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[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.

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 nonconvertible 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

15 U.S.C. 78s(b)(1).

17 CFR 240.19b-4.

See Exchange Act Release No. 34-104695 (Jan. 27, 2026), 91 FR 4121 (Jan. 30, 2026) (File No. SRFINRA-2026-002) (“Notice”).

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 addition of those categories to the accredited investor definition.

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.

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

See id.

The comment letters are available at https://www.sec.gov/rules-regulations/public-comments/sr-finra-2026002.

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-Extension1.pdf.

See Exchange Act Release No. 34-105296 (Apr. 23, 2026), 91 FR 22902 (Apr. 28, 2026) (File No. SRFINRA-2026-002).

See Notice at 4122.

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

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

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 closedend funds. See Notice at 4122 n.3.

See Rule 5110(c).

See Rule 5110.01(b).

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).

See Notice at 4122.

See Rule 5123.

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

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 nonconvertible 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

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

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)).

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.

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.

1. Rule 5110 Proposed Amendments

a. Valuation Method for Securities Acquisitions That Are

Considered Underwriting Compensation

FINRA stated that when participating members22 acquire securities that are deemed

underwriting compensation, 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

See Notice at 4125.

See id.

See id. at 4124.

See id. at 4125.

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).

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).

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

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

See Notice at 4122-23.

See id. at 4123; see also supra note 23.

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”).

See Notice at 4126.

See id. at 4123.

See id. at 4124-25.

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

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

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

See generally Rule 5110.

See proposed Rule 5110.01(b)(23).

See Rule 2310(a)(4); see also proposed Rule 5110.01(b)(24).

See Rule 2231(d)(4); see also proposed Rule 5110.01(b)(24).

See proposed Rule 5110(a)(4), 5110(c)(5), 5110(e), and 5110.06.

See Notice at 4124.

See id.

See id. at 4126.

See id. at 4124 n.26, 4125.

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 nonconvertible 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

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

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

See id. at 4126.

See id.

See id. at 4125.

See id.

See Rule 5110.01.

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

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

•

the debt-for-equity exchange is structured to provide economic and tax benefits to the

issuer and not the lender or affiliated member; 50

•

the affiliated member subsequently offered all of the equity securities the lender acquired

in a firm commitment offering following the debt exchange; 51

•

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

See Notice at 4123.

See id.

See id. at 4124 n.26, 4125.

FINRA stated that the proposed rule change is consistent with past exemptions that have been granted for

certain transactions. See id. at 4123.

See proposed Rule 5110.01(23)(A).

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.

See proposed Rule 5110.01(23)(C).

•

the affiliated member negotiated customary compensation for the subsequent equity

offering.53

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:

•

the acquisition of securities is disclosed in the prospectus;56

•

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

•

the offering for which the participating member is engaged is an offering subject the

requirements of Rule 2310 (Direct Participation Programs);58 and

See proposed Rule 5110.01(23)(D).

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.

See Notice at 4124 n.26, 4125.

See proposed Rule 5110.01(24)(A).

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.

See proposed Rule 5110.01(24)(C).

•

the securities acquired are restricted for a period of 180 days following the

commencement of sales. 59

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 price60 are considered underwriting compensation but have no

compensation value.61 However, at present, Rule 5110 does not offer parallel treatment of nonconvertible 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

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

See proposed Rule 5110.01(24)(D).

See Rule 5110.06(b).

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.

See id.

See Notice at 4123-24; see also supra note 60.

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

Second, the proposed rule change would also amend Rule 5110 to make non-substantive,

technical changes. 69

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

See Rule 5110(g)(5)(B).

See Notice at 4124.

See id.

See id. at 4124 n.19; see also proposed Rule 5110(g)(5)(B).

See Notice at 4124.

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).

amendments to the definition of “accredited investor” under Rule 501. 70 These changes included

adding to the definition of accredited investor:

•

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

•

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

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

FINRA stated that adding the two categories discussed to the existing exemption would

establish consistency 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

See SEC Accredited Investor Definition Release, supra note 16.

See 17 CFR 230.501(a)(9).

See 17 CFR 230.501(a)(12).

See Notice at 4124.

See id.

qualified purchasers, currently covered in another exemption from Rule 5123’s filing

requirements.76

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

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

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).

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).

15 U.S.C. 78o-3(b)(6).

on a U.S. registered national securities exchange or a “designated offshore securities market” on

the date of acquisition.79

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.

See Notice at 4122-23.

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).

See supra note 17 and accompanying text.

See Notice at 4126.

See id. at 4124-25.

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.

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

See generally Rule 5110.

See supra note 80 and accompanying text.

See supra note 44 and accompanying text.

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.”).

FINRA also stated that the exclusion from underwriting compensation has worked well for both

issuers and investors under the current exemptive relief process. 88

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 equitable principles of trade,

and, in general, to protect investors and the public interest.

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

See id. at 4125.

See id.

See supra note 54 and accompanying text.

See proposed Rule 5110.01(b)(24).

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

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.

c. Non-Convertible Preferred Securities

Third, as noted above, Rule 5110 currently provides that non-convertible or nonexchangeable 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

See Notice at 4125 n.27.

See id. at 4125.

See id.

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

The proposed parallel treatment of non-convertible preferred securities with nonconvertible 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.

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

See supra notes 61-62 and accompanying text.

See Notice at 4123-24.

See supra note 63 and accompanying text.

See supra note 42 and accompanying text; see also Notice at 4122.

compensation, if specific requirements are met.99 Commenters supported the proposed rule

change.100

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.

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

See supra note 66-67 and accompanying text.

100

See supra note 80 and accompanying text.

101

See proposed Rule 5110(g)(5).

102

See also supra note 73 and accompanying text.

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

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.

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.

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

103

See supra note 71 and accompanying text.

104

See supra note 72 and accompanying text.

105

See supra note 80 and accompanying text.

106

See supra note 75 and accompanying text.

107

15 U.S.C. 78o-3(b)(6).

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.

For the Commission, by the Division of Trading and Markets, pursuant to delegated

authority.109

Sherry R. Haywood,

Assistant Secretary.

108

15 U.S.C. 78s(b)(2).

109

17 CFR 200.30-3(a)(12).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.