[Federal Register Volume 91, Number 144 (Wednesday, July 29, 2026)]
[Notices]
[Pages 47903-47909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-15242]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105987; File No. SR-FINRA-2026-002]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA
Rules 5110 (Corporate Financing Rule--Underwriting Terms and
Arrangements) and 5123 (Private Placements of Securities)
July 24, 2026.
I. Introduction
On January 22, 2026, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rules 5110
(Corporate Financing Rule--Underwriting Terms and Arrangements) and
5123 (Private Placements of Securities).\3\ Specifically, the proposed
rule change (hereinafter, the ``proposed rule change'' unless otherwise
specified) would, among other things, amend provisions of Rule 5110 to:
(1) change the valuation method for securities acquisitions that are
considered to be underwriting compensation; (2) add certain securities
acquisitions to the existing exclusions from underwriting compensation;
(3) treat non-convertible preferred securities the same as non-
convertible debt securities; and (4) make other modifications for
clarity and to improve the operation of the rule. The proposed
amendments to Rule 5123 would expand the available exemptions for sales
to accredited investors to include offerings sold to investors meeting
the accredited investor categories for certain family offices and for
certain entities with assets under management in excess of $5,000,000,
consistent with the Commission's
[[Page 47904]]
addition of those categories to the accredited investor definition.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 34-104695 (Jan. 27, 2026), 91
FR 4121 (Jan. 30, 2026) (File No. SR-FINRA-2026-002) (``Notice'').
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The proposed rule change was published for public comment in the
Federal Register on January 30, 2026.\4\ The public comment period
closed on February 20, 2026. The Commission received comment letters in
response to the Notice.\5\ On March 12, 2026, FINRA consented to an
extension of the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to April 30, 2026.\6\ On April 28, 2026, the Commission
published an order instituting proceedings (``OIP'') to determine
whether to approve or disapprove the proposed rule change.\7\ The
Commission did not receive comment letters in response to the OIP. This
order approves the proposed rule change.
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\4\ See id.
\5\ The comment letters are available at https://www.sec.gov/rules-regulations/public-comments/sr-finra-2026-002.
\6\ See letter from Joseph Savage, Vice President and Associate
General Counsel, Office of General Counsel, FINRA (Mar. 12, 2026),
https://www.finra.org/sites/default/files/2026-03/SR-FINRA-2026-002-Extension-1.pdf.
\7\ See Exchange Act Release No. 34-105296 (Apr. 23, 2026), 91
FR 22902 (Apr. 28, 2026) (File No. SR-FINRA-2026-002).
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II. Description of the Proposed Rule Change
A. Background
FINRA states that the ability of small and large businesses to
raise capital is critical to job creation and economic growth, and
that, among other things, Rule 5110 has played an important role in the
capital raising process and continues to be important to promoting
investor protection and market integrity through effective and
efficient regulation that facilitates capital markets.\8\ In general,
FINRA Rule 5110 requires any broker-dealer that is a member of FINRA
(``member'') that participates in a public offering to file documents
and information with FINRA about the underwriting terms and
arrangements.\9\ Among other things, the rule contains provisions
relating to how underwriting compensation is valued,\10\ and provides
examples of payments that are not deemed to be underwriting
compensation.\11\ FINRA's Corporate Financing Department reviews this
information prior to the commencement of the offering to determine
whether the underwriting compensation and other terms and arrangements
meet the requirements of applicable FINRA rules.\12\
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\8\ See Notice at 4122.
\9\ See FINRA Rule 5110. FINRA stated that the following are
examples of public offerings that are routinely filed: (1) initial
public offerings (``IPOs''); (2) follow-on offerings; (3) shelf
offerings; (4) rights offerings; (5) offerings by direct
participation programs as defined in FINRA Rule 2310(a)(4) (Direct
Participation Programs); (6) exchange offers; (7) offerings pursuant
to SEC Regulation A; and (8) offerings by closed-end funds. See
Notice at 4122 n.3.
\10\ See Rule 5110(c).
\11\ See Rule 5110.01(b).
\12\ See Notice at 4122. A member may proceed with a public
offering only if FINRA has provided an opinion that it has no
objection to the proposed underwriting terms and arrangements. See
Rule 5110(a)(1)(C)(ii).
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FINRA states that Rule 5123 plays a critical role in providing
information that assists FINRA in the identification of potential
trends and rule violations in the private placement market, which is an
important source of capital for American businesses, including small
and midsize companies.\13\ In general, Rule 5123 requires members to
file with FINRA any private placement memorandum, term sheet or other
offering document, and any retail communication that promotes or
recommends a private placement, including any material amended versions
thereof, used in connection with a private placement of securities
within 15 calendar days of the date of first sale, unless the member
can rely on an applicable exemption from the rule.\14\ Rule 5123
contains an exemption from filing for offerings sold to certain types
of ``accredited investors'' under Rule 501 of the Securities Act of
1933 (``Securities Act'').\15\
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\13\ See Notice at 4122.
\14\ See Rule 5123.
\15\ See Rule 5123(b)(1)(J) (exempting offerings sold by the
member or person associated with the member to, among others,
accredited investors described in Securities Act Rule 501(a)(1),
(2), (3), or (7)).
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B. The Proposed Rule Change
FINRA's proposed rule change would, among other things, amend
provisions of Rule 5110 to: (1) change the valuation method for
securities acquisitions that are considered to be underwriting
compensation; (2) add certain securities acquisitions to the existing
exclusions from underwriting compensation; (3) treat non-convertible
preferred securities the same as non-convertible debt securities; and
(4) make other modifications for clarity and to improve the operation
of the rule. The proposed amendments to Rule 5123 would expand the
available exemptions for sales to accredited investors under paragraph
(b)(1)(J) to include offerings sold to investors meeting the accredited
investor categories for certain family offices with assets under
management in excess of $5,000,000 and certain entities owning
investments in excess of $5,000,000, consistent with the Commission's
addition of those categories to the accredited investor definition.\16\
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\16\ See Accredited Investor Definition, Securities Exchange Act
Release 89669 (Aug. 26, 2020), 85 FR 64234 (Oct. 9, 2020) (``SEC
Accredited Investor Definition Release''). The SEC Accredited
Investor Definition Release promulgated additional categories of
accredited investors, including two additional types of
institutional entities under Rule 501(a)(9) and (a)(12).
Additionally, the amendments also included natural persons holding
professional certifications and designations or other credentials,
knowledgeable employees of private funds, and certain family
clients. FINRA is not proposing to reflect these other amendments in
the proposed rule change.
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FINRA stated that the current approach to the valuation of
securities that are considered underwriting compensation under Rule
5110 can be complex, creating unnecessary burdens for members and
uncertainty regarding whether they are permitted to acquire certain
securities or instead would be required to receive a different form of
compensation; the proposed rule change would simplify this
approach.\17\ In addition, FINRA stated that certain transactions under
Rule 5110 currently require participating members to request exemptions
from FINRA if they do not want to negotiate the receipt of a different
form of compensation, which can increase the amount of time and cost
for issuers to access capital markets.\18\ FINRA stated that the
proposed rule change would reduce exemptive requests by replacing
existing requirements with more practical and transparent
alternatives,\19\ as well as align the rule with FINRA's current
practices relating to underwriting compensation.\20\ Finally, FINRA
stated that the proposed rule change would also expand the exemptions
available in Rule 5123 and better align FINRA rules with Commission
rules relating to the treatment of institutional accredited
investors.\21\ This order addresses each proposed rule change in turn.
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\17\ See Notice at 4125.
\18\ See id.
\19\ See id.
\20\ See id. at 4124.
\21\ See id. at 4125.
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1. Rule 5110 Proposed Amendments
a. Valuation Method for Securities Acquisitions That Are Considered
Underwriting Compensation
FINRA stated that when participating members \22\ acquire
securities that are deemed underwriting compensation,
[[Page 47905]]
FINRA rules require members to base the value of those securities on
either the public offering price per security or the market price per
security on the date of acquisition if a ``bona fide public market''
exists for that security.\23\ The proposed rule change would amend Rule
5110(c)(2) and (3) by replacing the ``bona fide public market''
valuation method with a valuation method based on the closing market
price of the security traded on a U.S. registered national securities
exchange or a ``designated offshore securities market'' as defined
under Securities Act Rule 902(b) on the date of the acquisition.\24\
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\22\ 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. See Rule 5110(j)(15).
\23\ See Rule 5110(c). The definition of ``bona fide public
market'' requires that the securities be traded on a national
securities exchange and relies on SEC Regulation M's definitions of
average daily trading volume and public float. See Rule 5121(f)(3).
\24\ See Notice at 4122-23.
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FINRA stated that members have experienced challenges determining
whether a security had a ``bona fide public market'' on the acquisition
date, based on the definition of that phrase under FINRA rules.\25\
According to FINRA, when a security does not have a public offering
price, and does not have a ``bona fide public market,'' it cannot be
valued under the rule and is therefore considered indeterminate
compensation, which is prohibited.\26\ In those cases, FINRA stated
that participating members must either negotiate a different form of
compensation or request an exemption from FINRA.\27\ According to
FINRA, the proposed rule change would replace the ``bona fide public
market'' valuation method with a more predictable valuation method, as
the new method would be based on readily available market data (the
closing market price of the security traded on a U.S. registered
national securities exchange or a ``designated offshore securities
market'') instead of requiring a calculation that included average
daily trading volume and public float.\28\ FINRA also stated that, by
continuing to ensure that securities are valued fairly, the proposed
rule change will maintain important protections for issuers and
investors participating in offerings.\29\
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\25\ See id. at 4123; see also supra note 23.
\26\ See Notice at 4123; see also Rule 5110(g)(1) (stating that
``[t]he 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'').
\27\ See Notice at 4126.
\28\ See id. at 4123.
\29\ See id. at 4124-25.
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b. Exclusions From Underwriting Compensation for Certain Securities
Acquisitions
Currently, Rule 5110 provides for certain exclusions from
underwriting compensation.\30\ The proposed rule change would expand
the exclusions to include: (1) debt-for-equity exchanges; \31\ (2)
capital investments for direct participation programs (``DPPs'') \32\
and unlisted real estate investment trusts (``REITs''); \33\ and (3)
non-convertible preferred securities.\34\
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\30\ See generally Rule 5110.
\31\ See proposed Rule 5110.01(b)(23).
\32\ See Rule 2310(a)(4); see also proposed Rule 5110.01(b)(24).
\33\ See Rule 2231(d)(4); see also proposed Rule 5110.01(b)(24).
\34\ See proposed Rule 5110(a)(4), 5110(c)(5), 5110(e), and
5110.06.
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FINRA stated that the proposed rule change would facilitate capital
formation by providing consistent and predictable regulatory treatment
of common financing strategies employed by issuers,\35\ and would also
benefit issuers through the capital investments made in exchange for
non-convertible preferred securities from affiliates of members that
participate in public offerings.\36\
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\35\ See Notice at 4124.
\36\ See id.
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Under current Rule 5110, transactions involving capital investments
made by affiliates of underwriters in DPPs and unlisted REITs, as well
as securities acquired by affiliates of underwriters in connection with
debt-for-equity exchange transactions, are deemed underwriting
compensation.\37\ FINRA stated that these transactions currently
require participating members to request an exemption from the
provisions of Rule 5110.\38\ According to FINRA, the proposed changes
would reduce compliance costs for participating members by reducing the
time and expense incurred by members seeking such exemptions, and may
also create new financing opportunities for members.\39\ FINRA also
stated that participating members that acquire non-convertible
preferred securities in connection with a public offering at a fair
price will benefit from being provided additional flexibility and
clarity regarding the regulatory requirements of these types of debt
securities under Rule 5110.\40\
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\37\ See id. at 4126.
\38\ See id. at 4124 n.26, 4125.
\39\ See id. at 4126.
\40\ See id.
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In addition, FINRA stated that these proposed exclusions are
narrowly tailored and based on exemptive relief previously provided by
FINRA, which has worked well in the past for both issuers and
investors.\41\ According to FINRA, the proposed rule change also would
not decrease FINRA's ability to oversee underwriting terms and
arrangements.\42\ Finally, FINRA stated that the proposed rule change
would reduce the administrative and operational burdens for members and
FINRA, promote regulatory efficiency, and enhance market functioning
while maintaining issuer and investor protection.\43\
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\41\ See id. at 4125.
\42\ See id.
\43\ See id.
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Each proposed amendment is discussed below.
i. Debt-for-Equity Exchanges
Currently, Rule 5110 does not provide an exclusion from
underwriting compensation for securities acquired by affiliates of
underwriters in connection with debt-for-equity exchange
transactions.\44\ A debt-for-equity exchange is comprised of a series
of transactions in which a lender acquires equity securities of the
issuer, often referred to as exchange shares, in return for a cash
loan.\45\ The exchange shares are subsequently or concurrently
registered and offered by underwriters in a public offering, and the
offering proceeds are used, in whole or in part, as repayment of the
loan.\46\ When the lender is an affiliate of an underwriter, the lender
falls within the definition of participating member, and the equity
securities acquired by the affiliated lender for making the loan fall
within the definition of underwriting compensation.\47\ FINRA stated
that debt-for-equity exchanges currently require participating members
to request an exemption from the provisions of Rule 5110.\48\
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\44\ See Rule 5110.01.
\45\ See Notice at 4123.
\46\ See id.
\47\ See id.
\48\ See id. at 4124 n.26, 4125.
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The proposed rule change would add new Rule 5110.01(b)(23) to
provide an exclusion from underwriting compensation for securities
acquired by participating members in connection with debt-for-equity
exchange transactions if the following conditions are met: \49\
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\49\ FINRA stated that the proposed rule change is consistent
with past exemptions that have been granted for certain
transactions. See id. at 4123.
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the debt-for-equity exchange is structured to provide
economic and tax benefits to the issuer and not the lender or
affiliated member; \50\
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\50\ See proposed Rule 5110.01(23)(A).
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[[Page 47906]]
the affiliated member subsequently offered all of the
equity securities the lender acquired in a firm commitment offering
following the debt exchange; \51\
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\51\ See proposed Rule 5110.01(23)(B). FINRA stated that
typically, lenders and affiliated members coordinate to satisfy this
condition. However, even if they do not coordinate, the affiliated
member can satisfy the condition with the subsequent offering. See
Notice at 4123 n.14.
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the parties determined the terms of the debt exchange and
the subsequent equity issued through arms' length negotiations based on
the market price of the equity; \52\ and
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\52\ See proposed Rule 5110.01(23)(C).
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the affiliated member negotiated customary compensation
for the subsequent equity offering.\53\
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\53\ See proposed Rule 5110.01(23)(D).
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ii. Capital Investments for DPPs and REITs
Currently, Rule 5110 does not provide an exclusion from
underwriting compensation for capital investments in exchange for an
equity stake made by affiliates of underwriters concurrently with or in
advance of a public offering.\54\ FINRA stated that these types of
capital investments currently require participating members to request
an exemption from the provisions of Rule 5110.\55\ The proposed rule
change would add new Rule 5110.01(b)(24) to provide an exclusion from
underwriting compensation for securities acquired before or during the
distribution of an offering by a participating member in the issuer or
an affiliated entity in connection with DPPs and unlisted REITs, if the
following conditions are met:
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\54\ See Rule 5110.01. FINRA stated that such investments are
common in DPP and REIT offerings to provide the initial or
subsequent equity capital or financing needed by an issuer. See
Notice at 4123.
\55\ See Notice at 4124 n.26, 4125.
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the acquisition of securities is disclosed in the
prospectus; \56\
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\56\ See proposed Rule 5110.01(24)(A).
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the securities offered to the public and the securities
acquired in the capitalization transaction are valued and priced on a
net asset value (``NAV'') basis; \57\
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\57\ See proposed Rule 5110.01(24)(B). Capitalization
transactions occurring before the issuer has material assets would
be deemed to occur at or above NAV. See Notice at 4123 n.16.
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the offering for which the participating member is engaged
is an offering subject the requirements of Rule 2310 (Direct
Participation Programs); \58\ and
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\58\ See proposed Rule 5110.01(24)(C).
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the securities acquired are restricted for a period of 180
days following the commencement of sales.\59\
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\59\ See proposed Rule 5110.01(24)(D).
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iii. Non-Convertible Preferred Securities
Currently, Rule 5110 provides that non-convertible or non-
exchangeable debt securities and derivative instruments acquired by any
participating member in a transaction related to a public offering at a
fair price \60\ are considered underwriting compensation but have no
compensation value.\61\ However, at present, Rule 5110 does not offer
parallel treatment of non-convertible preferred securities.\62\ Because
both non-convertible debt and non-convertible preferred securities
cannot be converted to common stock and provide predetermined payments
to holders, resulting in fixed sources of income, FINRA stated that it
views them as equivalent for purposes of the Rule 5110 exclusion and,
accordingly, the proposed rule change would treat them in a comparable
manner as long as non-convertible preferred securities are acquired at
a fair price.\63\
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\60\ See Rule 5110.06(b).
\61\ See Rules 5110(c)(5) and 5110.06. As noted above, per Rule
5110, compensation that cannot be valued is generally prohibited.
See Rule 5110(g)(1); see also supra note 26. However, FINRA stated
that, under the exclusion for non-convertible or non-exchangeable
debt securities and derivative instruments, treating these
transactions as compensation without value permits the participating
member to receive the securities (as long as they are received at a
fair price) while still allowing FINRA the ability to review the
transactions to determine whether they were, indeed, received at a
fair price. If they were not received at a fair price, the value of
underwriting compensation that is attributed to these securities is
the difference between their fair price and their actual price. See
Notice at 4123 n.18.
\62\ See id.
\63\ See Notice at 4123-24; see also supra note 60.
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c. Additional Modifications to Rule 5110
The proposed rule change would make other modifications to Rule
5110 that FINRA believes would improve the operation of the rule.
First, Rule 5110 permits termination fees or the receipt of
compensation in the form of rights of first refusal in connection with
a public offering that is terminated when specific requirements are met
that protect the issuer.\64\ FINRA stated that, increasingly, members
negotiate payments often described as ``tail fees'' in engagement
letters that are similar to the terms and requirements for termination
fees or rights of first refusal.\65\ Because tail fees provide
compensation in the event of a subsequent financing from investors
introduced by a member following the termination of an agreement, FINRA
believes these payments are comparable to termination fees for purposes
of Rule 5110.\66\ The proposed rule change would amend Rule
5110(g)(5)(B) to clarify that the same requirements that apply to
termination fees would also apply to tail fees.\67\ If these
requirements are not met, tail fees would constitute unreasonable
arrangements under Rule 5110.\68\
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\64\ See Rule 5110(g)(5)(B).
\65\ See Notice at 4124.
\66\ See id.
\67\ See id. at 4124 n.19; see also proposed Rule 5110(g)(5)(B).
\68\ See Notice at 4124.
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Second, the proposed rule change would also amend Rule 5110 to make
non-substantive, technical changes.\69\
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\69\ The proposed rule change would add language to various
cross-references throughout the rule in order to clarify that the
cross-references are related to the same rule. See, e.g., proposed
Rule 5110(g); 5110(j)(11); 5110 (j)(19); 5110(j)(21);
5110.01(a)(13); 5110.03; 5110.04; and 5110.07. In addition, the
proposed rule change would also change the wording of the definition
of ``immediate family'' to replace ``the spouse or child'' with
``the spouse or children.'' See proposed Rule 5110(j)(8)(A).
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2. Rule 5123 Proposed Amendments
The proposed rule change would expand the filing exemption under
Rule 5123 for sales to accredited investors to include offerings sold
to investors meeting two additional accredited investor categories,
consistent with the Commission's addition of those categories to the
accredited investor definition. As stated above, in August 2020, the
Commission adopted amendments to the definition of ``accredited
investor'' under Rule 501.\70\ These changes included adding to the
definition of accredited investor:
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\70\ See SEC Accredited Investor Definition Release, supra note
16.
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any entity, of a type not listed in paragraphs (a)(1),
(2), (3), (7), or (8) of Rule 501, not formed for the specific purpose
of acquiring the securities offered, owning investments in excess of
$5,000,000; \71\ and
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\71\ See 17 CFR 230.501(a)(9).
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any ``family office'' with assets under management in
excess of $5,000,000, that is not formed for the specific purpose of
acquiring the securities offered and its prospective investment is
directed by a person who has such knowledge and experience in financial
and business matters that such family office is capable of evaluating
the merits and risks of the prospective investment.\72\
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\72\ See 17 CFR 230.501(a)(12).
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The proposed rule change would amend Rule 5123(b)(1) to include
these same two categories of entities to the filing exemption under
Rule 5123.\73\
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\73\ See Notice at 4124.
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FINRA stated that adding the two categories discussed to the
existing exemption would establish consistency
[[Page 47907]]
with the purpose of Rule 5123, and would not diminish investor
protection.\74\ FINRA stated that it believes that these two categories
of investors possess a level of sophistication and expertise that is
similar to the institutional accredited investors currently exempted
under Rule 5123, and that these categories of investors generally do
not need the additional protections and oversight provided through the
filing requirements.\75\ FINRA stated that the two categories covered
by the proposed rule change have a similar financial threshold to
qualified purchasers, currently covered in another exemption from Rule
5123's filing requirements.\76\
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\74\ See id.
\75\ See id.
\76\ See id.; see also Rule 5123(b)(1)(B). ``Qualified
purchasers'' are defined under the Investment Company Act to include
natural persons or certain companies that own not less than
$5,000,000 in investments. See id.; see also Investment Company Act
Section 2(a)(51).
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III. Discussion and Commission Findings
After careful review of the proposed rule change and comment
letters received, the Commission finds that the proposed rule change is
consistent with the requirements of the Exchange Act and the rules and
regulations thereunder applicable to a national securities
association.\77\ As discussed in more detail below, the Commission
finds that the proposed rule change is consistent with Section
15A(b)(6) of the Exchange Act, which requires, among other things, that
FINRA rules be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.\78\
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\77\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\78\ 15 U.S.C. 78o-3(b)(6).
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A. Rule 5110 Proposed Amendments
1. Valuation Method for Securities Acquisitions Considered Underwriting
Compensation
As noted above, FINRA stated that when participating members
acquire securities in a public offering that are deemed underwriting
compensation, the value of those securities must currently be based on
either the public offering price per security or the price paid per
security on the date of acquisition if a ``bona fide public market''
exists for the security. The proposed rule change would amend Rule
5110(c)(2) and (3) by replacing the ``bona fide public market''
valuation method with a valuation method based on the closing market
price of a security traded on a U.S. registered national securities
exchange or a ``designated offshore securities market'' on the date of
acquisition.\79\
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\79\ See Notice at 4122-23.
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Commenters supported the proposed rule change.\80\ The proposed
rule change is reasonably designed to update and simplify the valuation
method for underwriting compensation in a manner that promotes capital
formation while maintaining protections for issuers and investors. As
discussed above, FINRA stated that requiring the use of the ``bona fide
public market'' valuation method under the current rule is not always
workable and can be overly complex.\81\ When participating members
cannot use the public offering price, and also cannot determine whether
there is a ``bona fide public market,'' FINRA stated that participating
members must either negotiate a different form of compensation or
request an exemption from FINRA, which can be time consuming and
expensive.\82\ Replacing the current system of valuation with a
valuation method based on readily available market data allows for more
predictability and certainty to participating members. In addition, the
proposed method of calculation will maintain protections for issuers
and investors participating in offerings by continuing to ensure that
these securities are valued in a fair manner.\83\ For these reasons,
the proposed rule change is reasonably designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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\80\ See generally letter from Anya Coverman, President and CEO,
Institute for Portfolio Alternatives (Feb. 20, 2026); letter from
Joseph P. Corcoran, Managing Director & Associate General Counsel,
Securities Industry and Financial Markets Association (Feb. 20,
2026).
\81\ See supra note 17 and accompanying text.
\82\ See Notice at 4126.
\83\ See id. at 4124-25.
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2. Exclusions From Underwriting Compensation for Certain Securities
Acquisitions
Currently, Rule 5110 provides for certain exclusions from
underwriting compensation.\84\ The proposed rule change would expand
the categories of exclusions from underwriting compensation for certain
types of investments by participating members in anticipation of, or
concurrently with, a public offering. FINRA's proposed amendments
cover: (1) debt-for-equity exchanges; (2) capital investments for DPPs
and unlisted REITs; and (3) non-convertible preferred securities.
Commenters supported the proposed rule change.\85\ Each proposed
amendment is discussed below.
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\84\ See generally Rule 5110.
\85\ See supra note 80 and accompanying text.
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a. Debt-for-Equity Exchanges
First, as noted above, Rule 5110 currently does not provide an
exclusion from underwriting compensation for securities acquired by
affiliates of underwriters in connection with debt-for-equity exchange
transactions.\86\ The proposed rule change would add new Rule
5110.01(b)(23) to provide an exclusion from underwriting compensation
for securities acquired by affiliated members of underwriters in
connection with debt-for-equity exchange transactions if certain
conditions are met. FINRA stated that these conditions codify those
factors and factual circumstances it has consistently considered when
granting exemptions to the current rule.\87\ FINRA also stated that the
exclusion from underwriting compensation has worked well for both
issuers and investors under the current exemptive relief process.\88\
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\86\ See supra note 44 and accompanying text.
\87\ See Notice at 4125 n.27 (The proposed rule ``codifies the
factors and factual circumstances FINRA has consistently considered
when granting these exemptions.''). However, members can still
request exemptive relief if they do not meet the conditions in the
proposed rule change. See id. at 4123 n.15 (``Member firms intending
to participate in transactions that do not align with the terms of
this Supplementary Material may, as with any transaction subject to
Rule 5110, request exemptive relief pursuant to FINRA Rule 5110(i)
and the Rule 9600 Series.'').
\88\ See id. at 4125.
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The proposed rule change is reasonably designed to codify an
exclusion from underwriting compensation that FINRA believes has worked
well for both issuers and investors based on FINRA's experience with
the current exemptive relief process.\89\ By codifying the factors and
factual circumstances that FINRA believes are appropriate, and has
used, to grant exemptions to securities acquisitions in connection with
debt-for-equity exchange transactions from being deemed underwriting
compensation, the proposed rule change will promote clarity and
efficiency by eliminating the need for the exemptive request process
when certain conditions are met. For these reasons, the proposed rule
change is reasonably designed to prevent fraudulent and manipulative
acts and practices, to promote just and
[[Page 47908]]
equitable principles of trade, and, in general, to protect investors
and the public interest.
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\89\ See id.
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b. Capital Investments for DPPs and REITs
Second, as noted above, Rule 5110 currently does not provide an
exclusion from underwriting compensation for securities acquisitions in
connection with a capital investment concurrently with or in
anticipation of a public offering.\90\ The proposed rule change would
add new Rule 5110.01(b)(24) to provide an exclusion from underwriting
compensation for securities acquired before or during the distribution
of an offering by a participating member in the issuer or an affiliated
entity in connection with DPPs and unlisted REITs as defined in Rule
2231(d), if certain conditions are met.\91\
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\90\ See supra note 54 and accompanying text.
\91\ See proposed Rule 5110.01(b)(24).
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Similar to the proposed rule change for debt-for-equity exchanges,
FINRA stated that proposed Rule 5110.01(b)(24) would codify the factors
and factual circumstances FINRA has consistently considered to grant
exemptions related to DPPs and unlisted REITs.\92\ FINRA also stated
that the exclusion from underwriting compensation has worked well for
both issuers and investors under the current exemptive relief
process.\93\
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\92\ See Notice at 4125 n.27.
\93\ See id. at 4125.
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The proposed rule change is reasonably designed to codify an
exclusion from underwriting compensation that FINRA believes has worked
well for both issuers and investors based on FINRA's experience with
the current exemptive relief process.\94\ By codifying the factors and
factual circumstances that FINRA believes are appropriate, and has
used, to grant exemptions regarding DPPs and unlisted REITs, the
proposed rule change will promote clarity and efficiency by making
clear the factors and factual circumstances FINRA considers appropriate
for excluding underwriting compensation for certain securities
associated with DPPs and unlisted REITs, and by doing so eliminate the
need for the exemptive request process in certain circumstances. For
these reasons, the proposed rule change is reasonably designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.
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\94\ See id.
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c. Non-Convertible Preferred Securities
Third, as noted above, Rule 5110 currently provides that non-
convertible or non-exchangeable debt securities and derivative
instruments--but not non-convertible preferred securities--acquired by
any participating member in a transaction related to a public offering
at a fair price are considered underwriting compensation but have no
compensation value.\95\ The proposed rule change would treat non-
convertible preferred securities in the same manner as non-convertible
or non-exchangeable debt securities and derivative instruments so long
as they are acquired at a fair price. This outcome reflects FINRA's
current treatment of these securities as equivalent for purposes of
Rule 5110.\96\
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\95\ See supra notes 61-62 and accompanying text.
\96\ See Notice at 4123-24.
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The proposed parallel treatment of non-convertible preferred
securities with non-convertible or non-exchangeable debt securities and
derivative instruments is reasonable in light of their shared
characteristics and FINRA's current treatment of them as equivalent for
purposes of Rule 5110. In particular, as discussed above, both non-
convertible debt and non-convertible preferred securities cannot be
converted to common stock and provide predetermined payments to
holders, resulting in fixed sources of income.\97\ In addition, FINRA
will maintain the ability to oversee underwriting terms and
arrangements because participating members would continue to be
required to file documents and information in connection with certain
public offerings.\98\ For these reasons, the proposed rule change is
reasonably designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.
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\97\ See supra note 63 and accompanying text.
\98\ See supra note 42 and accompanying text; see also Notice at
4122.
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3. Additional Modifications to Rule 5110
As noted above, the proposed rule change would make other
modifications to Rule 5110 that FINRA believes would improve the
operation of the rule. Specifically, the proposed rule change will add
tail fees to the types of termination fees that are allowed as
underwriting compensation, if specific requirements are met.\99\
Commenters supported the proposed rule change.\100\
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\99\ See supra note 66-67 and accompanying text.
\100\ See supra note 80 and accompanying text.
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The proposed rule change to add tail fees to the types of
termination fees that are permitted as underwriting compensation is
reasonably designed to provide a limited expansion of the types of
termination fees allowed as underwriting compensation under Rule 5110.
Specifically, like other termination fees, tail fees provide
compensation in the event of subsequent financing from investors
introduced by a member following the termination of an agreement. In
addition, tail fees, like other termination fees, will be prohibited
unless certain conditions are met, such as the elimination of any
obligation to pay tail fees if an issuer exercises its right to
terminate for cause; that the amount of any tail fee must be reasonable
in relation to the underwriting services contemplated in the agreement;
and that the issuer shall not be responsible for paying the tail fee
unless the transaction is consummated within two years of the date the
engagement is terminated by the issuer.\101\ For these reasons, the
proposed rule change is reasonably designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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\101\ See proposed Rule 5110(g)(5).
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B. Rule 5123 Proposed Amendments
As noted above, the proposed rule change would expand the filing
exemption under Rule 5123 for sales to accredited investors to include
offerings sold to investors meeting two additional accredited investor
categories, consistent with the Commission's addition of those
categories to the accredited investor definition.\102\ Specifically,
the proposed rule change would amend Rule 5123(b)(1) to include two
types of categories of ``accredited investor'': certain entities not
formed for the specific purpose of acquiring the securities offered,
owning investments in excess of $5,000,000; \103\ and certain ``family
offices'' with assets under management in excess of $5,000,000.\104\
Commenters supported the proposed rule change.\105\
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\102\ See also supra note 73 and accompanying text.
\103\ See supra note 71 and accompanying text.
\104\ See supra note 72 and accompanying text.
\105\ See supra note 80 and accompanying text.
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The proposed rule change to add these two categories of investors
to the filing exemption under Rule 5123 is reasonably designed to
expand the exemption--consistent with the SEC's amended ``accredited
investor'' definition--without materially impacting investor
protection.
[[Page 47909]]
Specifically, the proposed rule change would include two categories of
investors that FINRA believes possess a level of sophistication and
expertise similar to the institutional accredited investors currently
exempted under Rule 5123, and who FINRA has determined generally do not
need the additional protections and oversight provided through the
filing requirements.\106\ For these reasons, the proposed rule change
is reasonably designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.
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\106\ See supra note 75 and accompanying text.
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IV. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change is consistent with Section 15A(b)(6) of the
Exchange Act, which requires, among other things, that FINRA rules be
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, and, in general,
protect investors and the public interest.\107\
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\107\ 15 U.S.C. 78o-3(b)(6).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\108\ that the proposed rule change (SR-FINRA-2026-022)
be, and hereby is, approved.
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\108\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\109\
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\109\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-15242 Filed 7-28-26; 8:45 am]
BILLING CODE 8011-01-P