The amendments are targeted rather than comprehensive. They focus primarily on (i) improving and simplifying the valuation methodology for securities that are deemed “underwriting compensation” under Rule 5110, (ii) codifying several categories of exemptive relief that FINRA staff has historically granted on a case-by-case basis, and (iii) making certain technical and clarifying changes intended to improve the operation of the rule. In addition, the amendments expand the scope of an existing filing exemption under Rule 5123 for private placements sold exclusively to certain sophisticated institutional investors.

The approved amendments further FINRA’s stated objective of facilitating capital formation while maintaining the core investor- and issuer-protection principles underlying the Corporate Financing Rule.

II. Summary of the Corporate Financing Rule and Rule 5123

2.1 Summary of the Corporate Financing Rule (Rule 5110)

FINRA Rule 5110 regulates the terms and conditions of FINRA members’ participation in public offerings of securities registered under the Securities Act of 1933. The rule is designed to ensure that underwriting terms and arrangements, including the compensation received by underwriters and their affiliates, are fair and reasonable.

At a high level, Rule 5110 operates in three principal ways:

Filing and Review Requirement

Subject to various exemptions, a FINRA member participating in a public offering must file specified documents and information with FINRA’s Corporate Financing Department prior to the commencement of sales. FINRA reviews these materials solely for compliance with FINRA rules governing underwriting terms and arrangements and issues a “no objections” opinion if it determines that the arrangements comply with Rule 5110. 

Regulation of Underwriting Compensation

The rule aggregates all items of value received or to be received by a participating member and its related persons in connection with an offering and treats those items as “underwriting compensation.” Total underwriting compensation is subject to limitations, and certain forms of compensation are prohibited altogether. 

Disclosure and Prohibited Arrangements

Rule 5110 requires disclosure of underwriting compensation and prohibits specified terms and arrangements that FINRA deems per se unreasonable, including the receipt of compensation that cannot be valued (“indeterminate compensation”). 

Although the rule has been amended periodically, including through a significant reorganization that became effective in 2020, its core framework, particularly the treatment and valuation of underwriting compensation, has continued to present interpretive and practical challenges for issuers and underwriters.

2.2 Summary of Rule 5123

FINRA Rule 5123 applies to private placements of securities and requires FINRA members to file with FINRA copies of offering documents (or, if no such documents are used, specified transactional information) within 15 calendar days of the first sale. The rule is intended to provide FINRA with visibility into the private placement market and to assist in identifying potential regulatory concerns. 

Rule 5123 includes an important exemption for private placements sold solely to certain categories of institutional accredited investors, reflecting FINRA’s view that these investors possess sufficient sophistication to warrant exemption from the filing requirement. That exemption is one of fourteen categories of exempt private placements set out in Rule 5123(b). The purchaser-based exemptions cover offerings sold solely to: 

• institutional accounts under Rule 4512(c); 
• qualified purchasers under Section 2(a)(51)(A) of the Investment Company Act; 
• qualified institutional buyers under Securities Act Rule 144A; 
• investment companies under Section 3 of the Investment Company Act; 
• entities composed exclusively of qualified institutional buyers;
• banks under Section 3(a)(2) of the Securities Act; 
• employees and affiliates of the issuer under Rule 5121; 
• knowledgeable employees under Investment Company Act Rule 3c-5; 
• eligible contract participants under Section 3(a)(65) of the Exchange Act; and accredited investors described in Securities Act Rule 501(a)(1), (2), (3), (7), (9), or (12), the latter two being the family-office and $5 million-in-investments categories added by the 2026 amendments. 

The remaining, offering-based exemptions cover: 

• offerings of exempted securities under Section 3(a)(12) of the Exchange Act; 
• offerings made under Securities Act Rule 144A or SEC Regulation S; 
• short-term exempt securities under Section 3(a)(3) and qualifying Section 4(2) debt securities (maturity of 397 days or less, minimum denominations of $150,000); 
• subordinated loan offerings under SEA Rule 15c3-1, Appendix D; 
• offerings of variable contracts and of modified guaranteed annuity or life insurance contracts;
• offerings of non-convertible debt or preferred securities eligible for registration on Forms S-3 or F-3; 
• offerings of securities issued in conversions, stock splits, and restructurings requiring no additional investor consideration; 
• offerings of commodity pool securities; 
• business combination transactions under Securities Act Rule 165(f); 
• offerings of registered investment companies; 
• standardized options; and 
• offerings already filed with FINRA under Rules 2310, 5110, 5121, or 5122, or exempt from filing under Rule 5110(h)(1).

III. Summary of the 2026 Rule Amendments

3.1 Changes to Valuation Methods for Securities Considered Underwriting Compensation

Under the prior rule, when securities acquired by a participating member were deemed underwriting compensation, their value generally was based on either (i) the public offering price or (ii) the price paid per security if a “bona fide public market” existed for the security on the date of acquisition. The definition of “bona fide public market” was complex and incorporated concepts drawn from Regulation M, including public float and average daily trading volume. 

FINRA observed that members experienced persistent difficulty applying this definition. Where no bona fide public market existed and no public offering price was available, the securities could be treated as having “indeterminate” value, rendering them prohibited compensation under Rule 5110. 

The amendments revise Rule 5110(c) by replacing the “bona fide public market” concept with a valuation method based on:

• the closing market price of a security traded on a registered national securities exchange; or
• the closing market price of a security traded on a designated offshore securities market, in each case on the date of acquisition. 

FINRA stated that this change is intended to simplify compliance, reduce uncertainty, and minimize the need for exemptive relief where securities can be valued using readily available market data.

3.2 New Exclusions from Underwriting Compensation

The amendments add several exclusions from underwriting compensation, largely codifying exemptive relief that FINRA staff has historically granted.

Debt-for-Equity Exchanges

The amendments exclude from underwriting compensation certain equity securities acquired by affiliates of underwriters in connection with debt-for-equity exchange transactions, provided specified conditions are satisfied. These include conditions relating to the structure of the transaction, arm’s-length pricing, subsequent firm commitment offerings, and customary underwriting compensation. Specifically, codified as new Rule 5110.01(b)(23), the exclusion requires that: (i) the exchange be structured to provide economic and tax benefits to the issuer rather than to the affiliated member; (ii) the affiliate subsequently offer all of the exchange shares it acquired in a firm commitment underwritten offering following the debt exchange; (iii) the terms of both the exchange and the subsequent offering be negotiated at arm’s length based on the market price of the shares; and (iv) the affiliate receive only customary compensation for the subsequent equity public offering. 

Capital Investments in DPPs and Unlisted REITs

The amendments establish a self-operating exclusion for certain capital investments by participating members or their affiliates in direct participation programs (“DPPs”) and unlisted REITs, subject to disclosure, valuation, lock-up, and other conditions. Specifically, the exclusion, codified as new Rule 5110.01(b)(24), applies where the investment is disclosed in the offering prospectus, valued and priced on a net asset value (“NAV”) basis, made subject to FINRA Rule 2310 (Direct Participation Programs), and restricted from sale, transfer, or hypothecation for 180 days following the commencement of sales in the offering.

Non-Convertible Preferred Securities

The amendments provide treatment for non-convertible preferred securities that parallels the existing treatment of non-convertible or non-exchangeable debt securities. Although these securities remain underwriting compensation, they are deemed to have no compensation value when acquired at a fair price. FINRA reasoned that non-convertible preferred securities are economically comparable to non-convertible debt because neither can convert into common stock and both provide holders with predetermined, fixed payments. FINRA retains the ability to review whether the fair-price condition was satisfied; if it was not, the value of underwriting compensation attributed to the securities is the difference between the fair price and the price actually paid.

3.3    Other Changes to the Corporate Financing Rule

Among other changes, FINRA clarified the treatment of “tail fees” by expressly providing that tail fees are subject to the same conditions that apply to termination fees and rights of first refusal under Rule 5110(g)(5)(B). 

Those conditions require that: (i) the underlying agreement give the issuer a right of “termination for cause,” including the participating member’s material failure to provide the underwriting services contemplated by the agreement; (ii) the issuer’s exercise of that right eliminate any obligation to pay the fee or honor the right of first refusal; (iii) the fee be reasonable in relation to the underwriting services contemplated (and, for a right of first refusal, any resulting fees be customary for those services); and (iv) the issuer owe the fee only if the relevant offering or other financing is consummated within two years of the date the engagement was terminated. FINRA explained that members have increasingly negotiated tail fees (compensation payable if the issuer completes a later financing with investors the member introduced, following termination of the engagement), and that these arrangements are functionally comparable to termination fees. If a tail fee does not satisfy the four conditions above, it will be treated as a prohibited, unreasonable underwriting term or arrangement under Rule 5110, consistent with the treatment of non-conforming termination fees and rights of first refusal.

The amendments also include a number of technical and non-substantive revisions.

3.4 Changes to Rule 5123

The amendments expand the filing exemption under Rule 5123 to include:

• certain entities owning investments in excess of $5 million; and
• certain family offices with assets under management in excess of $5 million, consistent with the SEC’s 2020 amendments to the accredited investor definition. 

FINRA concluded that these categories of investors possess sophistication levels comparable to institutional accredited investors already covered by the exemption.

IV. The Adopted Rule

4.1 SEC Approval

On July 24, 2026, the SEC issued an order approving FINRA’s proposed rule change, SR-FINRA-2026-002. The approval order was published in the Federal Register on July 29, 2026. The Commission concluded that the amendments are consistent with the requirements of the Securities Exchange Act of 1934 and are reasonably designed to promote capital formation while continuing to protect investors and issuers. The rule was adopted substantially as proposed by FINRA.

4.2 Overview of the Adopted Amendments

The SEC approved the amendments substantially as proposed. The adopted rule:

• replaces the existing “bona fide public market” valuation methodology with a closing-market-price standard;
• creates new exclusions from underwriting compensation for qualifying debt-for-equity exchanges; 
• creates new exclusions for certain DPP and unlisted REIT capital investments; 
• extends favorable treatment to non-convertible preferred securities acquired at a fair price; 
• clarifies the treatment of tail fees under Rule 5110; and
• expands Rule 5123 filing exemptions for additional categories of accredited investors. 

The SEC specifically noted that the amendments are intended to simplify compliance, reduce unnecessary exemptive requests, promote regulatory efficiency, and provide greater certainty regarding the treatment of common financing transactions, while preserving FINRA’s oversight of underwriting arrangements.

4.3 Implementation Timeline

FINRA filed the proposal on January 22, 2026. The SEC published the proposal for comment on January 30, 2026, instituted proceedings to determine whether to approve or disapprove the proposal on April 28, 2026, and approved the amendments on July 24, 2026. The approval order was published in the Federal Register on July 29, 2026. 

The materials reviewed do not specify an implementation or operative date for the amendments. Market participants should monitor subsequent FINRA announcements regarding implementation timing and operational guidance.

V. Conclusion

The 2026 amendments represent an incremental but meaningful refinement of the Corporate Financing Rule framework. By simplifying valuation methodologies, codifying categories of exemptive relief that previously required individualized FINRA action, clarifying the treatment of tail fees, and expanding Rule 5123 exemptions, FINRA has sought to reduce friction in the capital-raising process while maintaining the fundamental investor- and issuer-protection principles embedded in Rule 5110. 

The SEC’s approval of the amendments confirms regulatory support for these changes and should provide greater certainty regarding the treatment of underwriting compensation, affiliate investments, debt-for-equity exchange transactions, DPP and REIT capital investments, and private-placement filing obligations. 

Broker-dealers, underwriters, issuers, placement agents, SPAC sponsors, and other market participants involved in public offerings and private placements should evaluate the extent to which the amendments affect underwriting arrangements, compensation structures, affiliate investment activities, disclosure practices, and compliance procedures.