Finra’s Role in IPOs for Nasdaq and NYSE Listings
Launching an Initial Public Offering (IPO) on the Nasdaq or NYSE is a significant milestone for companies aiming to access public capital markets. These prestigious exchanges offer visibility, liquidity, and credibility, but the process involves stringent regulatory oversight. A key player in this journey is the Financial Industry Regulatory Authority (FINRA), which ensures that underwriting terms for IPOs are fair and transparent. This article explores FINRA’s critical role in IPOs, including compliance with Rules 5110 and 5121, to assist issuers and underwriters in navigating the path to going public successfully.
FINRA’s Oversight in the IPO Process
When a company pursues an IPO and seeks listing on Nasdaq or NYSE, it must adhere to FINRA’s regulations, particularly if a FINRA member firm acts as an underwriter, dealer, or distributor—collectively known as a “Participating Member.” These members play a vital role in preparing offering documents, distributing shares, or providing advisory services. However, firms offering only independent financial advice are not considered Participating Members.
Defining a Participating Member
A Participating Member includes any FINRA member involved in the IPO, along with their affiliates, associated persons, and immediate family members. Their involvement may range from drafting offering documents to distributing securities or advising the issuer on matters related to the securities. Importantly, the issuer itself is excluded from this definition, ensuring focus remains on the roles of underwriters and related parties.
Understanding Underwriting Compensation
Underwriting compensation encompasses any payments, rights, or benefits a Participating Member receives for services like underwriting, allocation, or advisory work during the IPO. This includes finder’s fees, legal fees for underwriters, and securities received. FINRA’s Rule 5110, also known as the Corporate Financing Rule, provides detailed guidance through Supplementary Materials to clarify what qualifies as compensation, ensuring transparency and fairness.
FINRA Rule 5110: The Corporate Financing Rule
Rule 5110 is designed to prevent Participating Members from engaging in IPOs with unfair or unreasonable compensation terms. In determining whether the compensation to be received by the Participating Members for the offering is “unfair or unreasonable,” FINRA will look not only at the “spread” or underwriting discount to be received by the underwriters, but also at any other fees and arrangements or securities of the issuer that could be deemed to be “Underwriting Compensation” received by (or payable to) the Participant Member during the “Review Period”—from 180 days before the SEC filing to 60 days after the offering’s effective date. The Securities and Exchange Commission (SEC) will not declare a registration statement effective until FINRA issues a “no objections letter” confirming compliance with these terms.
For IPOs, underwriters are required to submit specific information to FINRA for review. With respect to documents, FINRA allows registration statements or other documents that have been filed with the SEC to be filed with FINRA, solely by providing the relevant EDGAR identification or “accession” number. Amendments are only required if they affect the underwriting terms. Filings must include details about whether any issuer’s officer, director, or 10% equity holder is affiliated with a Participating Member. These submissions are due within three business days of the SEC filing. Notably, IPOs are not exempt from FINRA’s filing requirements, unlike some other public offerings, making early planning essential to avoid delays.
FINRA Rule 5121: Managing Conflicts of Interest
If a Participating Member has a conflict of interest—such as being an affiliate of the issuer or receiving 5% or more of the offering proceeds—Rule 5121 applies. In such cases, a qualified independent underwriter (QIU) may be required to ensure impartiality. Early identification of potential conflicts is crucial to streamline the IPO process, as direct participation programs and real estate investment trusts are exempt from this rule.
The Role of Questionnaires in Compliance
To comply with Rules 5110 and 5121, underwriters’ counsel, often in collaboration with the issuer’s counsel, distributes detailed questionnaires to the issuer, its officers, directors, and 10% equity holders. These questionnaires identify underwriting compensation and any affiliations with Participating Members during the Review Period. While the responses inform FINRA filings, the questionnaires themselves are not submitted, and FINRA treats all submitted information confidentially. However, certain compensation details and relationships must be disclosed in the prospectus under FINRA and SEC regulations.
Strategic Planning for a Smooth IPO
Successfully navigating FINRA’s requirements is critical for a timely IPO. Issuers and underwriters should integrate FINRA’s filing and review process into their IPO timeline, ensuring all documentation and potential conflicts are addressed early. By understanding and complying with Rules 5110 and 5121, companies can achieve a seamless listing on Nasdaq or NYSE, unlocking the benefits of public market access.
If you are considering an IPO on the NASDAQ or NYSE or need to hire a securities attorney, Hamilton & Associates Law Group, P.A. is ready to assist you. Our Founder, Brenda Hamilton, is a nationally known and recognized securities attorney with over two decades of experience assisting issuers worldwide with going public on the Nasdaq, NYSE, and OTC Markets. Since 1998, Ms. Hamilton has been a leading voice in corporate and securities law, representing both domestic and international clients across diverse industries and jurisdictions. Whether you are taking your company public, raising capital, navigating regulatory challenges, or entering new markets, Brenda Hamilton and her team deliver the experience, strategic insight, and results-driven representation you need to succeed.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].
Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
