Investor Definition, Securities Exchange Act
Release 89669 (August 26, 2020), 85 FR 64234 (October 9, 2020),
including new categories of accredited investor under Rule 501(a)(9)
and (a)(12).
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Overview of Proposed Amendments
The proposed amendments to Rule 5110 would improve and clarify
parts of the rule covering the valuation method for securities deemed
underwriting compensation. The proposed amendments would also include
new exclusions from underwriting compensation that codify exemptions
FINRA staff has issued and clarifications of other provisions, all of
which would further promote capital formation without lessening
investor or issuer protection. In addition, the proposed amendments
would include several minor changes to improve the operation of the
rule and address common questions encountered during the review
process.
The proposed amendments to Rule 5123 would add two types of
entities that would qualify under the existing filing exemption under
Rule 5123, consistent with the Commission's treatment of the accredited
investor definition.
Rule 5110 Proposed Amendments
Valuation Method for Securities Acquisitions Considered Underwriting
Compensation
Currently, when participating members \7\ acquire securities that
are deemed underwriting compensation, the value of the securities is
based on either the public offering price per security or the price
paid per security on the date of acquisition if a ``bona fide public
[[Page 4123]]
market'' exists for the security.\8\ The definition of ``bona fide
public market'' requires that the securities be traded on a national
securities exchange and relies on SEC Regulation M's definitions of
average daily trading volume and public float.\9\ FINRA understands
that members have experienced challenges determining whether a security
had a ``bona fide public market'' on the acquisition date using this
complex, multipart definition. When a security does not meet the
definition, and does not have a public offering price, it cannot be
valued under the rule and is therefore considered indeterminate
compensation, which is prohibited under Rule 5110(g)(1).
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\7\ The term ``participating member'' means any FINRA member
that is participating in a public offering, any affiliate or
associated person of the member, and any immediate family, but does
not include the issuer. See Rule 5110(j)(15).
\8\ See Rule 5110(c).
\9\ See Rule 5121(f)(3).
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The proposed rule change would amend Rule 5110(c)(2) and (3) by
replacing ``bona fide public market'' with a valuation method in which
the calculation is more predictable, based on the closing market price
of a security traded on a registered national securities exchange or a
``designated offshore securities market'' \10\ on the date of
acquisition. Using this readily available market data would greatly
simplify application of the rule.
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\10\ See Securities Act Rule 902(b).
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Exclusions From Underwriting Compensation for Certain Securities
Acquisitions
The proposed rule change is intended to foster capital raising by
providing additional exclusions from underwriting compensation for
certain types of investments by participating members in anticipation
of, or concurrently with, a public offering. These proposed amendments
cover (1) debt-for-equity exchanges; (2) capital investments for direct
participation programs (``DPPs'') \11\ and unlisted real estate
investment trusts (``REITs''); \12\ and (3) non-convertible preferred
securities, and describe factors FINRA has considered regarding whether
to exclude securities acquisitions from being deemed underwriting
compensation when such acquisitions are in connection with bona fide
financing that would benefit the issuer and investors. Each proposed
amendment is discussed below.
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\11\ See Rule 2310(a)(4).
\12\ See Rule 2231(d)(4).
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Debt-for-Equity Exchanges
Rule 5110 does not now provide an exclusion from underwriting
compensation for securities acquired by affiliates of underwriters in
connection with debt-for-equity exchange transactions. Debt-for-equity
exchanges have increasingly occurred in recent years and provide
favorable tax treatment and economic benefits to issuers.\13\ A debt-
for-equity exchange is composed of a series of transactions in which a
lender acquires equity securities of the issuer, often referred to as
exchange shares, in return for a cash loan. The exchange shares are
subsequently or concurrently registered and offered by underwriters in
a public offering. The offering proceeds are used, in whole or part, as
repayment of the loan. When the lender is an affiliate of an
underwriter, it falls within the definition of participating member,
and the equity securities acquired by the affiliated lender for making
the loan fall within the definition of underwriting compensation.
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\13\ Pursuant to Rule 5110(i), FINRA received 15 exemption
requests for debt-for-equity transactions from 2022 through 2024.
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The proposed rule change would add new Supplementary Material
.01(b)(23) to provide relief from such exchanges being deemed
underwriting compensation if the equity acquired is part of a
transaction that provides economic and tax benefits to the issuer and
meets the following conditions:
<bullet> the affiliated member subsequently offered all of the
equity securities the lender acquired in a firm commitment offering
following the debt exchange; \14\
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\14\ Typically, lenders and affiliated members coordinate to
satisfy this condition. However, even if they do not coordinate, the
affiliated member can satisfy the condition with the subsequent
offering.
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<bullet> the parties determined the terms of the debt exchange and
the subsequent equity issued through arms' length negotiations based on
the market price of the equity; \15\ and
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\15\ Past exemptions that have been granted consistent with the
conditions of this proposed Supplementary Material involved
operating companies with equity listed on a national securities
exchange with a market price and did not involve an IPO or a
spinoff. Member firms intending to participate in transactions that
do not align with the terms of this Supplementary Material may, as
with any transaction subject to Rule 5110, request exemptive relief
pursuant to FINRA Rule 5110(i) and the Rule 9600 Series.
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<bullet> the affiliated member negotiated customary compensation
for the subsequent equity offering.
The proposed rule change would facilitate capital formation by
providing consistent regulatory treatment of a common financing
strategy issuers employ.
Capital Investments for DPPs and REITs
Rule 5110 does not now provide an exclusion from underwriting
compensation for capital investments in exchange for an equity stake
made by affiliates of underwriters concurrently with or in advance of a
public offering. Such investments are common in DPP and REIT offerings
to provide the initial or subsequent equity capital or financing needed
by an issuer.
The proposed rule change would add new Supplementary Material
.01(b)(24) to provide relief from such transactions by setting out the
conditions for excluding capital investments from being deemed
underwriting compensation. Supplementary Material .01(b)(24) would work
as a self-operating exclusion and would not limit when the transactions
could occur. The conditions for Supplementary Material .01(b)(24) apply
to securities acquired before or during the distribution of an offering
by a participating member in the issuer or an affiliated entity and
would require that:
<bullet> the capital investments are disclosed in the prospectus;
<bullet> the offering and the securities acquired in the
capitalization transaction are valued and priced based on net asset
value (``NAV''); \16\
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\16\ Capitalization transactions occurring before the issuer has
material assets would be deemed to occur at or above NAV.
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<bullet> the offering is subject to the requirements of Rule 2310
(Direct Participation Programs); and
<bullet> the securities acquired are restricted for a period of 180
days following the commencement of sales.
These conditions are intended to promote transparency, ensure fair
valuation, and address potential conflicts of interest in these
transactions.
Non-Convertible Preferred Securities
Rule 5110 provides that non-convertible or non-exchangeable debt
securities and derivative instruments acquired by any participating
member in a transaction related to a public offering at a fair price
\17\ are considered underwriting compensation but have no compensation
value.\18\ Because both non-convertible debt and non-convertible
preferred securities cannot be converted to common stock and provide
predetermined payments to holders, resulting in fixed sources of
income, FINRA views them as
[[Page 4124]]
equivalent for purposes of the Rule 5110 exclusion and, accordingly,
the proposed rule change would treat them in a comparable manner as
long as non-convertible preferred securities are acquired at a fair
price. This rule change would facilitate capital formation by providing
members with predictable regulatory treatment and benefit issuers
through the capital investments made in exchange for non-convertible
preferred securities from affiliates of members that participate in
public offerings.
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\17\ See Rule 5110.06(b).
\18\ See Rules 5110(c)(5) and 5110.06. As a general rule,
compensation that cannot be valued is prohibited. See Rule
5110(g)(1). Under this exclusion, treating these transactions as
compensation without value permits the participating member to
receive the securities (as long as they are received at a fair
price) while still allowing FINRA the ability to review the
transactions to determine whether they were, indeed, received at a
fair price. If they were not, the value of underwriting compensation
that is attributed to these securities is the difference between
their fair price and their actual price.
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Changes To Improve Operation of Rule 5110
The proposed rule change would make other minor modifications to
Rule 5110 based on FINRA's experience reviewing filings that FINRA
believes would improve the operation of the rule and reduce the number
of questions raised by filers during the review process. For example,
Rule 5110(g)(5)(B) permits termination fees or the receipt of
compensation in the form of rights of first refusal in connection with
a public offering that is terminated when specific requirements are met
that protect the issuer (i.e., they are not deemed to be prohibited
unreasonable terms or arrangements). Increasingly, members negotiate
payments often described as ``tail fees'' in engagement letters that
are similar to the terms and requirements for termination fees or
rights of first refusal. Because tail fees provide compensation in the
event of a subsequent financing from investors introduced by a member
following the termination of an agreement, these payments are
comparable to termination fees for purposes of Rule 5110. The proposed
rule change would amend Rule 5110(g)(5)(B) to clarify that the same
requirements would apply to such fees.\19\ If these requirements are
not met, tail fees would constitute unreasonable arrangements under
Rule 5110.
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\19\ These requirements are that: (i) the agreement specifies
that the issuer has a right of ``termination for cause,'' which
shall include the participating member's material failure to provide
the underwriting services contemplated in the written agreement;
(ii) an issuer's exercise of its right of ``termination for cause''
eliminates any obligations with respect to the payment of any
termination fee or provision of any right of first refusal; (iii)
the amount of any termination fee must be reasonable in relation to
the underwriting services contemplated in the agreement and any fees
arising from underwriting services provided under a right of first
refusal must be customary for those types of services; and (iv) the
issuer shall not be responsible for paying the termination fee
unless an offering or other type of transaction (as set forth in the
agreement) is consummated within two years of the date the
engagement is terminated by the issuer. See Rule 5110(g)(5)(B).
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Proposed Amendments to Rule 5123
The proposed rule change would add two types of entities to the
filing exemption under Rule 5123, consistent with the Commission's
treatment of the accredited investor definition. As stated above, in
August 2020, the Commission adopted amendments to the definition of
``accredited investor'' under Rule 501 \20\ to more effectively
identify institutional and individual investors that have the knowledge
and expertise to participate in private capital markets. These changes
included:
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\20\ See SEC Accredited Investor Definition Release, supra note
6.
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<bullet> any entity, of a type not listed in paragraphs (a)(1),
(2), (3), (7), or (8) of Rule 501, not formed for the specific purpose
of acquiring the securities offered, owning investments in excess of
$5,000,000; \21\ and
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\21\ See 17 CFR 230.501(a)(9).
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<bullet> any ``family office'' with assets under management in
excess of $5,000,000, that is not formed for the specific purpose of
acquiring the securities offered and its prospective investment is
directed by a person who has such knowledge and experience in financial
and business matters that such family office is capable of evaluating
the merits and risks of the prospective investment.\22\
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\22\ See 17 CFR 230.501(a)(12).
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Adding these two types of entities to the existing exemption would
establish consistency with the purpose of Rule 5123. FINRA believes
that the investors described above possess a level of sophistication
and expertise that is similar to the institutional accredited investors
currently exempted under Rule 5123 and generally do not need the
additional protections and oversight provided through the filing
requirements. FINRA notes that qualified purchasers, which currently
are covered in another exemption from Rule 5123's filing requirements,
are defined under the Investment Company Act of 1940 and the rules
thereunder (``Investment Company Act'') to include natural persons or
certain companies that own not less than $5,000,000 in investments.\23\
The two entities above have a similar financial threshold, which
indicates an equivalently high level of sophistication to justify
exemption from Rule 5123.\24\
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\23\ See Investment Company Act Section 2(a)(51).
\24\ The Commission's August 2020 accredited investor amendments
promulgated additional categories of accredited investors, including
natural persons holding professional certifications and designations
or other credentials, knowledgeable employees of private funds, and
certain family clients, which FINRA is not proposing to add in these
amendments.
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If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice.
2. Statutory Basis
FINRA believes that the proposed rule changes are consistent with
the provisions of Section 15A(b)(6) of the Act,\25\ which requires,
among other things, that FINRA rules be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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\25\ 15 U.S.C. 78o-3(b)(6).
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The proposed amendments to Rules 5110 would enhance the efficiency
of FINRA rules and further support capital formation. For example, the
proposed amendments to Rule 5110 would improve and clarify the
application of Rule 5110 and align the rule with current practices
relating to underwriting compensation. The proposed amendments to Rule
5110 regarding valuation of securities that are considered underwriting
compensation would replace a valuation process that members have stated
is unnecessarily complex and cumbersome with a simpler, more
straightforward valuation process, which would provide predictability
and efficiency to members' valuation processes. The proposed amendments
to Rule 5110 regarding new exclusions from underwriting compensation
that codify exemptions FINRA staff has issued would provide additional
flexibility and clarity for member firms that would reduce the need for
and cost associated with certain participating members requesting
exemptions from FINRA, reduce the amount of time for FINRA's review of
these filings, allow issuers to access capital markets faster, and
enhance the transparency and efficiency of the regulatory process.\26\
The codification of these exemptions as exclusions may lead some
members that would not request an exemption under the baseline to use
an exclusion, generating additional or greater investments in issuers,
thereby increasing access and options to capital raising.
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\26\ FINRA received 21 requests for exemptions for capital
investments and debt-for-equity transactions from 2022 through 2024.
Each request required substantial analysis by FINRA staff and
discussions with the member firm, resulting in a longer review of a
potential offering in order to consider the request.
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The proposed amendments to Rule 5110 also would maintain important
protections for issuers and investors
[[Page 4125]]
participating in offerings. The proposed valuation method would
continue to ensure that securities that are acquired by underwriters
are valued fairly. In addition, the proposed exclusions are narrowly
tailored and based on exemptive relief FINRA has provided, which have
worked well for issuers and investors.\27\ The proposed rule change
also would not decrease FINRA's ability to oversee underwriting terms
and arrangements. In totality, the proposed rule change would reduce
the administrative and operational burdens for members and FINRA,
promote regulatory efficiency, and enhance market functioning while
maintaining issuer and investor protection.
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\27\ Rule 5110.01(b)(23)-(24) codifies the factors and factual
circumstances FINRA has consistently considered when granting these
exemptions.
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The proposed amendments to Rules 5123 also would enhance the
efficiency of FINRA rules and further support capital formation. By
expanding the scope of private placements that are exempt from the
requirement of Rule 5123, members that participate in these offerings
would no longer be required to comply with Rule 5123.
In addition, the proposed amendments to Rule 5123 would not
diminish investor protection. The institutional investors who would be
covered by the filing exemption possess a level of sophistication and
expertise that is similar to the institutional accredited investors
currently exempted under Rule 5123 and generally do not need the
additional protections and oversight provided through the filing
requirements. Non-institutional accredited investors who may not
possess the same level of sophistication and expertise as institutional
investors would continue to receive the protections of the Rule 5123
filing requirement, with FINRA reviewing private placement offerings
sold to these investors and helping detect misconduct in the private
placement process, thereby promoting investor protection.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule changes will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment to analyze the
regulatory need for the proposed rule change, its potential economic
impacts, including anticipated costs, benefits, and distributional and
competitive effects, relative to the current baseline, and the
alternatives FINRA considered in assessing how best to meet FINRA's
regulatory objectives.
Regulatory Need
As discussed earlier, the current approach to valuation of
securities that are considered underwriting compensation under current
Rule 5110 can be complex, creating unnecessary burdens for members and
uncertainty on whether they are permitted to acquire certain securities
or required to receive a different form of compensation. The proposed
rule change would provide a simpler, more straightforward approach. In
addition, certain transactions require participating members to request
exemptions from FINRA. This approval process can increase the amount of
time for issuers to access capital markets. By codifying existing FINRA
staff positions, the proposed rule change would reduce such requests by
replacing existing requirements with more practical and transparent
alternatives. The proposed rule change would also expand the exemptions
available in Rule 5123 and better align FINRA rules with SEC rules
relating to the treatment of institutional accredited investors.
Economic Baseline
The economic baseline for the proposed rule changes is the existing
regulation framework of public offerings and private placements subject
to regulatory oversight under Rules 5110 and 5123 and their
interpretations and implementation by FINRA. The economic baseline also
includes industry practices relating to and compliance with these
existing regulations and other relevant regulatory frameworks.
With respect to public offerings subject to Rules 5110, FINRA
evaluated filing information to assess members' participation in public
offerings required to be filed with FINRA. FINRA notes that the
observations addressed here do not include observations in which
members may have relied on a filing exemption under Rule 5110(h)(1).
FINRA received 3,711 new filings under Rule 5110 during 2022-2024. The
annual number of new filings ranged from 1,398 in 2022 to 1,209 in
2024, with an average number of 1,237 filings per year. These filings
represented underwriting, allocation, distribution, advisory and other
investment banking services in connection with a public offering
conducted by 333 members, to the extent the member's participation in
the public offering is required to be provided. The average and median
number of filings in which a member participated was 15 and three
during the period, respectively. The aggregate amount of offering
proceeds in association with these filings was over $781 billion, with
a median value of approximately $50 million per filing.
Certain proposed changes to Rule 5110 specifically relate to public
offerings with capital investments for DPPs and REITs, debt-for-equity
transactions, and securities acquired by a participating member without
a ``bona fide public market.'' FINRA collected information on exemption
requests submitted by members in non-shelf filings related to these
three sets of acquisitions. An analysis of this data finds that among
the 2,402 new non-shelf offerings filed under Rule 5110 during 2022-
2024, six (0.25 percent) offerings requested exemptions relating to
capital investments for DPPs and REITs, 15 (0.62 percent) offerings
requested exemptions relating to debt-for-equity transactions, and 12
(0.5 percent) offerings requested exemptions relating to valuing
securities without a bona fide public market.\28\ A majority of these
exemptions were granted after FINRA took into consideration all
relevant factors.
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\28\ See Rule 5110(i). ``Pursuant to the Rule 9600 Series,
FINRA, for good cause shown after taking into consideration all
relevant factors, may conditionally or unconditionally grant an
exemption from any provision of this Rule to the extent that such
exemption is consistent with the purposes of the Rule, the
protection of investors, and the public interest.''
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With respect to private placement offerings under Rule 5123, FINRA
collected information detailing 8,485 unique filings under Rule 5123
submitted by 525 members during the above period. The annual number of
unique filings ranged from 3,807 in 2022 to 2,344 in 2024, with an
average number of 2,828 filings per year. Among the 8,485 unique
filings, 7,599 (90 percent) had projected proceeds totaling $388
billion with a median value of $10 million per filing. Projected
proceeds were reported as unknown for the remaining filings. The
average and median number of these filings submitted per participating
member during the above period were 15 and three, respectively.
Economic Impact
The proposed rule change would directly impact members, issuers and
investors that participate in public offerings and private placements.
This economic impact analysis considers the significant impacts
associated with specific rule changes relating to
[[Page 4126]]
underwriting compensation and private placement offerings.
Anticipated Benefits of Proposed Amendments to Rule 5110
Overall, the proposed changes to Rule 5110 would simplify and
clarify the application of Rule 5110 and align the rule with current
practice relating to underwriting compensation. The additional
flexibility in the proposed changes would facilitate negotiation
between members and issuers of underwriting terms and arrangements that
comply with Rule 5110. The proposed changes would also reduce the need
for certain participating members to request exemptions from FINRA,
reduce the amount of time for FINRA's review of these filings, allow
issuers to access capital markets faster, and enhance the transparency
and efficiency of the regulatory process. The codification of the
exemptions as exclusions may lead some members that would not request
an exemption under the baseline to use an exclusion, generating
additional or greater investments in issuers thereby increasing access
and options to capital raising.
The proposed amendments related to the valuation method for
securities acquisitions would increase the options participating
members have for receiving underwriting compensation, which may include
convertible and non-convertible securities. Currently, participating
members in these offerings experience challenges using the market price
on the date of the acquisition because a ``bona fide public market''
does not exist. Because a value cannot be determined, participating
members must either negotiate to be compensated in cash or request an
exemption from FINRA because the receipt of such securities would
constitute an unreasonable term or arrangement under Rule 5110(g)(1).
Under current Rule 5110, transactions involving capital investments
made by affiliates of underwriters in DPPs and REITs as well as
securities acquired by affiliates of underwriters in connection with
debt-for-equity exchange transactions are deemed underwriting
compensation. Hence, participating members must either find alternative
financing options or request exemptive relief from the presumption that
these transactions may be deemed underwriting compensation.
The proposed changes to codify these exemptions would reduce
compliance costs for participating members insofar as they reduce the
time and expense incurred by members' employees and outside legal
counsel in seeking such exemptions. The proposed changes may also
create new financing opportunities for issuers and members and reduce
costs associated with such exemptions. The benefits may also extend to
offerings exempt from the filing requirements in Rule 5110(h)(1), but
otherwise subject to compliance.
Participating members that acquire non-convertible preferred
securities in connection with a public offering at a fair price will
benefit from the proposed amendments to treat non-convertible preferred
securities equivalently to non-convertible or non-exchangeable debt
securities. FINRA believes that these proposed changes would provide
participating members additional flexibility and clarity with respect
to the applicable requirements for such securities acquisitions under
Rule 5110.
Anticipated Costs of Proposed Amendments to Rule 5110
As discussed earlier, the proposed amendments would codify prior
positions taken by FINRA staff that have not imposed costs on issuers
and investors. To the extent that codification allows for greater use
of the flexibilities provided, capital formation may be enhanced at
limited additional risk to investors. FINRA does not expect this change
to affect overall underwriting compensation or negatively affect
investors, given FINRA's oversight and competitive pressure among
underwriters. Therefore, the proposed changes are not expected to
increase costs to issuers and investors that participate and invest in
public offerings.
Anticipated Benefits and Costs of Proposed Amendments to Rule 5123
The proposed changes would expand the scope of private placements
that are exempt from the requirement of Rule 5123. The proposed
exemptions relate to private placements sold to two additional types of
institutional entities that were included in the SEC's amended
definition of accredited investor in 2020 (i.e., certain entities
owning investment in excess of $5,000,000 and certain family offices
with assets under management in excess of $5,000,000).\29\ Members in
these offerings would no longer incur the costs to comply with Rule
5123, whereas the regulatory protection provided through the filings
requirement is not necessary because the two new categories of
accredited investors are considered to have sufficient sophistication
to appropriately evaluate the risks and rewards of the investment and
therefore warrant an exemption from Rule 5123.
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\29\ See supra note 6.
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The extent of the cost savings for members cannot be estimated in
aggregate because FINRA does not collect the information that would
identify the private placement offerings sold exclusively to the above
two types of specified institutional entities. The expected cost
savings would likely be greater for members that participate in these
offerings more frequently or members that seek to expand their private
placement activities.
Alternatives Considered
FINRA considered several alternatives in developing the proposed
rule change. One alternative FINRA considered was to expand the types
of securities that are eligible to be valued under the proposed rule to
also include over-the-counter (``OTC'') equity securities. While this
alternative would provide participating members with additional
compensation options, FINRA notes that there can be material
differences in the frequency and volume of trading among OTC equity
securities, which may impact the availability of information for use in
performing valuations for such securities.
Although FINRA has not incorporated this alternative into the
current proposed rule change, FINRA is continuing to evaluate whether
additional types of securities could be eligible for valuation under
Rule 5110. In the interim, FINRA believes the proposed rule change as
drafted achieves an appropriate balance between supporting capital
formation and maintaining adequate issuer and investor protection.
Under current Rule 5110, securities that trade only OTC in the U.S.,
including securities of foreign issuers, may nonetheless qualify as
underwriting compensation. Further, foreign ordinary shares, including
those traded OTC in the U.S., may be eligible for the designated
offshore securities market provision proposed in this rule, and thus
such securities would be eligible to be valued under the current
proposal.\30\
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\30\ FINRA estimates that, from February 1, 2025 to July 29,
2025, 9,435 out of 18,927 issuers with securities traded on the U.S.
OTC market also have equity securities traded in foreign markets.
These issuers account for most of total OTC market capitalization,
with the dollar trade volume representing 89% of the total U.S. OTC
equity market during the referenced six months period. The
estimation is based on the American Depository Receipts, Global
Depository Receipts, and foreign ordinary shares classification and
market capitalization data for issuers for which this data is
available.
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[[Page 4127]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In December 2024, FINRA published Regulatory Notice 24-17 (the
``Notice''), requesting comment on the proposed rule change (the
``Notice Proposal''). Six comments were received in response to the
Notice. A copy of the Notice is available on FINRA's website at <a href="http://www.finra.org">http://www.finra.org</a>. A list of the commenters in response to the Notice and
copies of the comment letters received in response to the Notice are
available on FINRA's website.\31\
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\31\ See SR-FINRA-2026-002 (Form 19b-4, Exhibits 2b and 2c) for
a list of abbreviations assigned to commenters (available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>).
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Most commenters were overall supportive of the direction of the
proposed rule changes in the Notice, but not all commenters supported
every aspect of the Notice Proposal. Some commenters sought
clarifications or changes to specific rule provisions. FINRA has
considered the concerns raised by commenters and, as discussed in
detail below, has addressed many of the concerns noted by commenters in
response to the Notice Proposal. The comments and FINRA's responses are
set forth in detail below.
Valuation Method Under Rule 5110(c)
While the ABA expressed broad support for FINRA's efforts to
continue to modernize its rules, simplify compliance and codify
additional exclusions from underwriting compensation, the ABA expressed
concern about the drafting of proposed FINRA Rule 5110(c) in the Notice
Proposal. According to the ABA, because FINRA proposed to delete the
words ``or to a security with a bona fide public market'' without
substituting alternative language referring to ``a security traded on a
U.S. exchange or designated offshore market,'' the new valuation
methods in paragraphs (c)(2)(A) and (c)(3)(B) for securities traded on
U.S. exchanges and offshore markets ``will be without effect.'' \32\
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\32\ See ABA letter.
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In response to the comments, FINRA has modified the proposed rule
language to clarify that a security can be accurately valued ``using
any method in this paragraph (c).'' This includes the valuation of a
security traded on a national securities exchange that is registered
under Section 6(a) of the Exchange Act or a designated offshore
securities market as defined under Securities Act Rule 902(b). If the
security can be accurately valued, it would not be subject to the
prohibition in paragraph (g)(1), which precludes receipt of any
underwriting compensation for which a value cannot be determined.
The ABA also suggested that FINRA expand the types of securities
that are eligible to be valued under the rule to also include certain
OTC equity securities, which are not traded on national securities
exchanges. While FINRA has not incorporated this suggestion into the
current proposed rule change, FINRA is continuing to evaluate whether
additional types of securities could be eligible for valuation under
Rule 5110.
Debt-for-Equity Exchanges
In general, FINRA received positive feedback and support for these
proposed changes.\33\ The ABA sought clarification that an affiliated
member would not be prohibited from placing a portion of the equity
securities acquired by the lender in its investment account if it is
unable to sell that portion in the offering. In FINRA's view, the rule
language in the Notice Proposal does not foreclose placing a portion of
the equity securities acquired by the lender in its investment account
if it is unable to sell that portion in the offering.
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\33\ See ABA, SIFMA letters.
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SIFMA sought clarification that the safe harbor would apply when
the transaction is structured to provide economic and tax benefits to a
direct or indirect shareholder of issuer. In FINRA's view, the
definition of ``issuer'' is broad enough to capture significant
shareholders.\34\
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\34\ See Rule 5110(j)(12).
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Capital Investments for DPPs and REITs
In general, FINRA received positive feedback and support for these
proposed changes.\35\ The ABA sought more guidance as to application of
the exclusion in the Notice Proposal. The ABA, ADISA, and IPA also
raised questions about whether the investments must be made before an
offering, as the use of the word ``seed'' may imply before the
offering. FINRA did not intend to limit the capital investments to
before the offering in the Notice Proposal. Accordingly, FINRA has
replaced references to ``seed capital'' with ``capital investments''
and confirms that the amendments are agnostic to the timing of the
acquisition.
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\35\ See ABA, ADISA, IPA letters.
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IPA suggested that the principles-based approach FINRA proposed in
the Notice should instead be a self-operating exclusion to provide
regulatory certainty. FINRA agrees that the exclusion for capital
investments would operate most efficiently as a self-operating
exclusion instead of a principles-based approach and has replaced
Supplementary Material .05 with new Supplementary Material .01(b)(24)
to include these capital investments as an example of payments not
deemed to be underwriting compensation.
ADISA recommended that the conditions in the proposed capital
investments exclusion to underwriting compensation in the Notice
Proposal should fully align with the North American Securities
Administrators Association (NASAA) REIT Guidelines. According to ADISA,
the proposed conditions for this exclusion do not provide that
securities may be transferred to an affiliate of the sponsor, which is
allowable pursuant to Section Il.A.2. of the NASAA REIT Guidelines.
ADISA suggested adding language to the rule text that ``the securities
acquired and excluded may be transferred to other affiliated entities,
which transfer would not be deemed to constitute an economic
disposition of the securities during the 180 day period.'' \36\ In
FINRA's view, this additional language is unnecessary, as the capital
provided and transferred would already be excluded under FINRA Rule
5110(e)(2)(b), which permits the transfer of any security to any member
participating in the offering and its officers or partners, its
registered persons or affiliates, if all transferred securities remain
subject to the lock-up restriction in paragraph (e)(1) for the
remainder of the 180-day lock-up period.\37\
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\36\ See ADISA letter.
\37\ See Rule 5110(e)(2)(b).
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ADISA also recommended that for the purposes of calculating the
lockup restriction period in the Notice Proposal, FINRA should use the
definitive date of effectiveness of the offering as a measurement
rather than commencement of sales. In FINRA's view, replacing the date
of commencement of sales with the date of effectiveness could result in
an unreasonably short lockup period, as a prospectus may become
effective long before the commencement of sales. Accordingly, FINRA did
not accept this suggestion.
IPA suggested that FINRA clarify that a capitalization transaction
occurring before the issuer has material assets will be deemed to occur
at or above NAV, as a NAV determination should not be necessary in
connection with a capital
[[Page 4128]]
transaction.\38\ FINRA agrees that a capitalization transaction
occurring before the issuer has material assets would be deemed to
occur at or above NAV.
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\38\ See IPA letter.
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Non-Convertible Preferred Securities
The ABA was generally supportive of treating non-convertible or
non-exchangeable preferred securities the same as non-convertible or
non-exchangeable debt or derivative instruments.\39\ However, the ABA
sought clarification that reliance on this exclusion in the Notice
Proposal would not be prohibited where the otherwise non-convertible
preferred securities convert into the class of securities to be sold to
the public as part of a recapitalization or other reorganization in
preparation for an IPO. FINRA views this comment as beyond the scope of
the proposed rule change.
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\39\ See ABA letter.
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Changes To Improve Operation of the Rule
The ABA was generally supportive of this proposed change, however
the ABA suggested further clarification in the rule text defining
``tail fee.'' \40\ FINRA does not think it is necessary to define
``tail fee,'' as ``tail fee'' is a commonly understood term and FINRA
does not define other fees under the rule (e.g., termination fees,
rights of first refusal). As FINRA stated in the Notice Proposal, tail
fees provide compensation in the event of a subsequent financing from
investors introduced by a member, following the termination of an
agreement. Moreover, FINRA would review these fees based on the facts
and circumstances of how they are structured.
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\40\ See supra note 39.
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Rule 5123
Several commenters, including SIFMA and ADISA, supported the Rule
5123 amendments in the Notice Proposal. However, Intellivest suggested
that FINRA include all accredited investors under Rule 5123's filing
exemption.\41\ FINRA notes that the overwhelming majority of private
placements are sold to accredited investors only. During 2022-2024,
less than 4% of the private placements filed under Rule 5123 permitted
sales to non-accredited investors. FINRA does not believe exempting
review and oversight of the vast majority of private placements,
including those that are offered and sold to all accredited investors,
would be appropriate. First, retail accredited investors generally do
not have the same level of sophistication and expertise as
institutional accredited investors. Second, exempting review and
oversight of the vast majority of private placements could impede
FINRA's ability to detect misconduct in the private placement market,
increasing risk exposure to retail investors. Third, FINRA notes that
there are proposals in Congress and the SEC regarding the definition of
accredited investor that we will monitor and consider in relation to
Rule 5123 as they develop.
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\41\ See Intellivest letter.
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Intellivest also suggested that FINRA provide a safe harbor for a
member that has a written agreement with another member to submit on
its behalf the required 5123 filing, so a member would not need to
follow up to ensure the other firm has met its filing obligations.
FINRA views this comment as beyond the scope of the proposed rule
change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7103041d145c121e1c1c141f0502310214125f161e07"><span class="__cf_email__" data-cfemail="c8babda4ade5aba7a5a5ada6bcbb88bbadabe6afa7be">[email protected]</span></a>. Please include
File Number SR-FINRA-2026-002 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2026-002. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the filing will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FINRA-2026-002 and should be submitted on or
before February 20, 2026.
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\42\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-01825 Filed 1-29-26; 8:45 am]
BILLING CODE 8011-01-P
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