FINRA Proposes Amendments to Rules 5110 and 5123 to Enhance Capital Formation and Regulatory Efficiency

The Financial Industry Regulatory Authority filed a proposed rule change with the Securities and Exchange Commission on January 22, 2026, to amend FINRA Rules 5110 and 5123. Published in the Federal Register on January 30, 2026, this proposal seeks to modernize regulations governing underwriting terms in public offerings and filing requirements for private placements. By clarifying valuation methods, adding exclusions from underwriting compensation, and expanding exemptions, the changes address challenges in capital formation. This development holds significance for issuers, underwriters, and investors, as it balances regulatory efficiency with market integrity amid evolving financing practices.

Background on FINRA Rules 5110 and 5123

FINRA Rule 5110, known as the Corporate Financing Rule, prohibits unfair underwriting terms in public offerings. Members participating in such offerings must file documents with FINRA for review to ensure compliance. The rule plays a key role in promoting fair capital raising, with reviews covering initial public offerings, follow-on offerings, and other structures. Rule 5123 requires members to file offering documents for private placements within 15 days of the first sale, unless exempted, to help FINRA monitor trends and potential violations. Exemptions currently apply to sales to certain institutional accredited investors under SEC Rule 501.

These rules support economic growth by enabling businesses to access capital efficiently while protecting investors. The proposal builds on SEC amendments in 2020 that expanded the accredited investor definition to include more sophisticated entities, aiming to align FINRA's framework with these updates.

Key Amendments to Rule 5110: Valuation and Exclusions

The proposal introduces a simplified valuation method for securities deemed underwriting compensation. Under the current rule, valuation relies on public offering price or a 'bona fide public market' definition tied to trading volume and public float, which members find complex. The amendment replaces this with a method using the closing market price on a registered national securities exchange or designated offshore securities market on the acquisition date. This change, outlined in amended paragraphs (c)(2) and (c)(3), aims to provide predictability and reduce indeterminate compensation issues prohibited under (g)(1).

New exclusions from underwriting compensation codify staff exemptions. For debt-for-equity exchanges, Supplementary Material .01(b)(23) excludes equity acquired in transactions providing economic and tax benefits to issuers, provided the securities are offered in a firm commitment underwriting, terms are negotiated at arm's length based on market price, and compensation is customary. This addresses a rise in such exchanges, with FINRA noting 15 exemption requests from 2022 to 2024.

For capital investments in direct participation programs and unlisted real estate investment trusts, Supplementary Material .01(b)(24) excludes acquisitions if disclosed in the prospectus, valued at net asset value, subject to Rule 2310, and restricted for 180 days post-sales commencement. This facilitates financing for these issuers.

Non-convertible preferred securities acquired at fair price would be treated like non-convertible debt, assigned no compensation value under amended (c)(5), promoting equivalent treatment for fixed-income instruments.

Minor operational changes include clarifying that tail fees, similar to termination fees, must meet requirements in (g)(5)(B) to avoid being deemed unreasonable.

Amendments to Rule 5123: Expanded Exemptions

The proposal aligns Rule 5123 with SEC updates by adding exemptions for private placements sold to two entity types: those with investments over $5,000,000 not formed for the specific purpose of acquiring the securities (per Rule 501(a)(9)), and family offices with assets under management exceeding $5,000,000 directed by knowledgeable persons (per Rule 501(a)(12)). These mirror institutional accredited investor sophistication, reducing filing burdens without compromising oversight. FINRA emphasizes that these investors do not need the rule's protections, similar to existing exemptions for banks, insurance companies, and certain trusts.

During 2022-2024, FINRA received 8,485 unique Rule 5123 filings, highlighting the market's scale. The changes would exempt offerings to these sophisticated entities, enhancing efficiency.

Statutory Basis and Economic Impact

FINRA asserts the proposal aligns with Section 15A(b)(6) of the Securities Exchange Act, promoting just and equitable trade principles and investor protection. It facilitates capital formation by reducing compliance costs, such as exemption requests—21 for capital investments and debt-for-equity from 2022-2024—while maintaining safeguards.

An economic assessment notes benefits like simplified valuations and new financing options, potentially increasing investments. Costs are minimal, as codifications extend proven exemptions. Alternatives considered, such as including over-the-counter securities in valuations, were deferred for further evaluation.

Responses to Public Comments

FINRA received six comments on its December 2024 Regulatory Notice 24-17. Commenters like the American Bar Association and SIFMA supported simplifications but sought clarifications on valuation language and debt-for-equity scope. FINRA adjusted rule text for clarity and confirmed broad applicability. Suggestions to expand Rule 5123 exemptions to all accredited investors were rejected, citing risks to retail investors. Overall, the proposal incorporates feedback to refine operations.