Laurie Green is a Partner in our Ft Lauderdale office, Danielle Price a Partner in our Miami office & Michael Taylor a Partner in our Portland office

On February 2, 2013, FINRA released answers to frequently asked questions (FAQs) regarding rules for making public offerings. The topics discussed include corporate financing, conflicts of interest, DPPs and REITs, as well as the filing process. The discussion below focuses on underwriting compensation, which was a main topic in the FAQs.

  • If underwriters receive valuable items during the 180-day review period prior to a company making a public offering, the valuable items are considered underwriter compensation. FINRA Rule 5110(d)(5) lists five exceptions to the items being considered underwriter compensation. FINRA Rule 5110(g) requires unregistered securities received by an underwriter during the review period to undergo a 180-day lock-up period. FINRA Rule 9600 provides exemptions from the lock-up period, using the following criteria in determining whether to grant the exemption:
    (1) whether the transaction was to reorganize the issuer's capitalization; (2) whether they were registered securities in the public offering; and (3) whether the goal of the transaction was to benefit the issuer rather than a firm member.
  • Rights of first refusal are considered valuable items under Rule 5110(c)(3)(ix) because they are approved during the review period. The rights are worth the amount that the issuer agrees to pay the underwriter to not use the rights. If there is no agreement over the amount, the rights of first refusal are automatically worth "1% of the offering proceeds."
  • A list of valuable items that must be factored into underwriting compensation is available under FINRA Rule 5110(c)(3). "Fees and expenses of underwriter's counsel" are included in this list. In the event that they are paid by the issuer, "the offering proceeds table on the cover page of the prospectus must include a cross-reference to the Underwriting or Plan of Distribution section." Rather than list the fees and expenses separately, they can be combined with all other fees and expenses paid by the issuer.
  • The terms of securities given as underwriter compensation in the form of an option, warrant, or convertible security do not have to be disclosed in the prospectus pursuant to FINRA Rule 5110. Instead, FINRA will review the agreement to make sure the terms comply with FINRA Rule 5110(f)(2)(H).

The FAQs and FINRA's answers can be found at: http://www.finra.org/Industry/Compliance/RegulatoryFilings/PublicOfferingSystem/FAQ/

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