You may be well aware that if you’re an issuer about to raise funds via Regulation A+, and are planning to use any type of broker-dealer service, you’ll need to file your offering statement with the Securities and Exchange Commission (SEC).
But did you know that this isn’t the only filing you’ll have to make? In addition to your offering statement to the SEC, you’ll also have to file specific documents and information with FINRA, as required by Rule 5110.
A little background on Rule 5110
FINRA oversees all broker-dealers (known as FINRA member firms). Rule 5110 enables FINRA to regulate compensation that’s paid to these member firms, as well as their associated persons who participate in public offerings.
Rule 5110, or the Corporate Financing Rule, requires the filing of details of underwriting terms and arrangements, generally to be made no later than one business day following your SEC filing. It pertains only to public offerings.
Keep in mind, however, that Rule 5110 is not limited to situations where a broker-dealer is acting as an underwriter. Whenever a broker-dealer participates – in any capacity – in an offering, you are required to file under Rule 5110. This could include such circumstances as:
• When a broker-dealer helps to prepare offering documents
• When a broker-dealer distributes the offerings on an underwritten, or non-underwritten
• When a broker-dealer furnishes customer and/or broker lists for solicitation
• When a broker-dealer participates in any advisory or consulting capacity to the issuer related to the offering
While Rule 5110 does pertain to Regulation A offerings, it does not apply to private security offerings made under Rule 506 of Regulation D.
What does Rule 5110 entail?
Rule 5110 requires the filing of FINRA review of documents and information connected with offerings of securities, while prohibiting unfair compensation arrangements. The issuer is typically responsible for paying the FINRA filing fee, as well as the broker-dealer’s legal fees.
Generally speaking, Rule 5110 includes all items of value received (or to be received) from any source by the broker-dealer (and related persons in connection with the public offering). This includes:
• Discounts or commission
• Expense reimbursements
• Fees associated with an underwriter, financial consultant and/or advisor
• Finder’s fees
• Any securities received
In addition, Rule 5110 also includes arrangements made for the future receipt of items of value by the broker-dealer.
The specific documents required to be filed include:
1. Registration statement and offering circular
2. Amendments and documents used to offer securities to the public
3. The proposed underwriting agreement
The types of information required to be filed include:
1. Estimate of the maximum public offering price
2. The maximum underwriting discount or commission
3. Any compensation, including reimbursement, of underwriter’s expenses
4. Underwriter’s counsel’s fees
5. Maximum financial consulting and/or advisory fees to the underwriter
6. Maximum finder’s fees
7. Statement of any other type and amount of compensation which may accrue to the member firm and related persons
FINRA’s Corporate Finance department will then review the filing documents and information. They’ll then provide a statement saying they have no objections to the proposed underwriting. Until that occurs, no broker-dealer (or associated persons) can participate in any public offering of securities.
If Corporate Finance finds issues with the underwriting, the applicant can then amend their filings to address FINRA’s concerns. FINRA’s finding that an underwriting is unfair or unreasonable is determined by considering the offering proceeds, the level of risk assumed by the member firm, and the type of securities offered.
What’s the take away?
Whenever you use a broker-dealer for your Regulation A+ offering, remember that a FINRA Rule 5110 filing will also be required, in addition to your SEC Form 1-A filing. We recommend you consult with your securities attorney and other competent professionals to ensure you meet all of the requirements associated with Rule 5110. These are complicated matters. Running the gambit alone is never advisable.