FINRA Proposes Changes to Corporate Financing and Private Placement Rules
FINRA proposed amending its rules on underwriting compensation valuations and expanding private placement exemptions from filing requirements.
Amendments to FINRA Rule 5110 ("Corporate Financing Rule — Underwriting Terms and Arrangements") replace the "bona fide public market" standard with a more predictable valuation method based on the closing market price of a security traded on a registered national securities exchange or a designated offshore securities market. This change addresses challenges members face in determining whether a bona fide public market existed using the previous complex definition. A new exclusion was added for securities acquired by a lender affiliated with a participating member in a debt-for-equity exchange. To qualify, the transaction must provide economic benefits to the issuer, be negotiated at arms' length, and the equity must be offered in a subsequent firm commitment offering.
The amendments also introduce a self-operating exclusion for capital investments made by participating members in Direct Participation Programs ("DPPs") and Real Estate Investment Trusts ("REITs"). Conditions for this exclusion include disclosure in the prospectus, valuation based on net asset value, and a 180-day restriction on selling the securities. The amendments treat non-convertible preferred securities comparably to non-convertible debt and derivative instruments, meaning they have no compensation value if acquired at a fair price.
Further, the amendments clarify that "tail fees" are subject to the same requirements as termination fees and rights of first refusal if not deemed unreasonable arrangements.
Amendments to FINRA Rule 5123 ("Private Placements of Securities") expand filing exemptions to include offerings sold to "family offices" and entities with over $5 million in investments, consistent with the SEC's updated "accredited investor" definition. FINRA determined these investors possess sufficient sophistication to allow placement agents to maintain an exemption from the FINRA filing requirements for private placements sold to institutional investors.
Upon SEC approval, FINRA will announce the effective date in a Regulatory Notice.