1. Do Rules 5110, 5121 and 2310 (the “Corporate Financing Rules”) apply to Regulation A offerings?
Yes. Rule 5110(a)(2) requires all public offerings, with limited exceptions as provided in Rule 5110(h), to be filed with FINRA. Regulation A offerings are public offerings subject to the Corporate Financing Rules. A member must comply with Rule 5121 (Public Offerings of Securities with Conflicts of Interest) when it is participating in a public offering that has a conflict of interest as defined in Rule 5121(f)(5). A member must comply with Rule 2310 (Direct Participation Offerings) when it is participating in a direct participation program, such as offerings of securities issued by limited liability companies and partnerships (see definition in Rule 2310(a)(4)). For additional guidance, see Regulatory Notices 15-32, 09-49 and 08-35.
2. If a member is acting only as a broker-dealer of record in a Regulation A offering, must the member file the offering with FINRA for review pursuant to Rule 5110?
Yes. A broker-dealer of record in a Regulation A offering performs functions and services that constitute “participating” in the offering pursuant to Rule 5110(j)(16). For example, a member acting as a broker-dealer of record in a Regulation A offering is “participating” in the offering pursuant to Rule 5110(j)(16) because reviewing investor qualifications, including KYC and AML checks, is a service within the definition of participation. The member is required to file the Regulation A offering pursuant to Rule 5110(a)(2). For additional guidance, see Regulatory Notice 15-32.
3. If a member is acting only as a broker-dealer of record in a Regulation A offering and is subsequently replaced by another member, can the newly engaged member rely on the prior member’s No Objections Letter?
No. The engagement of another member to provide broker-dealer of record services is a relevant and material change to the underwriting terms and arrangements. Rule 5110(a)(4)(B)(vi) requires a member to provide a detailed explanation and documents related to a modification of information previously provided to FINRA, regardless of whether a No Objections Letter was issued.
4. Would a member that acts solely as an escrow agent in a Regulation A offering be considered a “participating member” for purposes of Rule 5110?
No. As long as the member is not soliciting, marketing, distributing or otherwise participating in the offering, and the escrow agent fees are not contingent on the success of the offering, it would not be a “participating member” (see Question 5 below). (Please note that only a member that maintains at least $250,000 in net capital is generally allowed to carry customer accounts and receive or hold funds or securities for investors. For additional guidance, see Regulatory Notice 16-08).
5. If the compensation received by a participating member for providing escrow services is contingent on the success of the offering, would such compensation be considered “underwriting compensation” pursuant to Rule 5110(j)(22)?
Yes. Compensation for providing escrow services to the issuer that is contingent on the success of the offering is underwriting compensation.