FINRA Releases FAQs Related to Public Offering Review
FINRA has released certain Frequently Asked Questions (FAQs) related to public offerings, including underwriting compensation and disclosure requirements regarding certain items of value.
When ROFRs are Underwriting Compensation
FINRA rules provide that all items of value received by underwriters and related persons during the period commencing 180 days immediately preceding the required FINRA filing date will be considered to be underwriting compensation unless they meet one of five exceptions provided in the FINRA rules. A right of first refusal (ROFR) is an item of value that is worth the dollar amount that the issuer has contractually agreed to pay the underwriter to waive or terminate the ROFR. If the underwriter and issuer have not agreed upon a dollar amount, the ROFR must be valued at 1% of the offering proceeds. The FAQs clarify that a ROFR to participate in an offering granted within the 180 days immediately preceding the required FINRA filing date is an item of value that will be counted as compensation in the subsequent offering.
Disclosure Requirements in the Prospectus
The FAQs indicate that underwriter's counsel fees and expenses (other than “blue sky” fees) paid or reimbursed by the issuer are required to be disclosed in the Underwriting or Plan of Distribution section of the prospectus. When underwriting compensation includes counsel fees and expenses paid or reimbursed by the issuer, the offering proceeds table on the cover page of the prospectus must include a cross-reference to the Underwriting or Plan of Distribution section. However, underwriter's counsel fees need not be separately itemized. Rather, underwriter's counsel fees may be aggregated with other fees and expenses that are reimbursed by the issuer and disclosed in the prospectus.
FINRA rules restrict the terms under which an option, warrant or convertible security may be granted as underwriting compensation, and FINRA will review the warrant agreement or similar document to determine whether the terms would violate FINRA rules. However, the FAQs indicate that when an underwriter or related person receives compensation consisting of an option, warrant or convertible security, disclosure of the terms of such securities are not required in the prospectus.
Lock-up Requirements and Exemptions
As noted above, FINRA rules provide that all items of value received by underwriters and related persons during the period commencing 180 days immediately preceding the required FINRA filing date will be considered to be underwriting compensation unless they meet one of five exceptions provided in the FINRA rules. Unregistered securities that are excepted are subject to a 180-day lock-up. The FAQs discuss under what circumstances FINRA has provided an exemption from the lock-up requirements for unregistered securities that were acquired during the 180-day review period, but excepted from underwriting compensation pursuant to the five exceptions. FINRA has provided exemptions from the lock-up requirements for securities acquired during the review period as a result of an exercise, conversion, stock split or a pro rata rights offering of securities acquired before the review period. Some of the facts and circumstances that FINRA staff has considered when determining whether to grant an exemption include whether:
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the acquisition of the securities was required to restructure the issuer's capitalization in order to: (i) launch the public offering; (ii) complete a merger or acquisition; (iii) reorganize its corporate structure to receive tax or other benefits; (iv) emerge from a bankruptcy proceeding; (v) facilitate a stock repurchase arrangement; or (vi) facilitate some combination of these objectives;
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the securities were registered and included as part of the underwritten public offering; and
the arrangements that resulted in the acquisition of securities during the 180-day review period were designed to benefit the issuer and were not proposed by the member firm or a shareholder affiliated with the firm.
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