FINRA Rule 5110, known as the Corporate Financing Rule, governs how broker-dealers get paid for helping companies sell securities to the public. It requires every public offering that involves a FINRA member firm to be filed for review unless a specific exemption applies, and it holds underwriting compensation to a “fair and reasonable” standard before the deal can proceed.1Financial Industry Regulatory Authority. 5110. Corporate Financing Rule – Underwriting Terms and Arrangements The rule also restricts several deal terms that historically let underwriters keep leverage over issuers long after a deal closed, and it locks up any securities paid as compensation for 180 days.
Which Offerings Must Be Filed
The filing net is wide. Initial public offerings, follow-on equity sales, debt offerings with equity-like features, and Regulation A+ offerings all trigger a filing when a FINRA member firm participates. If a securities offering is registered with the SEC and a broker-dealer is involved, a Rule 5110 review is almost always required.2Financial Industry Regulatory Authority. Public Offerings
Several categories are exempt from the filing requirement, though the rule’s substantive limits on compensation still apply:
- Experienced issuers filing on Form S-3, F-3, or F-10, provided the company has been a public reporting entity for at least 36 months and has a public float of $150 million or more (or $100 million with annual trading volume of at least 3 million shares).
- Non-convertible debt and preferred securities rated investment grade.
- Banks and corporate issuers with outstanding non-convertible debt of at least four years carrying an investment-grade rating, though an equity IPO by the same issuer still requires filing.
- Exchange-traded pooled investment vehicles listed on a national exchange that can be created or redeemed daily at net asset value.
- Securities issued by churches and other charitable organizations exempt from SEC registration under Section 3(a)(4) of the Securities Act.
The experienced-issuer exemption is where most confusion arises. Filing on Form S-3 is not enough by itself; the public float and reporting history thresholds must also be met, or the offering has to be filed for review.1Financial Industry Regulatory Authority. 5110. Corporate Financing Rule – Underwriting Terms and Arrangements
How the Rule Defines Underwriting Compensation
FINRA takes a broad view of compensation. The tally starts with cash commissions and discounts and then sweeps in anything of value transferred from the issuer or its affiliates to the underwriter or its affiliates during the “review period”: warrants, options, shares, expense reimbursements beyond what the rule permits, and consulting fees all count.1Financial Industry Regulatory Authority. 5110. Corporate Financing Rule – Underwriting Terms and Arrangements
The Review Period
For a firm-commitment offering, the review period runs from 180 days before the required filing date through 60 days after the offering’s effective date. Best-efforts offerings use the same 180-day look-back but extend 60 days past the final closing. Anything of value acquired by participating members inside that window is presumed to be underwriting compensation.
Valuing Non-Cash Compensation
When underwriters take securities in place of, or on top of, cash, the rule prescribes specific valuation formulas. Non-convertible securities are valued by the difference between the market price (or offering price, if no market exists) and the underwriter’s cost, multiplied by the number of securities received. Warrants and options use a separate formula built around the offering price, exercise price, and a rule-specific multiplier. These are not standard financial models like Black-Scholes; they are formulas written into Rule 5110 itself.
An underwriter can voluntarily reduce the value attributed to securities received as compensation by agreeing to extend the lock-up. Each additional 180-day lock-up beyond the mandatory one cuts the attributed value by 10%.
What Doesn’t Count
Certain issuer expenses are excluded from the compensation total even when the underwriter handles the payments: printing costs, SEC registration fees, state blue sky fees, FINRA filing fees, fees paid to independent financial advisers, and accountant’s fees. The rule generally excludes expenses customarily borne by the issuer, whether or not they flow through the underwriter.
The Fairness Standard
Rule 5110 does not set a single percentage cap on total underwriting compensation. Instead, it applies a “fair and reasonable” standard that weighs the size of the offering, whether it is firm commitment or best efforts, whether it is an IPO or a follow-on, and the type of securities being sold. Higher-risk offerings (smaller, best-efforts, IPOs) generally support higher compensation percentages; larger, lower-risk deals support less.
Filing Mechanics, Fees, and Timing
Every FINRA member firm participating in a non-exempt public offering must file through the Public Offering System, reached through the FINRA Gateway portal. The filing is due no later than three business days after the registration statement or offering circular is filed with the SEC.3Financial Industry Regulatory Authority. Filing Guidance – Public Offering Review
The filing fee is $500 plus 0.015% of the proposed maximum aggregate offering price, capped at $225,500 per offering. Amendments that increase the offering size trigger an additional 0.015% fee on the net increase, but total fees on one registration statement still cannot exceed $225,500. Well-Known Seasoned Issuers filing on automatically effective Form S-3 or F-3 registration statements under Rule 415 pay a flat $225,500.4Financial Industry Regulatory Authority. Fees for Filing Documents Pursuant to the Securities Offerings Rules
Initial review typically takes 10 to 25 business days, depending on complexity and FINRA’s workload. Staff respond with one of several letter types. A “Defer” letter identifies concerns or requests more information; filers then submit amendments or explanations, and the back-and-forth can add weeks. The goal is a “No Objections” letter, which clears the deal. No sales of securities subject to the rule may begin, and no member firm may participate in the distribution, until that letter has been issued.2Financial Industry Regulatory Authority. Public Offerings
The 180-Day Lock-Up on Compensation Securities
Any securities received as underwriting compensation cannot be sold, transferred, pledged, or hedged for 180 days starting on the date sales of the offering commence. The restriction stops underwriters from immediately selling shares received as part of their fee and adding downward pressure at a critical point for the issuer.
The 180-day lock-up has several carve-outs:
- De minimis holdings: total underwriter holdings of the issuer’s securities that amount to no more than 1% of the securities being offered.
- Securities of issuers that meet the registration requirements for Form S-3, F-3, or F-10.
- Transfers by operation of law, such as court-ordered transfers or those required by a corporate reorganization.
- Securities held pro rata by all equity owners of an investment fund, provided no participating member manages the fund and participating members collectively own no more than 10% of the fund’s equity.
Even where the lock-up applies, an underwriter may transfer locked-up securities to another participating member or that member’s officers and registered persons, as long as the securities stay locked up for the balance of the 180 days. Exercising or converting securities is also allowed if the resulting securities remain locked up.
Deal Terms the Rule Prohibits Outright
Beyond the general fairness standard, Rule 5110 flatly bans certain terms. These are not open to negotiation or case-by-case review:
- Tail fees lasting more than two years. If the issuer terminates the engagement, the underwriter can claim a fee on a later deal only if that deal closes within two years of the termination date.
- Rights of first refusal lasting more than three years, measured from the commencement of sales of the current offering or the engagement’s termination date.
- Non-accountable expense allowances above 3% of offering proceeds. Accountable allowances for actual out-of-pocket costs are treated separately but cannot cover general overhead, salaries, or routine business supplies.
- Any form of underwriting compensation for which a value cannot be determined.
When a Conflict of Interest Adds Rule 5121
Rule 5110 sits alongside FINRA Rule 5121, which adds requirements when the underwriter has a conflict of interest with the issuer. A conflict exists when the underwriter is issuing its own securities, controls or is controlled by the issuer, or stands to receive at least 5% of the net offering proceeds through loan repayment or direct payment. A conflict also arises if the offering will result in the underwriter becoming an affiliate of the issuer, the underwriter becoming publicly owned, or the issuer becoming a broker-dealer.5FINRA.org. 5121. Public Offerings of Securities With Conflicts of Interest
“Control” here means owning 10% or more of an entity’s outstanding common equity, preferred equity, or partnership profits, or having the power to direct the entity’s management. That is a lower threshold than many people assume.
A conflicted offering generally must include a Qualified Independent Underwriter, a separate member firm with no conflict of its own that assumes underwriter liability under Section 11 of the Securities Act, participates in preparing the registration statement and prospectus, and performs its own due diligence. To qualify, the firm must have served as an underwriter in at least three comparable public offerings during the prior three years. Conflicted offerings also require prominent disclosure of the conflict in the summary and plan-of-distribution sections of the prospectus.
Consequences of Non-Compliance
Failing to file, filing late, or submitting false or misleading information exposes member firms and associated persons to FINRA disciplinary action, including fines, suspensions, or industry bars. The practical consequence is just as serious: without a No Objections letter, an offering cannot proceed with FINRA member participation, and since virtually all underwriters are FINRA members, that effectively blocks most public distributions in the United States.2Financial Industry Regulatory Authority. Public Offerings
Rule 5110 applies to member firms rather than to issuers directly, but issuers feel it anyway. An offering with terms FINRA deems unfair will be held up until they are renegotiated, and on a tight capital-raising timeline that delay can cost more than any fine.