SEC Approves FINRA Capital Formation Rule Amendments to Streamline Offerings

Overview of the Amendments

On July 24, 2026, the Securities and Exchange Commission (SEC) issued an order approving FINRA’s proposed amendments to Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) and Rule 5123 (Private Placements of Securities). Originally filed with the SEC in January 2026 as part of FINRA’s Forward initiative, these changes are intended to modernize the capital formation process. The amendments streamline how FINRA member broker-dealers value securities received as underwriting compensation, codify exclusions from the underwriting compensation definition, and expand private placement filing exemptions to include two new categories of accredited investors. These revisions are designed to facilitate capital formation, reduce compliance burdens, and eliminate the need for member firms to submit costly, one-off exemptive requests, all while maintaining robust investor protections. As of the date of this alert, FINRA has not yet announced a specific effective date for the new rules.

Operational Relief: Expanding Private Placement Exemptions (Rule 5123)

FINRA Rule 5123 generally requires FINRA member firms to file offering documents, such as private placement memoranda and term sheets, as well as related retail communications, within 15 calendar days of the first sale in a private placement, unless a filing exemption applies. Historically, the rule provided exemptions for private placements sold to specific institutional accredited investors.

In practice: today, a firm selling a private placement to certain sophisticated investors already avoids this filing obligation. The amendments simply widen who counts as sophisticated enough to qualify.

To align FINRA's framework with the SEC’s 2020 amendments to the accredited investor definition, the newly approved amendments expand Rule 5123's filing exemptions to include sales made to two additional investor categories:

Family Offices: The exemption now covers sales to certain family offices that possess assets under management exceeding $5 million, provided their investment decisions are directed by an individual with sufficient financial and business expertise.

In practice: a family office managing a wealthy family's investments would no longer trigger a filing requirement for the broker-dealer selling it a private placement, provided the office meets the $5 million AUM threshold and has qualified staff directing its decisions.

Certain Entities: The exemption also includes sales to certain entities not otherwise listed in SEC Rule 501 that own investments exceeding $5 million.

In practice: this captures other sophisticated investment vehicles, for example, certain trusts or investment companies, that hold more than $5 million in investments but don't fall neatly into the SEC's existing accredited investor categories.

The SEC concluded that these two categories of investors possess a level of sophistication and expertise comparable to the institutional accredited investors who already benefit from the Rule 5123 filing exemption. For member firms, this expansion materially reduces the administrative necessity of submitting FINRA filings for qualifying private placements.

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Clarity on Compensation: Modernizing Underwriting Terms (Rule 5110)

FINRA Rule 5110 requires member firms participating in public offerings to file underwriting terms and compensation information with FINRA for pre-offering review, unless an exemption applies. The SEC's approval introduces several critical updates to the rule:

Simpler Valuation Standard: The amendments replace the complex "bona fide public market" valuation method, previously used for securities deemed underwriting compensation that lacked a public offering price, with a more straightforward approach. The new standard is based on the closing market price of the security as traded on a U.S. registered national securities exchange or a "designated offshore securities market". This provides FINRA members with a predictable and readily verifiable valuation method.

In practice: when an underwriter receives securities (rather than cash) as part of its compensation, it currently has to work through a somewhat subjective test to figure out what those securities are "worth" for compliance purposes. Under the new standard, firms could simply look up the security's closing price on a recognized exchange, a much more mechanical, defensible calculation.

Codification of Exemptive Relief: The amendments add new exclusions from the definition of underwriting compensation, formally codifying relief that FINRA staff had previously granted on a case-by-case basis. These exclusions cover specific financing strategies, such as debt-for-equity exchanges and capital investments in direct participation programs (DPPs) and unlisted real estate investment trusts (REITs).

In practice: firms engaging in these specific transaction types would no longer need to individually petition FINRA for an exemption each time — the exemption would already be built into the rule. It's worth noting, though, that firms with transactions falling outside these newly codified categories can still request case-by-case relief under existing exemptive procedures.

Non-Convertible Preferred Securities: The amendments extend no-compensation-value treatment to non-convertible preferred securities that are acquired at a fair price.

In practice: if an underwriter receives this type of security as part of its deal compensation, and pays a fair price for it, it would not need to be counted toward underwriting compensation limits, provided the fair-price condition is met.

Tail Fees: The rule changes also clarify that tail fees are subject to the same regulatory requirements and protective conditions as termination fees.

In practice: a "tail fee" is compensation an underwriter can still collect after an engagement ends, if a deal closes shortly afterward with a client the underwriter introduced. The amendments would remove any ambiguity by confirming these fees face the same scrutiny and conditions as fees paid when an engagement is terminated outright.

Disclaimer: This article does not constitute legal advice. Readers should seek legal or tax advice from their professional advisers regarding their specific regulatory and legal obligations.

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