On December 20, 2024, FINRA requested public comment on its proposed rule changes to Rules 5110 (Underwriting Terms and Arrangements), 5121 (Public Offerings of Securities With Conflicts of Interest) and 5123 (Private Placements of Securities). These proposed rule changes stem from comments received from the public in response to the May 2023 Regulatory Notice 23-09, which we blogged about, that relate to rules that impact capital formation.
Rule 5110 prohibits unfair underwriting arrangements in connection with the public offering of securities. FINRA’s proposed amendments would use a valuation method that is based on the closing price of a security traded on a securities exchange for securities deemed underwriting compensation and also include new exceptions from underwriting compensation, including a new principles-based approach that excludes seed capital investments from being deemed underwriting compensation.
Rule 5121 applies to public offerings of securities in which a member or its affiliates has a conflict of interest. If a member has a conflict of interest, a qualified independent underwriter is required to conduct due diligence for the member to participate in the offering unless the securities offered have a bona fide public market. FINRA proposes to replace the “bona fide public market” condition with a standard that requires the issuer to have been a reporting company for at least one year, be current in its reporting requirements and have an aggregate market value of common equity of at least $300 million.
Rule 5123 requires members to file with FINRA any private placement memorandum, term sheet or other offering document used in connection with a private placement of securities within 15 calendar days of the date of first sale. FINRA’s proposal importantly amends Rule 5123 to expand its exemptions from the filing requirement to be consistent with the SEC’s expanded treatment of the accredited investor definition.
Comments must be received by FINRA on or prior to March 20, 2025. FINRA’s notice can be found here, which includes the proposed rule text changes in an appendix.
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