I. 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 non-convertible 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 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 ( printed page 47904) 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 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 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 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 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 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 members ^[22] acquire securities that are deemed underwriting compensation, ( printed page 47905) 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 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]

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 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 non-convertible 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 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

• 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

• 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 price ^[60] are considered underwriting compensation but have no compensation value.^[61] However, at present, Rule 5110 does not offer parallel treatment of non-convertible 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 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 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 ( printed page 47907) 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 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 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.

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] 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 ( printed page 47908) 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]

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 non-exchangeable 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 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 non-convertible 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 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 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. ( printed page 47909) 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]

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.