United States: FINRA Releases FAQs On Its Public Offering Review Process

Last Updated: February 24 2013
Article by Nilene R. Evans and Justin Kamen

FINRA recently released a set of frequently asked questions ("FAQs")1 relating to its public offering process and the Corporate Financing Rule (Rule 5110).2 The guidance provided in the FAQs is summarized below.

Underwriting Compensation

Lock-up Requirements and Exemptions

Under FINRA Rule 5110(g), unregistered securities that are excluded from the calculation of underwriting compensation3 are generally subject to a 180-day lock-up. However, FINRA has provided exemptions from the lock-up requirement for securities acquired as a result of an exercise, conversion, stock split or a pro rata rights offering of securities acquired before the review period. The FAQs set forth the facts and circumstances that FINRA staff consider when determining whether to grant an exemption:

  • The acquisition of the securities was required to restructure the issuer's capitalization in order to: (i) launch the public offering; (ii) complete a merger or acquisition; (iii) reorganize its corporate structure to receive tax or other benefits; (iv) emerge from a bankruptcy proceeding; (v) facilitate a stock repurchase arrangement; or (vi) facilitate some combination of these objectives.
  • The securities were registered and included as part of the underwritten public offering.
  • The arrangements that resulted in the acquisition of securities during the review period were designed to benefit the issuer and were not proposed by the member firm or a shareholder affiliated with the firm.

Filing Exemption

Offerings by seasoned issuers are exempt from FINRA filing requirements. FINRA bases its "seasoned" standard on whether the issuer can satisfy the standards for filing on Form S-3 or F-3 as they existed prior to October 21, 1992.4 To meet those standards, the issuer must have been a reporting company for at least three years and either have "at least (1) $150 million aggregate market value of voting stock held by non-affiliates or (2) $100 million aggregate market value of voting stock held by non-affiliates and an annual trading volume of at least three million shares."5

Valuing a Right of First Refusal

A right of first refusal ("ROFR") to participate in an offering is an "item of value" to be counted as underwriter compensation if granted within 180 days of an offering even if the ROFR is added by amendment to an agreement entered into before the 180-day period. A ROFR is worth "the dollar amount that the issuer has contractually agreed to pay the underwriter to waive or terminate the ROFR."6 If a dollar amount is not agreed to, which it usually is not, then the ROFR is valued at 1% of the offering proceeds.

Disclosure Requirements

Reimbursements for Underwriter's Counsel Fees and Expenses

Where an issuer pays or reimburses an underwriter's counsel fees and expenses (other than "blue sky" fees), such amounts must be disclosed in the Underwriting or Plan of Distribution section of the prospectus and the offering proceeds table on the cover page must include a cross-reference to this section.7 These costs may be aggregated with other fees and expenses that are disclosed in the prospectus as reimbursements by the issuer.

Terms of Options, Warrants and Convertible Securities

FINRA does not require disclosure of the terms of options, warrants and convertible securities granted as underwriting compensation. However, FINRA reviews the agreements to determine whether the terms would violate any FINRA rules.8 It should be noted that while FINRA does not require such disclosure, it is generally appropriate and customary to disclose the terms of such securities, particularly if they are different from the securities being offered by the issuer pursuant to the prospectus.

Conflicts of Interest

Government Sponsored Entities

FINRA has granted a limited exemption from the filing requirements of FINRA Rules 5110 and 51219 to a government sponsored enterprise ("GSE") conducting a public offering where an affiliate of an underwriter owned more than 10% of the GSE. FINRA granted the filing exemption due to extensive government regulation of the GSE, including periodic audits by the U.S. Government Accountability Office.

Qualified Independent Underwriters

Under FINRA Rule 5121, a member making a public offering of its own securities must hire a Qualified Independent Underwriter ("QIU") in order to address conflicts of interest. A firm can only be a QIU if it meets the criteria in FINRA Rule 5121(f)(12). A member making an offering that requires a QIU must make representations in the filing made in the Public Offering System that the QIU meets these requirements.

REITs and DPPs

Dividend Reinvestment Programs

Under FINRA Rule 2310,Real Estate Investment Trusts ("REITs") may not charge a sales load or commission on securities that are purchased through dividend reinvestment programs ("DRIPs").10 The purpose of the rule is to prevent double charges to investors. However, FINRA permits unlisted REITs that calculate net asset value daily ("Daily NAV REITs") to charge sales loads or commissions. Unlisted REITs typically do not develop as liquid a market for their securities as do listed REITs. Daily NAV REITs seek to offset this lack of liquidity by publishing daily NAVs in order to provide some guidance to investors on valuation of their securities. In FINRA's view, Daily NAV REITs finance most of their distributions through distribution asset-based charges based on the issuer's NAV or the per-share NAV, which would not impose a double charge on reinvested dividends. Further, the prohibition would force Daily NAV REITs to create segregated accounts for DRIP shares and would have potentially negative tax implications for investors.

Direct Participation Programs

Direct Participation Programs ("DPPs") must follow the requirements of FINRA Rule 2310, which imposes strict underwriting standards including suitability requirements and limitations on offering expenses.11 FINRA will consider a closed-end fund to be a DPP if it receives flow-through tax treatment under the Internal Revenue Code, irrespective of its legal structure.

Training and Education Meetings

FINRA Rule 2310 prohibits participation by a member in a public offering by a DPP or REIT with unfair and unreasonable offering expenses. Offering expenses include training and education ("T&E") meetings with affiliated REITs. An unlisted REIT cannot receive reimbursement for T&E meetings from offering proceeds unless the meeting is held at an appropriate location, such as near an asset of the unlisted REIT. However, FINRA has permitted reimbursement where a REIT and an affiliated REIT split the costs of the meeting, were managed by the same sponsor, had selling agreements with the same broker-dealers, and complied with the other non-cash compensation requirements of FINRA Rule 2310. Nonetheless, any payments to broker-dealers in connection with such T&E meetings must be included in the 10% compensation cap under FINRA Rule 2310(b)(4)(ii).

Filing Process

Same Day Clearance

Filing fees for Same Day Clearance ("SDC") should be sent immediately after the SDC filing is made with FINRA. The fee should be submitted using the FINRA file ID provided at the time the SDC filing is initially made.

Carried Forward Amounts

FINRA waives filing fees on registered but unsold securities to be carried forward on a new registration statement if they are entered in the "Details" screen of the Public Offering Filing System as "carried forward amounts."

Amendments to Registration Statements

Where an amendment to a registration statement does not change the amount or value of the securities being registered, FINRA's Public Offering Filing System nonetheless requires the entry of a value for the securities included therein. Filers must include the most recent Proposed Maximum Aggregate Offering Price and the number of securities being offered from the initial registration statement or latest amendment thereto.

Confidential Filings

Where a confidential filing is subsequently publicly filed,12 the filer must enter accession numbers into the Public Offering Filing System for both the registration statement and the confidentially filed documents. The FAQs set forth the numbering systems. However, FINRA plans to change the system so that documents that are confidentially filed will not require accession numbers.

Footnotes

1 The FINRA FAQs are available at: http://www.finra.org/Industry/Compliance/RegulatoryFilings/PublicOfferingSystem/FAQ.

2 FINRA Rule 5110 is available at: http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=4583&print=1.

3 Under FINRA Rule 5110(c)(1), underwriting compensation must be fair and reasonable. In determining the amount of underwriting compensation, FINRA Rule 5110(d)(5) excludes certain items.

4 FINRA Rule 5110(b)(7)(C)(i).

5 FINRA Notice to Members 93-88, available at: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=1551.

6 See FINRA Rule 5110(c)(3)(ix).

7 See FINRA Rules 5110(c)(3) and 5110(c)(2)(C).

8 See FINRA Rule 5110(f)(2)(H).

9 FINRA Rule 5121 is available at http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=4583&print=1.

10 FINRA Rule 2310 is available at: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=11706&element_id=8469&highlight=2310#r11706.

11 DPPs allow investors to have direct participation in cash flow and tax benefits without requiring any active management by the investors.

12 Confidential filings are made by certain foreign private issuers and by emerging growth companies under the Jumpstart Our Business Startups Act ("JOBS Act"). Our Client Alert discussing these provisions of the JOBS Act is available at: http://www.mofo.com/files/Uploads/Images/120326-The-JOBS-Act.pdf.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nilene R. Evans
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.