On March 20, 2020, FINRA announced in Regulatory Notice 20-10 that it has amended FINRA Rule 5110 (the “Corporate Financing Rule” or the “Rule”). The amendments institute substantive, clarifying, organizational and terminology changes, while preserving the basic principles of the Rule. Of particular note, the amendments will significantly streamline the filing and approval process for shelf offerings that are subject to a filing requirement, including requiring only the registration statement number and fee payment information. The no-objections letter will be issued instantaneously upon submission.
March 20, 2020 was the effective date for certain amendments regarding required documents for FINRA filings, including the extension of the filing deadline from one to three business days following SEC filings. The implementation date for all other amendments, including the shelf offering amendments, is September 16, 2020.
The text of the amended Rule is available here.
The amendments include:
Documentary Filing Requirements
The amendments institute important changes related to timing and documentary requirements for filings under the Corporate Financing Rule (a “FINRA filing”), generally relaxing the same, and were effective as of March 20, 2020. These include:
Information Filing Requirements
The following changes to the information required in a FINRA filing are not effective until September 16, 2020:
The pre-amendment Rule provided a filing exemption for shelf offerings of issuers that met the SEC’s pre-1992 standards for eligibility on Forms F-3 and S-3, or pre-1991 standards for offerings on Form F-10. The Amended Rule states the particular eligibility standards in the rule itself, creating the category of an “experienced issuer” with the same standards as the pre-1992 F-3 and S-3 standards:
Under the Amended Rule, offerings on Form S-3, F-3 or F-10 by an “experienced issuer” are eligible for exemption from FINRA filing obligations. FINRA noted that any guidance or interpretation issued by the SEC or FINRA relating to those eligibility standards remains applicable to the Amended Rule’s definition.
For shelf offerings that are subject to a FINRA filing requirement, the amendments considerably streamline the filing process. As of the September 16 implementation date, filers will only need to provide the Securities Act registration statement number and the Fedwire number reflecting fee payment. Upon submission, the filer will immediately receive FINRA’s no-objections letter.
These changes institute a considerably more streamlined process for shelf offerings, as FINRA’s current shelf offering review programs require a more detailed filing, including information with respect to the offering, the issuer and the securities being registered under the shelf, and require separate filings for each takedown off of the shelf. Whereas the current shelf offering program filings required some time to prepare, the new shelf offering filings should be able to be prepared in a matter of minutes, if not seconds (provided that the Fedwire number is available). Further, filers will not need to make filings in respect of takedowns off of the shelf, as the system being developed by FINRA will pull relevant SEC-filed documents from EDGAR.
FINRA may request additional documents related to the filing after approval, which is expected to be conducted on a risk basis.
Through this change, FINRA’s stated goal is to facilitate the ability of issuers to take advantage of favorable market conditions on short notice and to quickly raise capital through takedown offerings. We understand that the Corporate Financing Department expects to issue additional guidance before the implementation date.
While these changes, and all streamlining of shelf offering review, is generally welcome, we note that these changes place considerable additional pressure on underwriters and their counsel to reasonably ensure compliance with the substantive requirements of the Corporate Financing Rule at the time of the initial submission. Unlike some of FINRA’s current review programs, which allow FINRA to comment on issues before the applicable transaction has occurred, practice under these amendments will shift to after-the-fact review of any issues spotted by FINRA. If issues have been overlooked, or if an interpretive stance has been taken with which FINRA disagrees, then FINRA will need to consider whether to allege a Corporate Financing Rule violation in an enforcement proceeding. This is consistent with current practice with respect to offerings entitled to “same-day clearance.”
The pre-amendment Rule sets out categories of offerings that are exempt from (i) the Rule’s filing requirements but are otherwise subject to the Rule’s substantive requirements and (ii) both the Rule’s substantive and filing requirements. The Amended Rule continues this structure, with the following modifications.
Offerings Not Subject to Filing Requirements
The Amended Rule, consistent with current interpretation, clarifies that the exemption for issuers with outstanding investment grade-rated securities also applies to banks and foreign banks.
Offerings Not Subject to Filing and Substantive Requirements
Consistent with existing interpretive guidance, the Amended Rule expands the list of offerings exempt from both the Rule’s filing and substantive requirements to include offerings of a closed-end tender offer fund, provided that the fund complies with certain requirements, including the compensation provisions set forth in FINRA Rule 2341. The Amended Rule also exempts offerings of insurance contracts, unit investment trusts and, in response to comments, issuer self-tender offers.
The pre-amendment Rule uses the term “Exempt Offerings” to refer to offerings not subject to the Rule’s filing and substantive requirements. The Amended Rule instead refers to “Offerings Not Subject to Filing and Rule Compliance.”
In the pre-amendment Rule, whether an item was deemed to be underwriting compensation turned on whether that item was an “item of value”: any item of value received by the underwriter or its related persons in the 180 days preceding the SEC filing and running until 90 days following effectiveness was presumed to constitute underwriting compensation. The term item of value was not defined, but the rule provided non-exhaustive lists of items that would and would not be considered items of value.
The Amended Rule does not use the term item of value, but instead defines the term “underwriting compensation” as:
Any payment, right, interest, or benefit received or to be received by a participating member from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public offering. In addition, underwriting Icompensation shall include finder’s fees, underwriter’s counsel fees and securities.
Further, the Amended Rule also creates the new defined term “review period,” defined as 180 days preceding the SEC filing date through the 60-day period following: (i) for a firm commitment offering, the effective date; (ii) for a best efforts offering, final closing and (iii) for a takedown or any other continuous offering made pursuant to Securities Act Rule 415, the 60-day period following the final closing.
Like the pre-amendment Rule, the Amended Rule provides two non-exhaustive lists of examples of payments and benefits that are and are not considered underwriting compensation, with many of the examples derived from the pre-amendment Rule’s lists.
However, there are some new additions to those lists, including the following examples of payments or benefits that are not considered underwriting compensation:
In Regulatory Notice 20-10, FINRA addressed the scope of underwriting compensation in offerings with U.S. and non-U.S. components, addressing two scenarios:
Securities Acquired from Third Parties or Through Directed Share Programs
The Amended Rule includes Supplementary Materials addressing when securities acquired from third-parties or through issuer directed share programs should be deemed underwriting compensation, adopting a principles-based approach.
Expansion of Venture Capital Exceptions to Underwriting Compensation Definition
The Amended Rule modifies and expands the existing venture capital exceptions from classification as underwriting compensation, with the stated goal of facilitating the participation of broker-dealers in bona fide venture capital transactions. The amendments:
The Amended Rule continues to require a 180-day lock-up restriction on securities that are considered underwriting compensation, subject to exceptions. Commenters had requested that FINRA shorten the FINRA lock-up period for follow-on offerings, given that the insider lock-up period is commonly shorter for such offerings. FINRA declined, but the amendments institute exceptions for situations in which market forces or other factors obviate the need for a lock-up, and these exceptions may mitigate the impact of the lock-up restrictions in follow-on offerings.
The amendments institute the following additional exceptions, among others:
Whereas the pre-amendment Rule had provided that the lock-up restrictions commence on the date of effectiveness or commencement of sales, the Amended Rule provides that the lock-up restriction begins on the date of the commencement of sales.
The Amended Rule also updates the list of prohibited terms and arrangements in connection with a public offering of securities. For example, under the Amended Rule, it is prohibited for any underwriting compensation to be paid prior to the commencement of sales of the public offering, except (i) an advance against accountable expenses actually anticipated to be incurred or (ii) advisory or consulting fees for services provided in connection with the offering that are subsequently completed according to the terms of an agreement entered into by an issuer and participating member.
Although the amendments do not alter the basic principles of the Rule, they re-organize the Rule’s structure, make clarifying changes and institute both small and large substantive changes, including an extension of the filing deadline for required FINRA filings from one to three business days (already effective), and a significant streamlining of the FINRA shelf offering filing process (effective September 16, 2020) that will change the tenor of the FINRA filing process for shelf offerings. Firms should review their WSPs and other procedures to determine whether any revisions should be made in respect of the amendments. We will closely monitor developments, including any guidance issued on the new shelf offering filing process.
 See Regulatory Notice 20-10, FINRA Amends the FINRA Corporate Financing Rule, available at https://www.finra.org/rules-guidance/notices/20-10.
 For background on the amendments, please see our prior publications: (i) FINRA Proposes Substantive and Organizational Amendments to Corporate Financing Rule (Jun. 6, 2019), available at https://www.shearman.com/perspectives/2019/06/finra-proposes-substantive-and-organizational-amendments-to-corporate-financing-rule [hereinafter, “June 2019 Client Memo”] and (ii) FINRA Proposes Broad Range of Amendments to Corporate Financing Rule (April 26, 2017), available at https://www.shearman.com/perspectives/2017/04/finra-amndts-to-corporate-financing-rule. Our full range of publications relating to the Corporate Financing Rule, and other topics, are available at https://brokerdealer.shearman.com/.
 FINRA’s Corporate Financing Rule regulates the underwriting terms and arrangements of FINRA members’ participation in U.S. public offerings. The Rule requires a FINRA member that participates in a U.S. public offering to file certain information and documentation with FINRA, unless subject to an exemption, and receive confirmation that FINRA raises no objection with respect to the fairness and reasonableness of the proposed underwriting terms and arrangements. It also mandates certain disclosure, prohibits certain terms and arrangements and requires lock-ups of securities that constitute underwriting compensation, among other obligations.
 Rule 5110(b)(4).
 Rule 5110(b)(5)(A)(ii).
 Rule 5110(b)(5)(A)(iii).
 Amended Rule 5110(a)(4)(B)(iii). All Amended Rule references reflect the numbering of the version of the Rule effective September 16, 2020 and onwards.
 Amended Rule 5110(a)(4)(C).
 Amended Rule 5110(h)(1)(C).
 See Exchange Act Release No. 34-87855, Dec. 23, 2019, at 72406.
 FINRA filing exemptions can potentially be lost if there is a conflict of interest as that term is defined in Rule 5121. In our June 2019 Client Memo (link above at note 2), we noted the concern that Forms S-3 and F-3 allow offerings by certain persons other than the issuer itself, i.e., guaranteed subsidiaries, and that, under the proposed definition of “experienced issuer,” no exception would be available for guaranteed subsidiaries. In the final Rule, for primary and follow-on offerings that are exempt under Amended Rule 5110(h)(1)(C), this concern appears to have been addressed because the “registrant” is required to be the experienced issuer. However, the exchange offer filing exemption of Amended Rule 5110(h)(1)(E) is less clear and is subject to interpretation, because the language would appear to require the entity issuing the security to be the experienced issuer.
 Amended Rule 5110(a)(4)(E).
 FINRA’s current shelf offering programs would be discontinued following the shelf offering process established in the amendments.
 Amended Rule 5110(j)(2).
 See, for example, Russell D. Sacks, Shearman & Sterling, Request for Exemption from the Provisions of NASD Conduct Rule 2710, available at https://www.finra.org/rules-guidance/guidance/exemptive-letters/russell-d-sacks-shearman-sterling-llp.
 Amended Rule 5110(h)(2).
 Amended Rule 5110(j)(22).
 Amended FINRA Rule SM .01(b)(4), (21).
 See, for example, SIFMA’s May 30, 2019 comment letter, available at https://www.sec.gov/comments/sr-finra-2019-012/srfinra2019012-5603986-185507.pdf. [SIFMA May 30, 2019 Letter]
 Supplementary Material .01(b)(14),(16)-(18).
 Amended Rule 5110(d)(1).
 Amended Rule 5110(d)(4).
 SIFMA May 30, 2019 Letter.
 Amended Rule 5110(e)(2).
 Amended Rule 5110(e)(1).
 Amended Rule 5110(g).
 Amended Rule 5110(a)(3)(A)(ii).
 Amended Rule 5110(g)(2).