If you are an issuer getting ready to raise funds by way of Regulation A+, and are planning to utilize any services of a broker-dealer, then filing your offering statement with the Securities and Exchange Commission (SEC) is not the only filing you need to make. You are also required to file specified documents and information with FINRA as required by Rule 5110.
FINRA oversees all broker-dealers (FINRA member firms), and Rule 5110 enables FINRA to regulate compensation paid to member firms and their associated persons who participate in public offerings. The filing generally is required to be made no later than one business day after you have made your SEC filing. Known as the “Corporate Financing Rule,” Rule 5110 requires the filing of details of underwriting terms and arrangements. It is not limited, however, to circumstances where a broker-dealer is functioning as an underwriter. Any participation in an offering by a broker-dealer is sufficient to require a filing under Rule 5110, such as where a broker-dealer participates in the preparation of the offering documents; participates in the distribution of the offering on an underwritten, non-underwritten, or any other basis; furnishes customer and/or broker lists for solicitation; or participates in any advisory or consulting capacity to the issuer related to the offering.
Notably, Rule 5110 only pertains to public offerings. And while this specifically includes Regulation A offerings, it does not apply to private securities offerings made under Rule 506 of Regulation D and thus no Rule 5110 filing needs to be made (not to be confused with Form D or FINRA Rule 5123, which are required to be complied with for Rule 506 offerings).
Rule 5110 requires the filing and FINRA review of specified documents and information in connection with offerings of securities, and prohibits unfair compensation arrangements. It generally includes as underwriting compensation all items of value received or to be received from any source by the broker-dealer and related persons in connection with or related to the distribution of the public offering. These include such diverse types as a discount or commission, reimbursement of expenses, certain fees and expenses of underwriter’s counsel, finder’s fees, financial consulting and advisory fees; and any securities received. It also includes arrangements made for the future receipt of an item of value by the broker-dealer (e.g., warrants). All items of broker-dealer compensation are required to be disclosed in the prospectus.
The documents required to be filed include the registration statement and offering circular, any amendments and other documents used to offer securities to the public; the proposed underwriting agreement or other agreement with the broker-dealer and that describe underwriting or other arrangements in connection with or related to the securities distribution. Information required to be filed includes an estimate of the maximum public offering price, the maximum underwriting discount or commission, or other compensation including reimbursement of underwriter’s expenses, underwriter’s counsel’s fees, maximum financial consulting and/or advisory fees to the underwriter and related persons; maximum finder’s fees; and a statement of any other type and amount of compensation which may accrue to the member firm and related persons. Keep in mind that the issuer is usually responsible for paying the FINRA filing fee as well as the broker-dealer’s legal fees for working with the issuer to make the FINRA 5110 filing.
No broker-dealer or person associated with it can participate in any manner in any public offering of securities subject to Rule 5110 unless documents and information as specified in the rule have been filed with and reviewed by FINRA’s Corporate Finance department. Corporate Finance will review the filing documents and information and provide an opinion that it has no objections to the proposed underwriting and its terms and arrangements. If Corporate Finance finds that the proposed underwriting terms and arrangements are unfair and unreasonable, then applicants are permitted to amend their filings to meet FINRA’s objections. Fairness and reasonableness of compensation is determined by considering the offering proceeds, the amount of risk assumed by the member firm, and the type of securities being offered. Rule 5110 also regulates non-cash compensation, prohibited compensation, various lock up provisions the issuer may have with a broker-dealer, and rights of first refusal.
So when you use a broker-dealer to assist you with your Regulation A offering, keep in mind that a FINRA Rule 5110 filing is also required in addition to your SEC Form 1-A filing. As always, consult with your securities attorney to advise and assist you in meeting the requirements of Rule 5110 and all requirements of law for a public offering of securities.
About Scott Andersen:
Scott is principal at finLawyer.com and General Counsel of FundAmerica. He was most recently the Deputy Regional Chief Counsel at FINRA, and prior to that was the Enforcement Director at FINRA and the NYSE, Co-Chief of the Securities Prosecutions Unit of the NY Attorney General’s office, and Asst. Attorney General for the State of NY. He concentrates his practice on securities and regulatory law.
The information and materials in this article are provided for general informational purposes only and are not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.
Principal at finLawyer.com