FINRA Rule 5110: Corporate Financing, Filing, and Compensation

FINRA Rule 5110, the Corporate Financing Rule, limits what a broker-dealer can be paid for helping a company sell securities to the public and requires most of those offerings to be cleared with FINRA before distribution starts. Every FINRA member that acts as an underwriter, placement agent, or distributor has to make sure the full compensation package is fair and reasonable under the rule, and the definition of compensation is far wider than the commission printed on the prospectus cover.¹

Which Offerings and Firms Are Covered

The rule reaches any public offering of securities in which a FINRA member participates in the distribution. That includes initial public offerings, follow-on equity offerings, shelf takedowns, REIT offerings, and direct participation programs. Equity or debt, startup or Fortune 500, the same test applies: if a member firm helps move the securities from the issuer to public investors, the compensation arrangement has to satisfy Rule 5110.¹

Some products sit entirely outside the rule. Open-end mutual funds, certain closed-end funds that make periodic repurchase offers, and variable insurance contracts operate under separate regulatory frameworks and are not subject to Rule 5110 at all.

What Counts as Underwriting Compensation

Rule 5110 bundles everything of value flowing to the participating firm into a single aggregate compensation figure. FINRA’s supplementary materials list fourteen categories, and the list is not exhaustive. The main items include:

Discounts and commissions: the spread between what the underwriter pays and the public offering price.
Expense reimbursements, including road show costs, due diligence expenses, and underwriter’s counsel fees (blue sky filing fees are excluded).
Equity compensation such as common stock, preferred stock, warrants, options, and convertible securities acquired during the review period, valued under formulas the rule prescribes.
Advisory and consulting fees tied to the offering.
Finder’s fees and wholesaling costs paid to parties that helped source the deal or distribute shares.
Rights of first refusal on the issuer’s future offerings, valued at 1% of the offering proceeds unless the parties agree on a different dollar amount to waive the right.
Board compensation paid to a person the underwriter nominates as a board advisor, to the extent it exceeds what other board members receive.
Non-cash benefits such as gifts, training expenses, sales incentives, and business entertainment.¹

The rule also prohibits paying the same underwriting compensation twice for the same services. Any arrangement that effectively double-counts a fee under two different labels violates the rule.

The 180-Day Review Period

Compensation is not measured only from the engagement date. Rule 5110 uses a 180-day look-back window preceding the filing date, and any security of the issuer that a participating member acquired and beneficially owned during that window is pulled into the compensation calculation. Shares picked up six months before the deal was filed count.¹

How FINRA Judges Fairness

There is no single percentage cap that applies to every deal. FINRA weighs total compensation against the offering’s size and risk profile. Smaller offerings and riskier issuers can carry a higher compensation percentage because the underwriter is doing more work and taking more exposure. Large offerings by established issuers with active trading histories typically warrant lower percentages.¹

A firm can reduce the calculated value of equity compensation by voluntarily agreeing to lock-ups longer than the standard requirement. Each additional 180-day lock-up cuts the value attributed to those securities by 10%. An underwriter holding warrants with a high notional value can bring the compensation figure down by agreeing not to sell them for a longer stretch after closing.

Terms That Are Flatly Prohibited

Some arrangements are off-limits regardless of the deal’s size or the issuer’s willingness:

Non-accountable expense allowances above 3% of offering proceeds.
Tail fees on deals that close more than two years after the engagement ends.
Rights of first refusal lasting more than three years from the commencement of sales or the termination of the engagement.
Overallotment (green shoe) options covering more than 15% of the securities offered in a firm commitment offering.
Warrants or convertible securities received as compensation that are exercisable more than five years after the commencement of sales.¹
Compensation paid before sales begin, with narrow exceptions for advances against accountable expenses that will be reimbursed if not incurred, and advisory fees under an existing engagement.²

Lock-Up on Compensation Securities

Securities received as underwriting compensation in a public equity offering are subject to a 180-day lock-up. During that window the underwriter cannot sell, transfer, or pledge them as collateral. Derivative contracts and other transactions that give the economic equivalent of a sale are also barred. The clock starts on the date sales of the public offering actually begin, not on the date the SEC declares the registration statement effective.²

Filing With FINRA

Most public offerings involving a member firm must be filed with FINRA’s Corporate Financing Department for review before distribution can start. The filing has to include the registration statement and its exhibits, the underwriting agreement, early engagement and intent letters, the maximum anticipated offering price, a breakdown of each compensation item’s maximum value, and a description of any issuer securities acquired by participating members during the 180-day look-back.¹

The filing deadline is no later than three business days after any documents are filed with or submitted to the SEC, including confidential submissions. Filings go through FINRA’s Public Offering System, and review typically takes 10 to 25 business days. The firm receives either a “No Objections” opinion or a comment letter asking for changes. No member firm may distribute securities until FINRA has issued the No Objections opinion. If FINRA finds the terms unfair, the managing underwriter has to notify the other participating members and the terms must be modified before the offering proceeds.³

Filing Fees

The filing fee is $500 plus 0.015% of the proposed maximum aggregate offering price, capped at $225,500 total. Well-known seasoned issuers filing automatically effective Form S-3 or F-3 registration statements under SEC Rule 415 pay a flat $225,500. Amendments that raise the maximum aggregate offering price trigger an additional 0.015% on the net increase, but the cumulative total for a single registration statement still cannot exceed $225,500.⁴

Offerings Exempt From Filing

Certain offerings are exempt from the filing requirement, though the underlying fairness and reasonableness standards still apply. The main exempt categories are:

Experienced issuers on Form S-3 or F-3, meaning at least a 36-month reporting history plus $150 million in public float, or $100 million in public float combined with annual trading volume of at least three million shares.
Non-convertible debt and non-convertible preferred securities carrying an investment-grade rating.
Investment-grade asset-backed securities.
Banks and corporate issuers with outstanding unsecured non-convertible debt or preferred securities rated investment grade, although IPOs of equity by these issuers must still be filed.
Certain exchange offers where the securities are listed on a national exchange or the issuer qualifies as an experienced issuer on Form S-3 or F-3.
Securities issued by organizations exempt from SEC registration under Section 3(a)(4) of the Securities Act.
Exchange-listed pooled investment vehicles such as ETFs that allow daily creation and redemption at net asset value.¹

The exemption only removes the pre-clearance filing. If FINRA later concludes the compensation was unreasonable, the exemption is no defense.

When Rule 5121 Pulls a Deal Back In

If a participating member has a conflict of interest — for example, when a significant portion of the offering proceeds will go to the firm itself or an affiliate — FINRA Rule 5121 layers on additional requirements. A conflicted member generally cannot participate unless certain conditions are met, such as a bona fide public market for the securities or an investment-grade rating. Otherwise, the firm must appoint a qualified independent underwriter to help prepare the registration statement and prospectus and to exercise standard due diligence. The prospectus must prominently disclose the conflict, name the qualified independent underwriter, and describe its role.⁵

Any offering that uses a qualified independent underwriter under Rule 5121 becomes subject to Rule 5110’s full filing and review requirements, even if it would otherwise qualify for an exemption.

Consequences of a Violation

A violation of Rule 5110 is also treated as a violation of FINRA Rule 2010, which requires member firms to observe high standards of commercial honor and just and equitable principles of trade. Providing misleading information to FINRA during the filing process independently violates Rule 2010. Under FINRA Rule 8310, sanctions can include censures, substantial fines, and undertakings requiring the firm to overhaul its supervisory systems, with single enforcement actions producing six-figure penalties.

1
FINRA.org. FINRA Rule 5110 – Corporate Financing Rule Underwriting Terms and Arrangements
2
FINRA.org. Regulatory Notice 20-10
3
FINRA. Public Offerings
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FINRA.org. Section 7 – Fees for Filing Documents Pursuant to the Securities Offerings Rules
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FINRA.org. Public Offerings of Securities With Conflicts of Interest