Quick Answer
The corporate-financing rule requires a member firm to file deal documents with FINRA's Public Offering System (POS): within 3 business days of SEC/state filing, or 15 business days before sale if none. It defines underwriting compensation broadly (cash, expenses, securities, warrants, rights of first refusal), requires compensation be fair and reasonable, and imposes a 180-day lock-up on compensation.
The corporate-financing rule is the FINRA principal's primary supervisory tool for public offerings. It exists because SEC registration alone does not police the economics of the underwriter's compensation. FINRA review under the corporate-financing rule fills that gap.
Filing Requirement and Timing
| Step | What | When |
|---|---|---|
| 1. Initial filing | Registration statement, proposed underwriting agreement, and any other documents that define the economics; industry-standard master forms of the selected dealer agreement and agreement among underwriters need not be filed unless FINRA requests them | If filed with SEC / state / other regulator: within 3 business days of that regulator filing. If not regulator-filed: at least 15 business days before sales commence |
| 2. Updates | Amendments and supplements affecting compensation, terms, or syndicate | Each amendment filed with the regulator must be filed with FINRA within 3 business days |
| 3. No-objection letter | FINRA POS reviewer issues a "no-objection" letter once compensation and terms clear review | Required before sales commence |
Filings are made through FINRA's Public Offering System (POS) by a designated managing underwriter. The principal at the managing firm is responsible for confirming the filing happens and that no-objection is received before any sales.
Exam Tip: Gotchas
- The 3-business-day clock runs from the regulator filing, not from the SEC effective date. A deal filed with the SEC on Monday must be filed with FINRA POS by Thursday (close of the third business day). The clock does not wait for SEC effectiveness.
- Sales cannot commence without a FINRA no-objection letter. Even if the SEC has declared the registration effective, a covered offering needs FINRA clearance on compensation before the syndicate can sell.
What Counts as Underwriting Compensation
The corporate-financing rule defines underwriting compensation broadly. Cash spreads are obvious; everything else is what trips firms up.
| Category | Examples |
|---|---|
| Cash compensation | Underwriting discounts, selling concessions, management fees |
| Expense reimbursements | Legal, due-diligence, road-show expenses paid by the issuer |
| Securities compensation | Warrants, "compensation shares," equity participation rights |
| Financial advisory fees | Pre-deal advisory fees, M&A success fees tied to the offering |
| Finder's fees | Payments to finders or "introducers" who source the deal |
| Rights of first refusal (ROFR) | Right to be lead manager on a future financing |
| Other items of value | Offering-related consulting and post-deal advisory arrangements; market-rate pricing alone does not exclude an item |
Compensation is valued under formulas in the corporate-financing rule. Warrants are valued by a fixed formula in the rule, built from the public offering price, the exercise price, and the market price. It is not an option-pricing model, so volatility and time to expiration are not inputs. The valuation of warrants and other non-cash items can swamp the cash spread in determining the total compensation pool.
Think of it this way: FINRA does not just look at the cover-page underwriting discount. The reviewer adds up cash, valued warrants, expense reimbursements, ROFRs, and any other consideration tied to the deal. A principal who approves a deal counting only the spread misses the bigger compensation pool and creates a corporate-financing-rule violation.
Exam Tip: Gotchas
- A right of first refusal counts as compensation. A ROFR on the issuer's next financing has a measurable value (the optionality of guaranteed future business) and is valued under the rule's compensation formulas. ROFRs longer than 3 years are flat prohibited.
- Warrants count at their value under the rule's formula. Apply the specified calculation rather than labeling a warrant nominal or using an option-pricing model with a time-to-expiration input.
- Expense reimbursements count even if they look like ordinary business expenses. Issuer reimbursement of underwriter legal fees is compensation. The issuer can pay; the firm just has to count it.
Standards of Fairness
Compensation must be fair and reasonable considering:
- The size of the offering (smaller offerings tolerate higher percentages)
- The type of security (riskier securities tolerate higher compensation)
- The risk to the underwriter (best-efforts vs. firm commitment)
- Market conditions
| Offering Size | Approximate FINRA Compensation Cap |
|---|---|
| Very small offerings (< $5M) | Up to ~10% |
| Mid-size offerings | ~6-8% typical |
| Large offerings ($100M+) | ~3-5% typical |
The FINRA staff publishes guidelines and adjusts them based on market conditions. The principal supervising a deal must verify the compensation falls within current guidelines and that the deal does not include a prohibited term.
Prohibited terms under the corporate-financing rule include:
- ROFRs longer than 3 years
- Tail provisions that extend payment obligations indefinitely
- "Most favored nation" clauses on future financings
- Cash escrow beyond what is reasonable for the offering
- Reciprocal selling-group obligations that lock the issuer into a future relationship
Exam Tip: Gotchas
- The compensation cap varies with offering size. Smaller deals tolerate higher percentages; larger deals get tighter caps. There is no single fair-and-reasonable percentage; the principal looks up the current FINRA guideline for the deal's size and structure.
- Some terms are flat-prohibited regardless of size. A 5-year ROFR is prohibited even on a small deal where the cash compensation is well within guidelines. The principal must check both the percentage and the specific terms.
Lock-Up on Compensation Securities
Securities received as compensation are locked up for 180 days beginning on the date of commencement of sales of the public offering. During the lock-up:
- No sale, transfer, hedge, or pledge by the underwriter, related persons, or any successor
- Limited carve-outs (intra-firm transfers, certain estate-planning transfers) require specific conditions under the corporate-financing rule
This lock-up applies on top of any contractual lock-up between the issuer and other shareholders. The 180-day clock runs from the date sales of the public offering commence (not the effective date, the closing date, or any later date).
Exam Tip: Gotchas
- The 180-day lock-up is FINRA-required, not just contractual. A firm cannot waive its 180-day lock-up by side-letter; the rule binds the underwriter regardless of issuer consent.
- The lock-up clock runs from the DATE SALES COMMENCE, not the effective date or the closing date. A deal whose sales begin on one date runs its 180-day clock from that commencement of sales, even if effectiveness or closing falls on a different day.
- The lock-up covers hedges and pledges, not just outright sales. A firm that pledges its compensation warrants as collateral has hedged its risk and violated the lock-up.
Related FINRA Rules: Fixed-Offering-Price and Selling-Group Disclosure
Two related rules govern conduct within the offering:
| Rule | What It Does |
|---|---|
| Fixed-offering-price rule | Members may not sell at a reduced public offering price during a fixed-price offering. Specified selling concessions and allowances to brokers or dealers in the syndicate or selling group are permitted. |
| Selling-group disclosure rule | Disclosure of price and concessions in selling-group agreements: agreements must disclose the public offering price, concession to dealers, and any reallowance terms |
Rebating part of the spread to a public customer reduces the public offering price. Offering the same rebate to every syndicate member does not authorize passing it to customers. Distinguish permitted dealer concessions from a reduced public customer price.
The selling-group disclosure rule is the disclosure backbone that makes the fixed-offering-price discipline enforceable. Selected dealers must know exactly what concession and reallowance they receive, so that any deviation is visible.
Exam Tip: Gotchas
- Dealer concessions and customer discounts are different. A permitted concession within a syndicate or selling group does not authorize a reduced public offering price for customers, even if every syndicate member could offer it.
- Selling-group disclosure is to selected dealers, not to retail customers. Customers see the public offering price; the underwriting spread mechanics are visible to the syndicate desks via the selling-group disclosure agreements.
What Should You Check on Exam Day?
- Can you state the corporate-financing rule's filing deadline: 3 business days after a regulator filing, or 15 business days before sale if none?
- Do you know when the 180-day lock-up clock starts, and that it runs from the date sales commence, not the effective date?
- Can you state which rights of first refusal are flat-prohibited under the corporate-financing rule regardless of the deal's size?
- Can you distinguish a permitted dealer concession from a prohibited reduction in the public offering price?