II. Corporate Financing Rule (Underwriter Compensation)

2.1 Overview of Rule 5110

FINRA Rule 5110 regulates the terms and conditions of the participation of FINRA- member broker-dealers in public offerings. ¹ It prohibits underwriting arrangements in connection with the public offering of securities if those underwriting terms and conditions are deemed to be “unfair” or “unreasonable”. Rule 5110 regulates underwriters’ compensation in three principal ways: (1) by aggregating all “items of value” received by underwriters and other related persons in connection with the public offering, deeming such items of value to be “compensation in connection with the public offering” and limiting that compensation; (2) placing a prohibition on the receipt of certain items of value in connection with participation in a public offering; and (3) requiring disclosure of all items of value that are deemed to be compensation to the underwriters in connection with the public offering in filings to FINRA.

2.1.1 Purpose of Rule 5110

Rule 5110 is intended to ensure that the terms and arrangements of a public offering, including the compensation paid or provided to underwriters and their affiliates, are fair and reasonable. Subject to applicable exemptions, a FINRA member participating in a public offering must file the relevant offering and underwriting materials with FINRA’s Corporate Financing Department before commencement of sales. FINRA reviews those materials for compliance with its rules governing underwriting terms and arrangements and, if no issue remains, provides a “no objections” opinion. Rule 5110 was comprehensively reorganized in 2020 and has been further amended in 2026. While many offerings are exempt from the filing and approval requirements of the Corporate Financing Rule, that rule is structured to require that all IPOs must be reviewed and approved by FINRA Staff. 

2.1.2 Compensation that is per se prohibited

Rule 5110 identifies certain forms of compensation and underwriting arrangements as prohibited because they are deemed unreasonable. These include compensation whose value cannot be determined, expense allowances that reimburse underwriters’

 general overhead or similar ordinary business costs, and underwriting compensation paid before commencement of sales, subject to limited exceptions such as advances for anticipated accountable expenses and certain advisory or consulting fees. 

Termination fees, rights of first refusal and comparable arrangements must satisfy specified conditions concerning termination for cause, reasonableness, duration and the circumstances in which payment may be required.² The rule also restricts the terms of options, warrants and convertible securities received as underwriting compensation, including securities exercisable or convertible more than five years after commencement of sales, securities with excessive demand or piggyback registration rights, securities with impermissible anti-dilution protections, and overallotment options (also known as “green shoe”options) exceeding 15% of the securities offered.³

2.1.3 Computing Underwriter Compensation

The compensation analysis begins by aggregating all “underwriting compensation” received or to be received by participating members and related persons during the applicable “review period,” generally beginning 180 days before the initial filing and extending through 60 days after termination or completion of the offering, depending on the offering structure. Under the current framework, underwriting compensation includes any payment, right, interest or benefit received from any source for underwriting, allocation, distribution, advisory or other investment banking services in connection with the offering, including finder fees, underwriter’s counsel fees and securities. 

The valuation of securities that are deemed to be underwriting compensation is particularly important. Under the prior framework, non-convertible securities generally were valued by reference to the public offering price or, if a bona fide public market existed, the price paid for the security; the 2026 amendments (described below) replace the bona fide public market test with a closing-market-price standard.

2.1.4 Exceptions from deemed compensation for certain securities acquisitions

Rule 5110 excludes certain securities acquisitions from deemed underwriting compensation when specified conditions are satisfied. The principal exceptions cover acquisitions or conversions undertaken to prevent dilution, purchases based on a prior investment history⁴, certain bona fide investments and loans by qualifying affiliates, and securities acquired in private placements in which institutional investors negotiate or lead the transaction and participating members do not purchase or receive more than 40% of the total offering. Non-convertible or non-exchangeable debt securities and derivative instruments acquired at a fair price in transactions unrelated to the public offering generally are also excluded. The 2026 amendments described below add further exclusions for qualifying debt-for-equity exchanges and certain capital investments in direct participation programs and unlisted REITs, and provide favorable treatment for non-convertible preferred securities acquired at a fair price.

2.1.5 Lock-up requirement

Securities that constitute underwriting compensation generally are subject to a 180-day lock-up beginning on the date of commencement of sales. During that period, they may not be sold, transferred, assigned, pledged or hypothecated, or made subject to hedging, short sales or derivative, put or call transactions that would result in an effective economic disposition. The rule provides exceptions for transfers required by law or a reorganization, holdings that do not exceed 1% of the securities offered, securities of issuers eligible to use Forms S-3, F-3 or F-10, and certain pro rata holdings of investment funds. It also permits transfers to participating members and registered persons or affiliates (so long as securities remain locked up post-transfer), exercises or conversions if the securities received remain locked up, and transfers back to the issuer in a transaction exempt from registration.

2.1.6 2026 Amendments to Rule 5110

The 2026 amendments, approved by the SEC as targeted changes to Rule 5110, make several practical revisions. ⁵

First, they replace the prior “bona fide public market” valuation test with a closing-market-price standard based on the closing price of a security traded on a registered national securities exchange or a designated offshore securities market on the date of acquisition. This change is intended to simplify compliance and reduce uncertainty where reliable market data is available. 

Second, the amendments add new exclusions from underwriting compensation. Rule 5110.01(b)(23) addresses qualifying debt-for-equity exchanges, generally requiring an issuer-oriented transaction structure, a subsequent firm-commitment offering of the exchange shares, arm’s-length negotiation based on market price and only customary compensation. Rule 5110.01(b)(24) addresses certain capital investments in direct participation programs and unlisted REITs, subject to prospectus disclosure, NAV-based pricing, compliance with Rule 2310 and a 180-day restriction on disposition. Non-convertible preferred securities remain underwriting compensation but are treated like non-convertible debt securities and have no compensation value when acquired at a fair price; if the fair-price condition is not met, the value is generally measured by the difference between fair price and the price paid. 

Third, the amendments clarify that “tail fees” are subject to the same conditions as termination fees and rights of first refusal, including a termination-for-cause right, elimination of the fee upon an exercise of that right, reasonable or customary compensation, and a two-year period for a later transaction to trigger payment. 

Fourth, the amendments expand Rule 5123 filing exemptions to include certain entities owning investments in excess of $5 million and certain family offices with more than $5 million in assets under management. FINRA filed the proposal on January 22, 2026; the SEC approved it on July 24, 2026; and the approval order was published in the Federal Register on July 29, 2026. Because the materials reviewed do not specify an operative date, market participants should monitor FINRA notices for implementation timing and related operational guidance.

(1) the securities are to be issued by the underwriter; 

(2) the issuer controls, is controlled by, or is under common control with the underwriter or associated persons of the underwriter; 

(3) at least 5% of the net offering proceeds, not including underwriting compensation, are intended to be either:

 (a) used to reduce or retire the balance of a loan or credit facility extended by the underwriter, its affiliates and its associated persons, in the aggregate; or 

(b) otherwise directed to the underwriter, its affiliates and associated persons, in the aggregate; or

(4) as a result of the offering and any transaction contemplated at the time of the offering, either the underwriter will:

 (a) be an affiliate of the issuer;

 (b) become publicly-owned; or

 (c) the issuer will become a FINRA member or form a broker-dealer subsidiary.

3.3 What happens if a transaction is subject to a conflict of interest?

When a public offering is subject to a conflict of interest, Rule 5121 provides two principal paths. 

The first is prominent disclosure of the nature of the conflict together with one of three conditions: the member primarily responsible for managing the offering is not conflicted, the securities have a bona fide public market, or the securities are investment-grade rated or have the same rights and obligations as investment-grade securities. 

The second is the engagement of a qualified independent underwriter, who must participate in preparing the registration statement and offering document and exercise the usual standards of due diligence; the offering document must identify the conflict, name the qualified independent underwriter and describe its role and responsibilities. A qualified independent underwriter must be free of the conflict, may not beneficially own more than 5% of the securities giving rise to the conflict, must assume the legal responsibilities and liabilities of an underwriter, including Section 11 liability, and generally must have underwritten at least three similar offerings during the preceding three years. A conflicted member also may not sell the relevant securities to a discretionary account without the account holder’s specific written approval, and an offering subject to Rule 5121 remains subject to Rule 5110 even if it would otherwise be exempt from Rule 5110 filing or other requirements.

III. IPO Allocation Rules

4.1 New Issue Rule 5130

4.1.1 General overview of the New Issue Rule

Rule 5130 restricts the purchase and sale of initial equity public offerings by “restricted persons.” The category generally includes FINRA members and their associated persons, certain direct and indirect owners of broker-dealers, portfolio managers and certain of their immediate family members, subject to the rule’s detailed definitions and exceptions. The rule is intended to preserve the integrity of bona fide public offerings by preventing industry participants and other persons able to influence financial-industry practices from withholding IPO securities for themselves or receiving preferential access in anticipation of directing future business.

4.1.2 What is a “new issue”?

For purposes of Rule 5130, a “new issue” generally means an initial public offering of an equity security made pursuant to a registration statement or offering circular, subject to specified exclusions. The 2019 amendments added exclusions for offerings made under Regulation S or otherwise outside the United States and its territories when the securities are not concurrently registered for sale in the United States, initial public offerings of special purpose acquisition companies, and allocations by non-U.S., non-member broker-dealers to non-U.S. persons when the allocation is not made at the direction or request of a FINRA member or its associated person(s).

4.1.3 Exceptions to the general prohibition

Rule 5130(c) contains several exceptions to the general prohibition. These include accounts of certain institutional investors; employee retirement benefit plans that satisfy the rule’s participant, asset, governance and fiduciary requirements, including at least 10,000 participants or beneficiaries and $10 billion in assets; business development companies (as defined in Section 2(a)(48) of the Investment Company Act, and provided that the business development company was not formed or maintained for the specific purpose of permitting restricted persons to invest in new issues); foreign public investment companies that meet the applicable direct- or indirect-investor thresholds; family investment vehicles; and issuer-directed securities allocated in accordance with the rule. 

The 2019 amendments also excluded sovereign entities from the category of restricted broker-dealer owners, subject to the rule’s limitations, and broadened the treatment of foreign investment companies and family investment vehicles. Each exception is conditional and should be documented before an allocation is made.

4.1.4 Using the “de minimis” exception

The de minimis exception permits an account that would otherwise be restricted to purchase new issues if the beneficial interests of restricted persons in the account do not exceed 10% of the account. The exception is frequently used by private equity funds, hedge funds and other pooled investment vehicles whose investor bases include both restricted and unrestricted persons. In practice, the exception is both a threshold and an allocation tool: an account of a collective investment vehicle may (a) receive and distribute an IPO allocation if the beneficial interests of restricted persons amount to less than 10% of the account, or (b) the investment manager can allocate IPO profit and loss in a manner that directs not more than 10% of such profit and loss, in the aggregate, to accounts of restricted persons.

4.2. IPO Allocation Rule 5131

4.2.1 General overview of the IPO Allocation Rule

Rule 5131 governs the allocation and distribution practices of FINRA members in connection with new issues. It prohibits “spinning,” meaning the allocation of new issue securities to accounts in which an executive officer or director of a public company or covered non-public company has a beneficial economic interest, when that company has specified current or prospective business relationships with the member. 

It also prohibits quid pro quo allocations, under which a member conditions an allocation on the receipt of excessive compensation or other business. The 2019 amendments added an exemption for unaffiliated charitable organizations from the definition of “covered non-public company” and added an anti-dilution provision allowing qualifying persons to maintain their prior percentage ownership in the issuer, subject to the rule’s conditions.

4.2.2 Required pricing and trading practices

Rule 5131 also establishes pricing and trading controls for new issue distributions. A member may not accept a market order to purchase new issue shares in the secondary market before secondary-market trading has begun. Members must maintain procedures addressing lock-up agreements and must make the required public announcements regarding releases or waivers of lock-ups; following the 2019 amendments, disclosure in a publicly filed registration statement for a secondary offering may satisfy the announcement requirement. The rule also addresses the handling of returned shares and the use of penalty bids, requiring syndicate practices that prevent those mechanisms from being used to circumvent the rule’s allocation and distribution safeguards.

4.3 Compliance with the IPO allocation rules

4.3.1 Compliance with the IPO allocation rules for broker-dealers

FINRA member firms must establish, maintain and enforce written supervisory procedures reasonably designed to ensure compliance with Rules 5130 and 5131. In practice, those procedures should address the collection of representations from account holders regarding restricted-person status, the review and approval of IPO allocations, the maintenance of supporting records and the periodic verification of the accuracy of customer representations. Firms should also maintain controls for identifying spinning and quid pro quo concerns, administering lock-up and returned-share procedures, restricting pre-opening market orders and documenting any reliance on an exception.

4.3.2 Compliance with the IPO allocation rules for private funds

Private funds and other investment vehicles seeking to purchase new issues should be prepared to provide representations concerning the beneficial interests held by restricted persons. Fund managers should establish procedures to identify restricted persons among their investors and relevant portfolio personnel, calculate and monitor the 10% de minimis threshold where applicable, and determine whether another Rule 5130 exception is available. They should also retain current investor questionnaires, allocation certifications, ownership calculations and other documentation supporting the representations made to a broker-dealer, and update that information when the fund’s investor base, ownership interests or governance arrangements change.

V. Proposed Reforms to the Registered Offering Regime

5.1 Overview

On May 19, 2026, the SEC proposed sweeping amendments to its Securities Act rules and forms governing registered offerings.⁶ SEC Chairman Paul Atkins characterized the reforms as part of his broader “Make IPOs Great Again” agenda, stating that the proposals “build upon the legislative and regulatory concepts that have proven successful in the past and aim to extend that success to more companies – particularly small and mid-sized companies – and incentivize them to go and stay public.”⁷

The proposal has several principal components: (i) significantly expanding the population of issuers eligible to use Form S-3 for shelf offerings, including at-the-market offerings; (ii) extending the registration and communication flexibilities currently reserved for "well-known seasoned issuers" to a broader group of public companies; (iii) preempting state securities law registration and qualification requirements for all registered offerings; (iv) expanding the Rule 139 research report safe harbor for broker-dealers; and (v) modernizing Form S-1 and streamlining other aspects of the registration process.⁸

5.2 Expanded Form S-3 Eligibility and Shelf Registration

Currently, an issuer must have been subject to Exchange Act reporting requirements for at least 12 months (the “One-Year Seasoning” requirement) and generally must have at least $75 million in public float to register an unlimited amount of securities on Form S-3. Issuers with a public float below $75 million that are exchange-listed may conduct limited primary offerings on Form S-3 under the “baby shelf” provision, but only up to one-third of their public float in any 12-month period.⁹

The proposed amendments would eliminate both the One-Year Seasoning requirement and the $75 million public float requirement, and, with them, the baby shelf limitation. Under the proposal, any issuer that is current and timely in its Exchange Act reporting obligations would be eligible to use Form S-3 to register any primary or secondary offering without regard to its public float, subject to exclusions for specified categories of higher-risk issuers (including blank check companies, shell companies and penny stock issuers). The SEC estimates that the amendments would expand unlimited Form S-3 eligibility to approximately 2,150 additional issuers, an increase of over 60 percent.¹⁰

5.3 Restructuring the WSKI Framework

The proposal would substantially restructure the “well-known seasoned issuer” framework for domestic issuers. Currently, an issuer qualifies as a WKSI only if it has at least $700 million in public float or has issued at least $1 billion of registered non-convertible debt in the prior three years.¹¹  Under the proposal, the WKSI category would be eliminated for domestic issuers and replaced with three new tiers:

Form S-3 Eligible Issuers: all issuers satisfying the proposed Form S-3 registrant requirements would have access to the Rule 139 research report safe harbor, the ability to omit selling security-holder identities from resale registration statements under Rule 430B(b), and the ability to use free writing prospectuses without a preceding statutory prospectus under Rule 433.

Eligible Listed Issuers (“ELIs”): Form S-3 eligible issuers with at least one class of common equity listed on a national securities exchange would additionally have access to pre-filing communication exemptions under Rules 163 and 163A, post-filing free writing prospectus treatment for Form S-8 offerings under Rule 164, the ability to register additional securities or classes by post-effective amendment under Rule 413(b), the ability to omit specified information from the base prospectus under Rule 430B(a), and pay-as-you-go filing fees under Rules 456(b) and 457(r).¹²

Seasoned Eligible Listed Issuers (“SELIs”): ELIs with at least 12 months of Exchange Act reporting history would additionally qualify for automatic shelf registration under Rule 462, under which registration statements become effective immediately upon filing.

Chairman Atkins noted that the WKSI-style benefits “have proven to be successful, and it is time to provide them to more public companies,” and that the proposed amendments would extend “nearly all of the current WKSI benefits to domestic companies with a class of common equity listed on a securities exchange, regardless of their maturity or size as a public company.”¹³ The SEC estimates that the amendments could increase by over 200 percent the number of issuers eligible for all enhanced registration and communication benefits.¹⁴ The WKSI definition would be retained for foreign private issuers, who would continue to use Form F-3.¹⁵

5.4 Expansion of the Rule 139 Safe Harbor for Broker-Dealer Research

Of particular significance to the IPO ecosystem is the proposed expansion of the Rule 139 safe harbor for broker-dealer research reports. Under current rules, when a broker-dealer is “participating” in a registered offering, any research report it publishes about the issuer can be treated as an “offer” under Sections 2(a)(10) and 5(c) of the Securities Act, subjecting the broker-dealer to potential gun-jumping liability. Rule 139 provides a safe harbor that allows a participating broker-dealer to publish or distribute an issuer-specific research report without such report constituting an offer, but only if the issuer meets specified eligibility criteria. Currently, this safe harbor is available where the issuer is a WKSI, or where the issuer is eligible to register a primary offering under General Instruction I.B.1 or I.B.2 of Form S-3 or Form F-3 (meaning the issuer generally must have at least $75 million in public float or $1 billion in registered debt).

The proposed amendments would expand Rule 139 to cover all Form S-3 eligible issuers, regardless of their public float or whether they are exchange-listed. This means that any domestic issuer that is current and timely in its Exchange Act reporting obligations, including smaller and newly public companies, would qualify for the safe harbor.

This change has meaningful implications for capital markets participants. Under the current framework, underwriting banks are constrained in their ability to publish research on smaller issuers during the offering process, which can limit investor awareness and reduce aftermarket liquidity, outcomes that are particularly harmful for smaller companies that lack a natural following among institutional investors. By expanding the safe harbor, the SEC intends to allow broker-dealers to “publish issuer-specific research reports about a broader group of issuers . . . without such reports being treated as ‘an offer for sale or offer to sell’ securities that are the subject of an offering pursuant to a registration statement.”¹⁶

The SEC also proposes a conforming amendment to Rule 139b, which provides a parallel research-report safe harbor for covered investment funds. Under the proposed amendment, the minimum public-float requirement in Rule 139b would be removed, allowing all covered investment funds (including unlisted funds and funds with less than 12 months of reporting history) to benefit from the safe harbor.¹⁷

5.5 Other Notable Proposed Reforms

At-the-Market Offerings: Because the proposal would expand Form S-3 eligibility, more issuers would be eligible to conduct ATM offerings. The proposal would also clarify the definition of “trading market” for ATM purposes, providing that ATM offerings may be conducted in securities listed on a national securities exchange or in a market designated by the Commission.¹⁸

Preemption of State Securities Law: The proposal would define “qualified purchaser” under Section 18(b)(3) of the Securities Act to include any person to whom securities are offered or sold in a registered offering, thereby preempting state registration and qualification requirements for all registered offerings — not only listed securities, as is currently the case. This change would reduce the cost and complexity of conducting multi-state registered offerings of unlisted securities.¹⁹

Free Writing Prospectuses: Rule 433 would be amended to allow all Form S-3 eligible issuers to use free writing prospectuses without a preceding statutory prospectus. Currently, this flexibility is available only to WKSIs and certain seasoned issuers.²⁰

Form S-1 Modernization: The proposal would expand the ability to backward and forward incorporate information by reference into Form S-1 beyond smaller reporting companies to all issuers that satisfy the applicable requirements, reducing redundant disclosure and streamlining the registration process for issuers that are not yet Form S-3 eligible.²¹

5.6 Interaction with the Filer Status and EGC Proposal

On the same day, the SEC also proposed a separate rulemaking (Release No. 33-11419) that would simplify the public company reporting framework by, among other things, raising the large accelerated filer public-float threshold from $700 million to $2 billion and extending the disclosure scaling and compliance accommodations currently available to smaller reporting companies and emerging growth companies to a significantly broader population of public companies.²² Chairman Atkins noted that these two proposals are intended to “work in tandem” as part of the broader effort to transform the SEC’s regulatory framework for public companies.²³

5.7 Practical Implications for IPO Participants

If adopted, these proposals would meaningfully affect the IPO landscape. Companies that have recently completed an initial public offering, including smaller and mid-cap issuers, would have substantially earlier access to the shelf registration process, ATM offerings and the communication flexibilities that currently are available only to the largest issuers. Underwriting banks would benefit from an expanded ability to provide research coverage during the offering process under the broadened Rule 139 safe harbor, and the preemption of state blue sky requirements for all registered offerings would reduce the transaction costs associated with follow-on offerings of unlisted securities. Market participants should monitor the rulemaking process for adoption timing and any modifications to the proposals as adopted.

For questions regarding the regulatory requirements or implications of IPOs, please reach out to members of the King & Spalding team.