A Review of FINRA’s Corporate Finance Rule
As the strongest U.S. IPO market in decades continues unabated, it seems a good time to talk about underwriter’s compensation. FINRA Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) governs the compensation that may be received by an underwriter in connection with a public offering.
Rule 5110 – The “Corporate Financing Rule”
Rule 5110 regulates underwriting compensation and prohibits unfair arrangements in connection with the public offerings of securities. The Rule prohibits member firms from participating in a public offering of securities if the underwriting terms and conditions, including compensation, are unfair as defined by FINRA. The Rule requires FINRA members to make filings with FINRA disclosing information about offerings they participate in, including the amount of all compensation to be received by the firm or its principals, and affiliations and relationships that could result in the existence of a conflict of interest. As more fully described herein, underwriter’s compensation is subject to lock-up provisions.
Filing Requirements
Emerging Growth Companies Will Start To Grow Up
The first of emerging growth companies (“EGC’s”) will begin losing EGC status as the five-year anniversary of the creation of an EGC has now passed. Those companies that will lose status as a result of the passage of time are almost unilaterally not pleased with the impending change and concurrent increase in regulatory compliance.
Background
Title I of the JOBS Act, initially enacted on April 5, 2012, created a new category of issuer called an “emerging growth company” (“EGC”). An EGC is defined as a company with total annual gross revenues of less than $1,070,000,000 during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011. An EGC loses its EGC status on the earlier of (i) the last day of the fiscal year in which it exceeds $1,070,000,000 in revenues; (ii) the last day of the fiscal year following the fifth year after its IPO (for example, if the issuer has
NASDAQ Issues Report Advocating for The U.S. Public Markets
Before SEC Commissioner Michael Piwowar’s May 16, 2017, speech at the SEC-NYU Dialogue on Securities Market Regulation regarding the U.S. IPO Market (see summary HERE), and SEC Chair Jay Clayton’s July 12, 2017, speech to the Economic Club of New York (see summary HERE), the topic of the U.S. IPO market had already gained significant market attention. Earlier this year, NASDAQ issued a paper titled “The Promise of Market Reform: Reigniting American’s Economic Engine” with its views and position on how to revitalize the U.S. equities and IPO market (the “NASDAQ Paper”). This blog summarizes the NASDAQ Paper.
The NASDAQ Paper begins with a statement by Adena Friedman, President and CEO of NASDAQ. The statement begins with a decidedly positive outlook, noting that “The U.S. equities markets exist to facilitate job creation and wealth creation for millions of people, ultimately driving economic growth for our country.” Ms. Friedman adds that “[E]xceptional market returns in recent years
The SEC Provides Further Guidance On Financial Statement Requirements In Registration Statements
On August 17, 2017, the SEC issued guidance on financial statement requirements for confidential and public registration statement filings by both emerging growth companies (EGC) and non-emerging growth companies. The new Compliance and Disclosure Interpretations (C&DI’s) follow the SEC’s decision to permit all companies to submit draft registration statements, on a confidential basis (see HERE). The newest guidance is in accord with the SEC’s announced policy to take active measures to promote the U.S. IPO market and small business capital-raise initiatives.
Earlier in the summer, the SEC expanded the JOBS Act benefit available to emerging growth companies, to be able to file confidential draft registration statements, to all companies. Confidential draft submissions are now available for all Section 12(b) Exchange Act registration statements, initial public offerings (IPO’s) and for secondary or follow-on offerings made in the first year after a company becomes publicly reporting.
Title I of the JOBS Act initially allowed for confidential draft submissions of registration
SEC Announces Regulatory Agenda
In July 2017 the SEC posted its latest version of its semi-annual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The agenda is as interesting for what’s on it, as for what isn’t. The semi-annual list only contains 33 legislative action items that the SEC intends to propose or finalize in the next 12 months. The fall 2016 list contained 62 items. As further discussed in this blog, the list does not include proposals on executive compensation, or many other Dodd-Frank mandated rules.
In the preamble to the list it indicates that it was completed in March, when Michael Piwowar was acting Chair of the SEC. Chair Jay Clayton and now Commissioner Michael Piwowar have been publicly like-minded, with a goal of directing the SEC towards assisting in small and emerging business growth and capital raise activities, while remaining tough on fraud. A summary of Chair Clayton’s first public speech as head of
SEC Chair Jay Clayton Discusses Direction Of SEC
In a much talked about speech to the Economic Club of New York on July 12, 2017, SEC Chairman Jay Clayton set forth his thoughts on SEC policy, including a list of guiding principles for his tenure. Chair Clayton’s underlying theme is the furtherance of opportunities and protection of Main Street investors, a welcome viewpoint from the securities markets’ top regulator. This was Chair Clayton’s first public speech in his new role and follows Commissioner Michael Piwowar’s recent remarks to the SEC-NYU Dialogue on Securities Market Regulation largely related to the U.S. IPO market. For a summary of Commissioner Piwowar’s speech, read HERE.
Guiding Principles
Chair Clayton outlined a list of eight guiding principles for the SEC.
#1: The SEC’s Mission is its touchstone
As described by Chair Clayton, the SEC has a three part mission: (i) to protect investors; (ii) to maintain fair, orderly and efficient markets, and (iii) to facilitate capital formation. Chair Clayton stresses that it
SEC Expands Ability To File Confidential Registration Statements
Nominate Us For ABA Journal’s Top Blog- HERE
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On June 19, 2017, the SEC announced that the Division of Corporation Finance will permit all companies to submit draft registration statements, on a confidential basis. Confidential draft submissions will now be available for all Section 12(b) Exchange Act registration statements, initial public offerings (IPO’s) and for secondary or follow-on offerings made in the first year after a company becomes publicly reporting.
The SEC has adopted the change by staff prerogative and not a formal rule change. On June 29, 2017, the SEC issued guidance on the change via new FAQs. The new policy is effective July 10, 2017.
Title I of the JOBS Act initially allowed for confidential draft submissions of registration statements by emerging growth companies but did not include any other companies, such as smaller reporting companies. Regulation A+ as enacted on June 19, 2015, also allows for confidential submissions of an offering circular by companies completing their
SEC Commissioner Piwowar Speaks On The IPO Market
Nominate Us For ABA Journal’s Top Blog- HERE
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On May 16, 2017, SEC Commissioner Michael Piwowar gave the opening remarks to the SEC-NYU Dialogue on Securities Market Regulation. The focus of the SEC-NYU Dialogue was the current state of and outlook for the U.S. IPO market. Mr. Piwowar specifically spoke about reviving the U.S. IPO market.
The declining IPO market has been a topic of review lately, and was one of the main points discussed at the SEC’s Investor Advisory Committee meeting held on June 22. SEC Chair Jay Clayton weighed in at the Investor Advisory Committee, stating that he is “actively exploring ways in which we can improve the attractiveness of listing on our public markets, while maintaining important investor protections.” Mr. Clayton’s words echoed his statements made to the Senate confirmation hearing prior to his swearing in as chair.
This blog summarizes Commissioner Piwowar’s speech and of course offers my views and commentary.
Commissioner Piwowar’s Opening
