(a) Requirements for Public Offerings
(1) General
(A) No member or person associated with a member shall participate in a public offering in which the terms and conditions relating thereto, including the aggregate amount of underwriting compensation, are unfair or unreasonable pursuant to this Rule or inconsistent with any By-Law or any rule or regulation of FINRA.
(B) Any member acting as a managing underwriter or in a similar capacity must notify the other members participating in the public offering if informed of an opinion by FINRA that the underwriting terms and arrangements are unfair and unreasonable and the proposed terms and arrangements have not been appropriately modified.
(C) No member may engage in the distribution or sale of securities in any public offeringrequired to be filed by this Rule, Rule 2310 or Rule 5121 unless:
(i) documents and information specified in paragraph (a)(4) have been filed with FINRA; and
(ii) FINRA has provided an opinion that it has no objection to the proposed underwriting terms and arrangements.
(2) Offerings Required to be Filed
All public offerings in which a member participates must be filed with FINRA for review, except as exempted from the filing requirement under paragraph (h).
(3) Timely Filing Requirements
(A) A member that participates in a public offering that is required to be filed under paragraph (a)(2) must file the documents and information specified in paragraph (a)(4):
(i) no later than three business days after any documents are filed with or submitted to:
a. the SEC, including confidential filings or submissions; or
b. any state securities commission or other similar U.S. regulatory authority; or
(ii) if not filed with or submitted to any such regulatory authority, at least 15 business days prior to the commencement of sales.
(B) A member that participates in a public offering is not required to make a filing if the filing has been made by a member that is responsible for managing the offering or by another member that is in the syndicate or selling group.
(4) Documents and Information Required to be Filed
(A) The following documents required to be filed under paragraph (a) must be filed in FINRA's Public Offering System for review by providing the SEC document identification number if available:
(i) the registration statement, offering circular, offering memorandum, notification of filing, notice of intention, application for conversion, and any other document used to offer securities to the public;
(ii) all documents relevant to the underwriting terms and arrangements, including any proposed underwriting agreement, agreement among underwriters, selected dealer’s agreement, agency agreement, purchase agreement, letter of intent, engagement letter, consulting agreement, partnership agreement, underwriter's warrant agreement, or escrow agreement, provided that industry-standard master forms of agreement need not be filed unless otherwise specifically requested by FINRA;
(iii) if amendments to any documents previously filed contain changes that impact the underwriting terms and arrangements for the public offering, marked pages showing the changes to such document;
(iv) the final registration statement declared effective by the SEC, or the equivalent final offering document, the notice of effectiveness issued by the SEC or any other U.S. regulatory authority, the executed form of the final distribution-related documents and any other document submitted to FINRA for review, each if applicable; and
(v) all requests for withdrawal filed with or submitted to the SEC or any other U.S. regulatory authority, including any correspondence submitted to the SEC for the withdrawal of confidential filings or submissions.
(B) Any member filing documents with FINRA pursuant to paragraph (a)(4)(A) must file the following information with respect to the offering in FINRA's Public Offering System:
(i) an estimate of the maximum public offering price;
(ii) an estimate of the maximum value for each item of underwriting compensation;
(iii) a representation as to whether any officer or director of the issuer and any beneficial owner of 10% or more of any class of the issuer's equity and equity-linked securities is an associated person or affiliate of a participating member;
(iv) a description of any securities of the issuer acquired and beneficially owned by any participating member during the review period, provided that:
a. non-convertible or non-exchangeable debt securities and derivative instruments acquired in a transaction related to the public offering must be filed and also accompanied by a representation that a registered principal or senior manager of the participating member has determined if the transaction was or will be entered into at a fair price;
b. non-convertible or non-exchangeable debt securities and derivative instruments need not be filed if acquired in a transaction that is unrelated to the public offering; and
c. securities if acquired in accordance with Supplementary Material .01(b) need not be filed.
(v) if applicable, a representation of compliance with all of the criteria for any exception from underwriting compensation provided in paragraph (d); and
(vi) a detailed explanation and all documents related to the modification of any information or representation previously provided to FINRA during the review period, whether or not FINRA has issued a no objections opinion.
(C) In the event an offering filed pursuant to this Rule is not completed according to the terms of an agreement entered into by the issuer and a participating member, any member receiving underwriting compensation must provide written notification to FINRA of all underwriting compensation received or to be received pursuant to paragraph (g)(5), including a copy of any agreement governing the arrangement.
(D) FINRA will provide confidential treatment to all documents and information filed pursuant to this Rule and use such documents and information solely for regulatory purposes.
(E) Notwithstanding paragraph (a)(4)(A) and (B), with respect to a shelf offering, the following documents and information must be filed in FINRA’s Public Offering System for review:
(i) the registration statement number; and
(ii) if requested by FINRA, other documents and information set forth in paragraph (a)(4)(A) and (B).
(b) Disclosure Requirements for Underwriting Compensation
(1) A description of each item of underwriting compensation received or to be received by a participating member must be disclosed in the section on distribution arrangements in the prospectus or similar document.
(2) Any underwriting compensation consisting of a commission or discount to the public offering price must be disclosed on the cover page of the prospectus or similar document. If the underwriting compensation includes items of compensation in addition to the commission or discount disclosed on the cover page of the prospectus or similar document, a footnote to the offering proceeds table on the cover page of the prospectus or similar document shall include a cross-reference to the section on distribution arrangements.
(c) Valuation of Underwriting Compensation
(1) Limitation on Securities Received Upon Exercise or Conversion of Another Security
A participating member may not receive a security (including securities in a unit), a warrant for a security, or a security convertible into another security as underwriting compensation in connection with a public offering unless:
(A) the security received or the security underlying the warrant or convertible security received is identical to the security offered to the public or to a security with a bona fide public market; or
(B) the security can be accurately valued, as required by paragraph (g)(1) of this Rule.
(2) Valuation of Non-Convertible Securities
Non-convertible securities received as underwriting compensation will have a compensation value based on:
(A) the difference between:
(i) either the market price per security on the date of acquisition, or, if no bona fide public market exists for the security, the public offering price per security; and
(ii) the per security cost;
(B) multiplied by the number of securities received or to be received as underwriting compensation;
(C) divided by the offering proceeds; and
(D) multiplied by one hundred.
(3) Valuation of Convertible Securities
Options, warrants or convertible securities (“warrants”) shall have a compensation value based on the following formula:
(A) the public offering price per security multiplied by .65;
(B) minus the resultant of the exercise or conversion price per warrant less either:
(i) the market price per security on the date of acquisition, where a bona fide public market exists for the security; or
(ii) the public offering price per security;
(C) divided by two;
(D) multiplied by the number of securities underlying the warrants;
(E) less the total price paid for the warrants;
(F) divided by the offering proceeds; and
(G) multiplied by one hundred;
(H) provided, however, that, notwithstanding paragraph (c)(4) of this Rule, such warrants shall have a compensation value of at least .2% of the offering proceeds for each amount of securities that is up to 1% of the securities being offered to the public (excluding securities subject to an overallotment option).
(4) Reduction in Valuation
If a participating member wishes to reduce the proposed maximum value of any securities received as underwriting compensation, it may do so by voluntarily agreeing to lock-up such securities for successive 180-day periods (in addition to the initial lock-up period required by paragraph (e) of this Rule if applicable). Each additional 180-day period will reduce the proposed maximum value attributable to such securities by 10%.
(5) Valuation of Securities Acquired in Connection with a Fair Price Non-Convertible or Non-Exchangeable Debt or Derivative Instrument
Any non-convertible or non-exchangeable debt or derivative instrument acquired or entered into at a "fair price" as defined in Supplementary Material .06(b) and underwriting compensation received in or receivable in the settlement, exercise or other terms of such non-convertible or non-exchangeable debt or derivative instrument shall not have a compensation value for purposes of determining underwriting compensation. If the actual price for the non-convertible or non-exchangeable debt or derivative instrument is not a fair price, compensation will be calculated pursuant to this paragraph (c) or based on the difference between the fair price and the actual price
(d) Securities Acquisitions Not Considered Underwriting Compensation
Securities acquired in transactions that meet the requirements of this paragraph (d) are excluded from underwriting compensation and not subject to the lock-up requirements of paragraph (e)(1), provided that the member does not condition its participation in the public offering on an acquisition of securities in a transaction that meets the requirements of this paragraph and any securities acquired are acquired at the same price and with the same terms as the securities purchased by all other investors.
(1) Purchases and Loans by Certain Affiliates — Securities of the issuer purchased in a private placement or received as compensation in connection with the provision of a loan or credit facility before the required filing date of the public offering pursuant to paragraph (a) by a participating member’s affiliate, if:
(A) the affiliate is a separate and distinct legal person from any member participating in the offering and is not registered as a broker-dealer;
(B) the investment or loan was made subject to the evaluation of individuals who have a contractual or fiduciary duty to select investments and loans based on the risks and rewards to the affiliate and not based on opportunities for the member participating in the offering to earn investment banking revenues;
(C) the affiliate does not receive investment banking fees paid to any participating member for underwriting public offerings;
(D) the affiliate, directly or through a subsidiary it controls, is primarily engaged in the business of making investments in or loans to other companies or is an entity that has been newly formed by such affiliate; and
(E) the affiliate either:
i. manages capital contributions or commitments of $100 million or more, at least $75 million of which has been contributed or committed by persons that are not participating members;
ii. manages capital contributions or commitments of $25 million or more, at least 75% of which has been contributed or committed by persons that are not participating members;
iii. is an insurance company as defined in Section 2(a)(13) of the Securities Act or is a foreign insurance company that has been granted an exemption under this Rule; or
iv. is a bank.
(2) Investments in and Loans to Certain Issuers — Securities of the issuer purchased in a private placement or received as compensation in connection with the provision of a loan or credit facility before the required filing date of the public offering pursuant to paragraph (a) by a participating member’s affiliate if:
(A) the affiliate:
(i) manages capital contributions or commitments of at least $50 million;
(ii) is a separate and distinct legal person from any member participating in the offering and is not registered as a broker-dealer;
(iii) does not receive investment banking fees paid to any participating member for underwriting public offerings; and
(iv) directly or through a subsidiary it controls, is primarily engaged in the business of making investments in or loans to other companies or is an entity that has been newly formed by such affiliate;
(B) institutional investors beneficially own at least 33% of the issuer's total equity securities, calculated immediately prior to the transaction; and
(C) the transaction was approved by a majority of the issuer's board of directors (if the issuer has a board of directors) and a majority of any institutional investors, or the designees of institutional investors, that are board members.
(3) Private Placements with Institutional Investors — Securities of the issuer purchased in, or received as compensation for services provided in connection with, a private placement before the required filing date of the public offering pursuant to paragraph (a) if:
(A) institutional investors, none of whom is an affiliate of a member participating in the offering purchase at least 51% of the total number of securities sold in the private placement at the same time and on the same terms;
(B) an institutional investor was the lead negotiator or, if the terms were not negotiated, was the lead investor with the issuer to establish or approve the terms of the private placement; and
(C) the participating members did not, in the aggregate, purchase or receive as compensation more than 40% of the "total number of securities sold in the private placement" (excluding purchases by any affiliate qualified under paragraph (d)(1)).
(4) Co-Investments with Certain Regulated Entities — Securities of the issuer acquired in a private placement before the required filing date of the public offering pursuant to paragraph (a) by a participating member if at least 15% of the total number of securities sold in the private placement were acquired, at the same time and on the same terms, by one or more entities that is an open-end investment company not traded on an exchange, and no such entity is an affiliate of a FINRA member participating in the offering.
(e) Lock-Up Restriction on Securities
(1) Lock-Up Restriction
(A) Any underwriting compensation consisting of securities must not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities for a period of 180 days beginning on the date of commencement of sales of the public equity offering, except as provided in paragraph (e)(2).
(B) The lock-up restriction must be disclosed in the section on distribution arrangements in the prospectus or similar document.
(2) Exceptions to Lock-Up Restriction
Notwithstanding paragraph (e)(1):
(A) the lock-up restriction will not apply:
(i) if the security is required to be transferred by operation of law or by reason of reorganization of the issuer;
(ii) if the aggregate amount of securities of the issuer beneficially owned by a participating member does not exceed 1% of the securities being offered;
(iii) to a security of an issuer that meets the registration requirements of SEC Registration Forms S-3, F-3 or F-10;
(iv) to a non-convertible or non-exchangeable debt security acquired in a transaction related to the public offering;
(v) to a derivative instrument acquired in connection with a hedging transaction related to the public offering and at a fair price;
(vi) if the security was acquired in a transaction that met the requirements of paragraph (d);
(vii) if the security is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund;
(viii) if the security was received as underwriting compensation, and is registered and sold as part of a firm commitment offering; or
(ix) to a security that is “actively-traded” (as defined in Rule 101(c)(1) of SEC Regulation M).
(B) the following will not be prohibited:
(i) 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;
(ii) the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction in paragraph (e)(1) for the remainder of the 180-day lock-up period; or
(iii) the transfer or sale of the security back to the issuer in a transaction exempt from registration with the SEC.
(f) Non-Cash Compensation
(1) Definitions
The terms "compensation," "non-cash compensation" and "offeror" as used in this paragraph (f) shall have the following meanings:
(A) “Compensation” shall mean cash compensation and non-cash compensation.
(B) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of securities that is not cash compensation, including, but not limited to, merchandise, gifts and prizes, travel expenses, meals and lodging.
(C) "Offeror" shall mean an issuer, an adviser to an issuer, an underwriter and any affiliated person of such entities.
(2) Restrictions on Non-Cash Compensation
In connection with the sale and distribution of a public offering of securities, no member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided below. Non-cash compensation arrangements must be consistent with the applicable requirements of SEA Rule 15l-1 ("Regulation Best Interest") and are limited to the following:
(A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors1 and are not preconditioned on achievement of a sales target.
(B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
(C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
(i) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not conditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph (f)(2)(D);
(ii) the location is appropriate to the purpose of the meeting, which shall mean an office of the issuer or affiliate thereof, the office of the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;
(iii) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
(iv) the payment or reimbursement by the issuer or affiliate of the issuer is not conditioned by the issuer or an affiliate of the issuer on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph (f)(2)(D).
(D) Non-cash compensation arrangements between a member and its associated persons or a company that controls a member company and the member's associated persons, provided that no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and
(E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in paragraph (f)(2)(D).
A member shall maintain records of all non-cash compensation received by the member or its associated persons in arrangements permitted by paragraphs (f)(2)(C) through (E). The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contributions; the names of the associated persons participating in the arrangements; the nature and value of non-cash compensation received; the location of training and education meetings; and any other information that proves compliance by the member and its associated persons with paragraphs (f)(2)(C) through (E).
(g) Unreasonable Terms and Arrangements
Without limiting the requirements of paragraph (a)(1)(A), the following terms and arrangements are prohibited:
(1) receipt of any underwriting compensation, including in the form of securities, for which a value cannot be determined;
(2) any accountable expense allowance that includes payment for general overhead, salaries, supplies, or similar expenses incurred in the normal conduct of business;
(3) any non-accountable expense allowance in excess of 3% of offering proceeds;
(4) any underwriting compensation paid prior to the commencement of sales of the public offering, except:
(A) an advance against accountable expenses actually anticipated to be incurred, which must be reimbursed to the issuer to the extent not actually incurred; or
(B) advisory or consulting fees for services provided in connection with the offering that subsequently is completed according to the terms of an agreement entered into by an issuer and a participating member;
(5) any underwriting compensation in connection with a public offering that is not completed according to the terms of an agreement entered into by an issuer and a participating member, except
(A) the reimbursement of accountable expenses actually incurred by the participating member; and
(B) a termination fee or a right of first refusal, as set forth in a written agreement entered into by an issuer and a participating member, provided 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;
(6) any right of first refusal to participate in the distribution of a future public offering, private placement or other financing that:
(A) has a duration of more than three years from the commencement of sales of the public offering or the termination date of the engagement between the issuer and member; or
(B) has more than one opportunity to waive or terminate the right of first refusal in consideration of any payment or fee;
(7) any payment or fee to waive or terminate a right of first refusal to participate in a future public offering, private placement or other financing that is not paid in cash;
(8) the receipt of underwriting compensation consisting of any option, warrant or convertible security that:
(A) is exercisable or convertible more than five years from the commencement of sales of the public offering;
(B) has more than one demand registration right at the issuer's expense;
(C) has a demand registration right with a duration of more than five years from the commencement of sales of the public offering;
(D) has a piggyback registration right with a duration of more than seven years from the commencement of sales of the public offering;
(E) has anti-dilution terms that allow the participating members to receive more shares or to exercise at a lower price than originally agreed upon at the time of the public offering, when the public shareholders have not been proportionally affected by a stock split, stock dividend, or other similar event; or
(F) has anti-dilution terms that allow the participating members to receive or accrue cash dividends prior to the exercise or conversion of the security;
(9) when proposed in connection with the distribution of a public offering of securities on a “firm commitment” basis, any overallotment option providing for the overallotment of more than 15% of the amount of securities being offered, computed excluding any securities offered pursuant to the overallotment option;
(10) the receipt by a participating member of any compensation in connection with the exercise or conversion of any warrant, option, or convertible security offered in the public offering if:
(A) the market price of the security into which the warrant, option, or convertible security is exercisable or convertible is lower than the exercise or conversion price;
(B) the warrant, option, or convertible security is held in a discretionary account at the time of exercise or conversion, except where prior specific written approval for exercise or conversion is received from the customer;
(C) the compensation arrangements are not disclosed in the offering documents provided to security holders at the time of exercise or conversion;
(D) the exercise or conversion is not solicited by the participating members; and
(11) for a member to participate with an issuer in the public offering of securities if the issuer hires persons primarily for the purpose of solicitation, marketing, distribution or sales of the offering, except in compliance with Section 15(a) of the Exchange Act or SEA Rule 3a4-1 and applicable state law.
(h) Exemptions
(1) Offerings Exempt from Filing
Documents and information related to the following public offerings need not be filed with FINRA for review, unless subject to the provisions ofRule 5121(a)(2), provided that the following public offerings must comply with this Rule and, if applicable, Rules 2310 and 5121:
(A) securities offered by a bank, foreign bank, corporate issuer, foreign government or foreign government agency that has outstanding unsecured non-convertible debt with a term of issue of at least four years or unsecured non-convertible preferred securities that are investment grade rated, as defined in Rule 5121(f)(8), or are outstanding securities in the same series that have equal rights and obligations as investment grade rated securities, provided that an initial public offering of equity is required to be filed;
(B) investment grade rated non-convertible debt securities and non-convertible preferred securities;
(C) offerings of securities registered with the SEC on registration statement Forms S-3, F-3, or F-10, provided that the registrant is an experienced issuer;
(D) investment grade rated financing instrument-backed securities;
(E) exchange offers where:
(i) the securities to be issued or the securities of the company being acquired are listed, or convertible into securities that are listed, on a national securities exchange as defined in Section 6 of the Exchange Act; or
(ii) the company issuing securities qualifies to register securities with the SEC on registration statement Forms S-3, F-3, or F-10 and is an experienced issuer;
(F) public offerings of securities by a church or other charitable institution that is exempt from SEC registration pursuant to Section 3(a)(4) of the Securities Act; and
(G) offerings of securities issued by a pooled investment vehicle, whether formed as a trust, partnership, corporation, limited liability company or other collective investment vehicle, that is not registered as an investment company under the Investment Company Act and has a class of equity securities listed for trading on a national securities exchange and that may be created or redeemed on any business day at their net asset value per share.
(2) Offerings Not Subject to Filing and Rule Compliance
The following offerings are not subject to this Rule, Rule 2310 and Rule 5121 including not being required to file documents and information for review:
(A) securities of "open-end" investment companies as defined in Section 5(a)(1) of the Investment Company Act;
(B) securities of any "closed-end" investment company as defined in Section 5(a)(2) of the Investment Company Act that makes periodic repurchase offers pursuant to Rule 23c-3(b) under the Investment Company Act and offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) of SEC Regulation C;
(C) variable contracts as defined in Rule 2320(b)(2);
(D) modified guaranteed annuity contracts and modified guaranteed life insurance policies, which are deferred annuity contracts or life insurance policies the value of which are guaranteed if held for specified periods, and the nonforfeiture value of which are based upon a market-value adjustment formula for withdrawals made before the end of any specified period;
(E) insurance contracts not otherwise included in paragraph (h)(2)(C) and (D);
(F) municipal securities as defined in Section 3(a)(29) of the Exchange Act;
(G) tender offers made pursuant to SEC Regulation 14D or Rule 13e-4 under the Exchange Act;
(H) securities issued pursuant to a competitively bid underwriting arrangement meeting the requirements of the Public Utility Holding Company Act;
(I) securities of a subsidiary or other affiliate distributed by a company in a spin-off or reverse spin-off or similar transaction to its existing security holders exclusively as a dividend or other distribution;
(J) securities registered with the SEC in connection with a merger or acquisition transaction or other similar business combination, except for any exchange offer, merger and acquisition transaction, or other similar corporate reorganization involving an issuance of securities that results in the direct or indirect public ownership of the member;
(K) securities of a unit investment trust as defined in Section 4(2) of the Investment Company Act; and
(L) offerings of securities by a “closed-end” investment company as defined in Section 5(a)(2) of the Investment Company Act that is operated as a tender offer fund, provided that the fund:
(i) makes continuous offerings pursuant to Securities Act Rule 415;
(ii) prices its securities at least quarterly;
(iii) limits the total amount of compensation paid to participating members to the amount permitted by the sales charge limitations of Rule 2341, in which case the underwriting compensation provisions of Rule 5110 will not apply;
(iv) makes at least two repurchase offers per calendar year for its securities pursuant to SEA Rule 13e-4 and Schedule TO under the Exchange Act; and
(v) does not list its securities on a national securities exchange.
(i) Requests for Rule 9600 Exemption from Rule 5110
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.
(j) Definitions
The definitions in Rule 5121 are incorporated herein by reference. For purposes of this Rule, the following terms have the meanings stated below:
(1) Associated Person
The term “associated person” has the meaning defined in Article I, Section (rr) of the FINRA By-Laws.
(2) Bank
The term “bank” means a bank as defined in Section 3(a)(6) of the Exchange Act, a branch or agency in the United States of a foreign bank that is supervised and examined by a federal or state banking authority and otherwise meets the requirements of Section 3(a)(6) of the Exchange Act, or a foreign bank that has been granted an exemption under this Rule and shall refer only to the regulated entity, not its subsidiaries or other affiliates.
(3) Company
The term “company” means a corporation, a partnership, an association, a joint stock company, a trust, a fund, or an organized group of persons whether incorporated or not; including any receiver, trustee in bankruptcy or similar official, or liquidating agent of any of the foregoing.
(4) Compensation
The term "compensation" means cash compensation and non-cash compensation.
(5) Effective Date
The term “effective date” means the date on which an issue of securities becomes legally eligible for distribution to the public.
(6) Experienced Issuer
The term “experienced issuer” means an entity that has:
(A) a reporting history of 36 calendar months immediately preceding the filing of the registration statement; and
(B) at least $150 million aggregate market value of voting stock held by non-affiliates; or alternatively the aggregate market value of the voting stock held by non-affiliates of the issuer is $100 million or more and the issuer has had an annual trading volume of such stock of three million shares or more.
(7) Equity-Linked Securities
The term “equity-linked securities” means any security that is convertible or exchangeable into an equity security.
(8) Immediate Family
The term “immediate family” means:
(A) the spouse or child of an associated person of a member; and
(B) any relative who either lives in the same household as, has a business relationship with, provides material support to, or receives material support from, an associated person of a member, including, but not limited to, a parent, sibling, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law.
(9) Independent Financial Adviser
The term “independent financial adviser” means a member or a person affiliated or associated with a member that provides advisory or consulting services to the issuer and is neither engaged in, nor affiliated or associated with any entity that is engaged in, the solicitation or distribution of the offering.
(10) Institutional Investor
For the purposes of paragraph (d), the term “institutional investor” means any person that has an aggregate of at least $50 million invested in securities in its portfolio or under management, including investments held by its wholly owned subsidiaries; provided that no participating members manage the institutional investor's investments or have an equity interest in the institutional investor, either individually or in the aggregate, that exceeds 5% for a publicly owned entity or 1% for a nonpublic entity.
(11) Insurance Company
For the purposes of paragraph (d), the term “insurance company” refers only to the regulated entity, not its subsidiaries or other affiliates.
(12) Issuer
The term “issuer” means a registrant or other person that is offering its securities to the public, any selling security holder offering securities to the public, any affiliate of the registrant or such other person or selling security holder, and the officers or general partners, and directors thereof, but does not include a participating member unless the participating member is itself the registrant or a selling security holder offering its own beneficially held securities to the public.
(13) Offering Proceeds
The term “offering proceeds” means the proceeds of all the securities offered in the public offering by participating members, not including securities subject to an overallotment option, securities to be received by the participating members, or underlying securities.
(14) Overallotment Option
The term “overallotment option” means an option granted by the issuer to the participating members for the purpose of offering additional shares to the public in connection with the distribution of the public offering.
(15) Participating Member
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.
(16) Participate, Participation or Participating
The terms “participate,” “participation” or “participating” in a public offering means involvement in the preparation of the offering document or other documents, involvement in the distribution of the offering, furnishing of customer or broker lists for solicitation, or providing advisory or consulting services to the issuer related to the offering, but do not include:
(A) the preparation of an appraisal in a savings and loan conversion or a bank offering or the preparation of a fairness opinion pursuant to SEA Rule 13e-3; and
(B) advisory or consulting services provided to the issuer by an independent financial adviser.
(17) Person
The term “person” means any natural person, partnership, corporation, company, association, or other legal entity.
(18) Public Offering
The term "public offering" means any primary or secondary offering of securities made in whole or in part in the United States pursuant to a registration statement, offering circular or similar offering document including exchange offers, rights offerings, and offerings of securities made pursuant to a merger or acquisition except for:
(A) securities exempt from registration with the SEC pursuant to the provisions of Sections 4(a)(1), 4(a)(2) or 4(a)(5) of the Securities Act;
(B) securities exempt from registration with the SEC pursuant to Rule 504 of SEC Regulation D if the securities are restricted securities under Securities Act Rule 144(a)(3) or Rule 506 of SEC Regulation D;
(C) securities exempt from registration with the SEC pursuant to Securities Act Rule 144A or SEC Regulation S; or
(D) securities which are defined as “exempted securities” in Section 3(a)(12) of the Exchange Act.
(19) Required Filing Date
(A) The term “required filing date” means the dates referenced in paragraph (a)(3); and
(B) For a public offering exempt from filing under paragraph (h), the term “required filing date” means the date the public offering would have been required to be filed with FINRA but for the exemption.
(20) Review Period
The term “review period” means:
(A) for a firm commitment offering, the 180-day period preceding the required filing date through the 60-day period following the effective date of the offering;
(B) for a best efforts offering, the 180-day period preceding the required filing date through the 60-day period following the final closing of the offering; and
(C) for a firm commitment or best efforts takedown or any other continuous offering made pursuant to Securities Act Rule 415, the 180-day period preceding the required filing date of the takedown or continuous offering through the 60-day period following the final closing of the takedown or continuous offering.
(21) Total Equity Securities
For the purposes of paragraph (d), the term "total equity securities" means the aggregate of the total shares of:
(A) common stock outstanding of the issuer; and
(B) common stock of the issuer underlying all convertible securities outstanding that convert without the payment of any additional consideration.
(22) Underwriting Compensation
The term “underwriting compensation” means any payment, right, interest, or benefit received or to be received by a participating member from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public offering. In addition, underwriting compensation shall include finder’s fees, underwriter’s counsel fees, and securities.
• • • Supplementary Material: --------------
.01 Underwriting Compensation
(a) The following are examples of payments or benefits that are considered underwriting compensation:
(1) discounts or commissions;
(2) fees and expenses paid or reimbursed to, or paid on behalf of, the participating members, including but not limited to road show fees and expenses and due diligence expenses;
(3) fees and expenses of participating members’ counsel paid or reimbursed to, or paid on behalf of, the participating members (except for reimbursement of “blue sky” fees);
(4) finder’s fees paid or reimbursed to, or paid on behalf of, the participating members;
(5) wholesaling fees and expenses;
(6) financial consulting and advisory fees;
(7) common or preferred stock, options, warrants, and other equity securities, including debt securities convertible to or exchangeable for equity securities, beneficially owned, as defined in Rule 5121 by the participating members the value of which is determined pursuant to this Rule, and acquired during the review period, as defined in this Rule, except that any such securities purchased during the review period by a participating member in a public offering at the public offering price and on the same terms as all others purchasing in the public offering that are not participating members shall not be deemed underwriting compensation;
(8) sales incentive items;
(9) any right or rights of first refusal provided to any participating member to participate in future public offerings, private placements or other financings, the value of which will be 1% of the offering proceeds or a dollar amount contractually agreed to by the issuer and the participating member to waive the right of first refusal;
(10) compensation to be received by a participating member or by any person nominated by the participating member as an advisor to the issuer’s board of directors in excess of that received by other members of the board of directors;
(11) any compensation to be received by the participating members as a result of the exercise or conversion of warrants, options, convertible securities, or similar securities distributed as part of the public offering within 12 months following the commencement of sales;
(12) fees of a qualified independent underwriter required by Rule 5121;
(13) any compensation paid to any participating member in connection with a prior proposed public offering that was not completed, if the member firm participates in the revised public offering, except that accountable expenses received pursuant to paragraph (g)(5)(A) shall not be deemed underwriting compensation; and
(14) non-cash compensation, such as gifts, training and education expenses, sales incentives, and business entertainment expenses.
(b) Participating members may receive payments from an issuer or another source during the review period that may be unrelated to a particular offering. Such payments generally would not be deemed to be underwriting compensation. The following list, while not comprehensive, provides examples of payments that are not deemed to be underwriting compensation:
(1) printing costs; SEC, “blue sky” and other registration fees; FINRA filing fees; fees of independent financial advisers; and accountant’s fees, and other fees and expenses customarily borne by an issuer, whether or not paid by or through a participating member;
(2) cash compensation for providing services for a private placement or for providing or arranging for a loan, credit facility, or for services in connection with a merger or acquisition;
(3) records management and advisory fees and expenses in connection with the conversion of the issuer from a mutual holding company to a stock holding company;
(4) payment or reimbursement of legal costs resulting from a contractual breach or misrepresentation by the issuer;
(5) compensation for providing brokerage, trust and insurance services to the issuer that is received in the ordinary course of business;
(6) fees for commercial banking services, which does not require registration as a broker-dealer, provided to the issuer in the ordinary course of business;
(7) compensation for providing services in a prior or concurrent public offering separately filed or exempt from filing pursuant to this Rule;
(8) a right of first refusal that is provided to a participating member in connection with a prior financing if the right of first refusal does not extend beyond the initial closing of the public offering currently under review or if the right of first refusal has already been included as underwriting compensation in a prior or concurrent public offering;
(9) dividends paid to shareholders of a class of the issuer’s securities when participating members are shareholders of that class;
(10) securities of the issuer pledged as collateral for a bona fide loan;
(11) listed securities purchased in public market transactions;
(12) compensation received through any stock bonus, pension, employee benefit plan, or profit-sharing plan that qualifies under Section 401 of the Internal Revenue Code or a similar plan, including, but not limited to, an employee benefit plan as defined in Securities Act Rule 405 or a compensatory benefit plan or compensatory benefit contract exempt from registration pursuant to Securities Act Rule 701;
(13) securities acquired by an investment company registered under the Investment Company Act;
(14) securities acquired as the result of a conversion of securities that were originally acquired prior to the review period;
(15) securities acquired as the result of an exercise of options or warrants that were originally acquired prior to the review period;
(16) securities acquired as the result of a stock-split, a pro-rata rights or similar offering where the securities upon which the acquisition is based were acquired prior to the review period;
(17) securities acquired as the result of a right of preemption that was granted prior to the review period;
(18) securities acquired in order to prevent dilution of a long-standing interest in the issuer, if:
(A) the amount of securities does not increase a member’s percentage ownership of the same generic class of securities of the issuer or of the class of securities underlying a convertible security calculated immediately prior to the investment; and
(B) an initial purchase of securities of the issuer was made at least two years preceding the required filing date and a second purchase was made before the review period;
(19) non-convertible or non-exchangeable debt securities and derivative instruments acquired in a transaction that is unrelated to the public offering;
(20) securities acquired subsequent to the issuer’s initial public offering in a transaction exempt from registration under Securities Act Rule 144A;
(21) securities acquired in the secondary market by a participating member that is a broker-dealer in connection with the performance of bona fide customer facilitation activities and bona fide market making activities; provided that securities acquired from the issuer will be considered “underwriting compensation” if the securities were not acquired at a fair price (taking into account, among other things customary commissions, mark-downs and other charges); and
(22) securities acquired pursuant to a governmental or court-approved proceeding or plan of reorganization as a result of action by the government or court (e.g., bankruptcy or tax court proceeding).
(c) Definitions
(1) The term “listed securities” means securities that are traded on the national securities exchanges identified in Securities Act Rule 146, on markets registered with the SEC under Section 6 of the Exchange Act, and on any "designated offshore securities market" as defined in Rule 902(b) of SEC Regulation S.
(2) The term “right of pre-emption” means the right of a shareholder to acquire additional securities in the same company in order to avoid dilution when additional securities are issued, pursuant to: (A) any option, shareholder agreement, or other contractual right entered into at the time of purchase of securities; (B) the terms of the securities purchased; (C) the issuer’s charter or by-laws; or (D) the domestic law of a foreign jurisdiction that regulates the issuance of the securities.
.02 Venture Capital Transactions and Significantly Delayed Offerings. Notwithstanding paragraph (d), in the event that an offering is significantly delayed and the issuer needs funding pending consummation of the public offering, FINRA may exclude from underwriting compensation any securities acquired in a transaction that otherwise meets the requirements in paragraph (d), but occurs after the required filing date. To determine whether an acquisition of securities that occurs after the required filing date may be excluded from underwriting compensation, FINRA will consider the following factors, as well as any other relevant factors and circumstances:
(a) the length of time between the required filing of the registration statement or similar document and the date of the transaction in which securities were acquired;
(b) the length of time between the date of the transaction in which the securities were acquired and the anticipated commencement of the public offering; and
(c) the nature of the funding provided, including, but not limited to the issuer’s need for funding before the public offering.
.03 Underwriting Compensation Securities Acquired Other than from the Issuer. Notwithstanding paragraph (j)(22), FINRA may exclude securities acquired from a third-party entity from underwriting compensation. To determine whether an acquisition of securities from a third-party entity may be excluded from underwriting compensation, FINRA will consider the following factors, as well as any other relevant factors and circumstances:
(a) the nature of the relationship between the issuer and the third party, if any;
(b) the nature of the transactions in which the securities were acquired, including, but not limited to, whether the transactions are engaged in as part of the participating member’s ordinary course of business; and
(c) any disparity between the price paid and the offering price or market price.
.04 Underwriting Compensation Resulting from Issuer Directed Sales Programs. Notwithstanding paragraph (j)(15) and (22), FINRA may exclude from underwriting compensation securities acquired by a participating member’s associated persons or their immediate family pursuant to an issuer directed sales program. To determine whether an acquisition of securities by a participating member’s associated persons or their immediate family pursuant to an issuer directed sales program may be excluded from underwriting compensation, FINRA will consider the following factors, as well as any other relevant factors and circumstances:
(a) the existence of a pre-existing relationship between the issuer and the person acquiring the securities;
(b) the nature of the relationship; and
(c) whether the securities were acquired on the same terms and at the same price as other similarly-situated persons participating in the directed sales program.
.05 Disclosure of Underwriting Compensation. A description of each item of underwriting compensation received or to be received by a participating member must be disclosed in the section on distribution arrangements in the prospectus (or other similar offering document). The description shall include the dollar amount ascribed to each individual item of compensation. When securities are acquired by a participating member, material terms and arrangements of the acquisition must also be disclosed in the section on distribution arrangements in the prospectus (or other similar offering document) when applicable, such as exercise terms, demand and piggyback registration rights and lock-up periods that may apply. Similarly, if underwriting compensation consists of a right of first refusal to participate in the distribution of a future public offering, private placement or other financing, the description should reference the existence of such right and its duration.
.06 Non-Convertible or Non-Exchangeable Debt Securities and Derivatives
(a) Non-convertible or non-exchangeable debt securities and derivative instruments acquired in a transaction related to the public offering and at a fair price, will be considered underwriting compensation but will have no compensation value. Non-convertible or non-exchangeable debt securities and derivative instruments acquired in a transaction related to the public offering but not at a fair price, will be considered underwriting compensation and subject to the normal valuation requirements of this Rule.
(b) The term “derivative instrument” means any "eligible OTC derivative instrument" as defined in SEA Rule 3b-13(a)(1), (2) and (3). The term “fair price” means the participating members have priced a derivative instrument or non-convertible or non-exchangeable debt security in good faith; on an arm’s length, commercially reasonable basis, and in accordance with pricing methods and models and procedures used in the ordinary course of their business for pricing similar transactions. A derivative instrument or other security received as compensation for providing services for the issuer, for providing or arranging a loan, credit facility, merger, acquisition or any other service, including underwriting services will not be deemed to be entered into or acquired at a fair price.
.07 Venture Capital Transactions. The determination of whether a securities acquisition may be excluded from underwriting compensation pursuant to paragraph (d) is to be made at the time of the securities acquisition.
1 The current annual amount fixed by the Board of Governors is $100.
