Public Offering Review Frequently Asked Questions (FAQ)


Corporate Financing Rule—Lock-up Requirements and Exemptions

  1. Under what circumstances has FINRA provided an exemption from the lock-up requirements in Rule 5110(g)(1) for unregistered securities that were acquired during the 180-day review period, but excepted from underwriting compensation pursuant to the Rule 5110(d)(5) exceptions?
  2. Where can I find additional information regarding how to meet the requirements for the seasoned issuer exemption in Rule 5110(b)(7)(C)(i)?

 

Corporate Financing Rule—Underwriting Compensation

  1. A member entered into a financial advisory agreement with the issuer one year before the issuer filed a public offering with FINRA. The advisory agreement was amended two months before the filing date to grant the member a right of first refusal (ROFR) to participate in the offering. Is the ROFR an item of value that will be counted as compensation in the offering?

 

Corporate Financing Rule—Disclosure Requirements

  1. Are underwriter's counsel fees and expenses paid or reimbursed by the issuer required to be disclosed in the Underwriting or Plan of Distribution section of the prospectus?
  2. When an underwriter or related person receives compensation consisting of an option, warrant or convertible security, do FINRA rules require disclosure in the prospectus of the terms of the option, warrant or convertible security?

 

Conflicts of Interest

  1. Has FINRA provided an exemption from the filing requirements of Rule 5110 and the provisions of Rule 5121 for public offerings of an issuer that is a government sponsored enterprise (GSE) when a conflict of interest exists because an affiliate of the underwriter owns more than 10 percent of the GSE?
  2. A member intends to be the lead manager of a public offering of its own securities and will be required to hire a Qualified Independent Underwriter (QIU) pursuant to Rule 5121. What information about the proposed QIU must the member provide?

 

DPPs and REITs

  1. Has FINRA provided an exemption from the provision that prohibits sales loads and commissions charged on securities purchased through a dividend reinvestment program (DRIP), for unlisted Real Estate Investment Trusts (REITs) that calculate their net asset value on a daily basis (Daily NAV REITs)?
  2. What types of closed-end funds would be considered a direct participation program (DPP) subject to Rule 2310?
  3. An unlisted REIT wants to host a training and education (T&E) meeting with an affiliated unlisted REIT at or near a representative asset of the affiliated REIT. Has FINRA provided an exemption for such a meeting?

 

Filing Process

  1. When is the filing fee due for filings eligible for Same Day Clearance (SDC)?
  2. How are "carried forward" securities entered in the Public Offering System?
  3. If an amendment to the registration statement does not have a registration fee chart, what should be entered as the Proposed Maximum Aggregate Offering Price (PMAOP) and securities amount in the Public Offering Filing System?
  4. An offering initially submitted as a confidential filing with the SEC and FINRA is subsequently publicly filed with the SEC. The confidential filing documents do not have accession numbers, but the publicly filed SEC registration statement does. How should the confidential filing be updated in the Public Offering System?

 

 

Corporate Financing Rule-Lock-up Requirements and Exemptions

 

1. Under what circumstances has FINRA provided an exemption from the lock-up requirements in Rule 5110(g)(1) for unregistered securities that were acquired during the 180-day review period, but excepted from underwriting compensation pursuant to the Rule 5110(d)(5) exceptions?
All items of value received by underwriters and related persons during the 180-day review period preceding the filing of a public offering are deemed underwriting compensation unless they meet one of five exceptions provided in FINRA Rule 5110(d)(5). Unregistered securities that are excepted are subject to a 180-day lock-up under Rule 5110(g). FINRA has provided exemptions from the lock-up requirements pursuant to the Rule 9600 Series for securities acquired during the review period as a result of an exercise, conversion, stock split or a pro rata rights offering of securities acquired before the review period. Some of the facts and circumstances that FINRA staff has considered when determining whether to grant an exemption include whether:
  • 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 180-day review period were designed to benefit the issuer and were not proposed by the member firm or a shareholder affiliated with the firm.
2. Where can I find additional information regarding how to meet the requirements for the seasoned issuer exemption in Rule 5110(b)(7)(C)(i)?
The seasoned issuer exemption in Rule 5110(b)(7)(C)(i) is based upon the standards for filing with the SEC on registration Forms S-3 and F-3 that existed before October 21, 1992. To meet those standards an issuer must have a three-year reporting history under the Securities Exchange Act of 1934 and at least $150 million aggregate market value of voting stock held by non-affiliates or, alternatively, $100 million aggregate market value of voting stock held by non-affiliates and an annual trading volume of at least three million shares. Additional information regarding the standards and calculation methodologies was published in Notice to Members 93-88, which is available on-line in the FINRA Manual.

Corporate Financing Rule-Underwriting Compensation

 

1. A member entered into a financial advisory agreement with the issuer one year before the issuer filed a public offering with FINRA. The advisory agreement was amended two months before the filing date to grant the member a right of first refusal (ROFR) to participate in the offering. Is the ROFR an item of value that will be counted as compensation in the offering?
Yes. Rule 5110(d)(1) provides that all items of value received by an underwriter during the period commencing 180 days immediately preceding the required filing date will be considered to be underwriting compensation, unless the Rule 5110(d)(5) exceptions apply. Rule 5110(c)(3)(ix) provides that a ROFR is an item of value that is worth the dollar amount that the issuer has contractually agreed to pay the underwriter to waive or terminate the ROFR. If the underwriter and issuer have not agreed upon a dollar amount, the ROFR must be valued at 1 percent of the offering proceeds. Although the original agreement was entered into prior to the review period, the ROFR was granted during the review period and its value must be included in the underwriting compensation calculations.

Corporate Financing Rule-Disclosure Requirements

 

1. Are underwriter's counsel fees and expenses paid or reimbursed by the issuer required to be disclosed in the Underwriting or Plan of Distribution section of the prospectus?
Rule 5110(c)(3) lists items of value that when received in connection with or related to the distribution of a public offering must be included as underwriting compensation. Fees and expenses of underwriter's counsel, except "blue sky" fees, are included in the list. Rule 5110(c)(2)(C) requires underwriting compensation to be disclosed in the Underwriting or Plan of Distribution section of the prospectus.

When underwriting compensation includes counsel fees and expenses paid or reimbursed by the issuer, the offering proceeds table on the cover page of the prospectus must include a cross-reference to the Underwriting or Plan of Distribution section. However, underwriter's counsel fees need not be separately itemized. Rather, underwriter's counsel fees may be aggregated with other fees and expenses that are reimbursed by the issuer and disclosed in the prospectus.
2. When an underwriter or related person receives compensation consisting of an option, warrant or convertible security, do FINRA rules require disclosure in the prospectus of the terms of the option, warrant or convertible security?
No. Rule 5110(f)(2)(H) restricts the terms under which an option, warrant or convertible security may be granted as underwriting compensation. FINRA will review the warrant agreement or similar document to determine whether the terms would violate Rule 5110(f)(2)(H). Rule 5110 does not require prospectus disclosure of the terms of the securities.

Conflicts of Interest

 

1. Has FINRA provided an exemption from the filing requirements of Rule 5110 and the provisions of Rule 5121 for public offerings of an issuer that is a government sponsored enterprise (GSE) when a conflict of interest exists because an affiliate of the underwriter owns more than 10 percent of the GSE?
Yes. FINRA has granted a limited exemption from compliance with the filing requirements of Rule 5110 and the provisions of Rule 5121 for the public offerings of a GSE. In granting the exemption, FINRA noted that the GSE is regulated, examined and supervised by the Farm Credit Administration and periodically audited by the U.S. Government Accountability Office.
2. A member intends to be the lead manager of a public offering of its own securities and will be required to hire a Qualified Independent Underwriter (QIU) pursuant to Rule 5121. What information about the proposed QIU must the member provide?
FINRA had a program by which a firm that wanted to act as a QIU filed information annually to demonstrate it met the standards under Rule 5121. We discontinued that program. Rule 5121(f)(12) describes the criteria that a firm must meet in order to qualify as a QIU. A firm making a filing that requires a QIU now must make representations in the Public Offering System that the proposed QIU meets the rule's qualification requirements.

DPPs and REITs

 

1. Has FINRA provided an exemption from the provision that prohibits sales loads and commissions charged on securities purchased through a dividend reinvestment program (DRIP), for unlisted Real Estate Investment Trusts (REITs) that calculate their net asset value on a daily basis (Daily NAV REITs)?
Yes. Rule 2310 prohibits an unlisted REIT from charging a sales load or commission on securities that are purchased through the reinvestment of dividends. Unlike more traditional REITs that charge front-end organization and offering expenses, Daily NAV REITs finance most of their distribution through distribution asset-based charges that are calculated based on the issuer's NAV or the per share NAV. This compensation is calculated taking into account all portfolio assets and liabilities, including funds acquired through purchases in the DRIP. Because DRIP shares are of the same class as the primary shares and the funds from the sale of both are aggregated in the portfolio, the rule would effectively prohibit asset-based fees charged against the aggregate portfolio.

When FINRA amended the rule to prohibit sales loads or commissions on reinvested dividends, FINRA explained that dividends in unlisted REITs often include a return of principal early in the offering period, and allowing a sales load or commissions charged on reinvested dividends would amount to a double charge to the investor. By charging asset-based fees, Daily NAV REITs will not impose a double charge on reinvested dividends.

In granting the exemption, FINRA noted that asset-based fees in Daily NAV REITs are similar to fees regulated under the Investment Company Rule (Rule 2830) in which front-end sales loads and deferred compensation are prohibited on shares sold through a DRIP, but asset-based Rule 12b-1 fees may be charged based on an investment company's NAV. FINRA also considered the logistical burden for firms and programs to create segregated accounts for DRIP shares and the potential negative tax implications for investors.
2. What types of closed-end funds would be considered a direct participation program (DPP) subject to Rule 2310?
Rule 2310 defines a DPP as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The determination of whether a closed-end fund is a DPP will therefore depend upon whether it receives flow-through tax treatment under the Internal Revenue Code, not on its legal structure. For example, a business development company may be structured as a closed-end fund with flow-through tax treatment and would be a DPP subject to the requirements of Rule 2310.
3. An unlisted REIT wants to host a training and education (T&E) meeting with an affiliated unlisted REIT at or near a representative asset of the affiliated REIT. Has FINRA provided an exemption for such a meeting?
Yes. The non-cash compensation provisions of FINRA Rule 2310 require that in order for firms to receive payments or reimbursements in connection with T&E meetings, the event must be held at an appropriate location, which includes a location near a significant or representative asset of the unlisted REIT. (FINRA stated in Regulatory Notice 08-39 that a bona fide T&E meeting can include inspections of real estate, oil and gas production facilities, or other types of assets that the program will hold and manage.) FINRA has granted a limited exemption from the non-cash provision for T&E locations when the REIT and the affiliated REIT:
  • split the costs of the meeting;
  • were managed by the same sponsor;
  • had selling agreements with the same broker-dealers; and
  • otherwise complied with the non-cash compensation requirements in the Rule.
Any payments and reimbursements to broker-dealers in connection with the T&E meeting would still be included in the 10 percent compensation cap under Rule 2310.

Filing Process

 

1. When is the filing fee due for filings eligible for Same Day Clearance (SDC)?
The filing fee should be sent immediately after the SDC filing is made with FINRA. A FINRA file ID is provided at the time the SDC filing is initially made and this file ID should be used when submitting the fee.
2. How are "carried forward" securities entered in the Public Offering System?
The SEC permits previously registered but unsold securities to be carried forward on a new registration statement without payment of additional registration fees. FINRA also waives filing fees on carried forward securities if they are entered in the Details screen of the Public Offering Filing System as carried forward amounts. In Details, select the "Registration pursuant to SEC Rule(s) 429; 457(p); 415(a)(5) or (6)" option in the "SEC/Other Reviewing Authority Information" section, and then enter the required information regarding the carried forward amounts.
3. If an amendment to the registration statement does not have a registration fee chart, what should be entered as the Proposed Maximum Aggregate Offering Price (PMAOP) and securities amount in the Public Offering Filing System?
An amendment that does not change the amount or value of the securities being registered often does not have a chart showing the applicable SEC registration fees. FINRA's Public Offering System, however, requires the entry of a value for the securities included in the amendment. Filers should enter the most recent PMAOP and the number of securities being offered from the initial registration statement or latest amendment containing the information.
4. An offering initially submitted as a confidential filing with the SEC and FINRA is subsequently publicly filed with the SEC. The confidential filing documents do not have accession numbers, but the publicly filed SEC registration statement does. How should the confidential filing be updated in the Public Offering System?
When a confidential filing is submitted to FINRA, the filing system does not require accession numbers to be entered. When the registration statement is publicly filed with the SEC and filed with FINRA, the filing system will prompt the filer to enter accession numbers for both the registration statement and the confidentially filed documents. Filers can satisfy the prompt for the confidential document by entering a substitute number with the same number of digits. For the first confidential document, please enter 9999999999-99-999999. If you filed more than one document, change the last digit of the number for each document (e.g., 999999999-99-999997). FINRA plans to change the system so that it will no longer prompt a filer for accession numbers for documents that were confidentially filed.