FINRA Rule 5110 Explained: Corporate Financing Rule
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Curious about FINRA Rule 5110 and how it governs underwriting terms in public offerings? This guide offers a clear and practical breakdown of the Corporate Financing Rule, which regulates underwriting compensation, required disclosures, and procedural filings to promote fairness and investor protection.
By reading this page, you’ll understand how Rule 5110 applies to broker-dealers participating in public offerings, what needs to be filed with FINRA, and how to avoid compensation structures that could be deemed excessive or unreasonable.
Whether you’re a compliance professional, legal advisor, or managing underwriting activities for a broker-dealer or fintech firm, this guide will help you navigate Rule 5110 confidently.
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
What Is FINRA Rule 5110?
The primary purpose of FINRA Rule 5110 is to promote fairness, transparency, and investor protection in public offerings by regulating how underwriting compensation is structured and disclosed.
This rule is designed to prevent broker-dealers involved in public offerings from receiving excessive or hidden compensation, while also keeping investors fully informed about the terms of the deal. Here are the key components that define the structure of Rule 5110:
Filing and Review Requirements
One of the foundational elements of Rule 5110 is the requirement to file detailed offering-related documents with FINRA.
Unless the offering is specifically exempt, broker-dealers participating in a public offering must file a comprehensive package with FINRA’s Public Offering System. This package should include the registration statement, offering memorandum, proposed underwriting agreements, and any other documents that define the economics and structure of the deal. Typically, the lead underwriter submits the information to FINRA.
FINRA also strictly defines the timing of the filing. Documents submitted to the SEC, a state securities commission, or other similar US regulatory authority must also be submitted to FINRA within three business days. If a broker-dealer has not filed with these authorities, the documents must be submitted at least 15 business days before commencing sales.
FINRA provides three types of response letters:
1. Defer letter: They have identified regulatory concerns or require clarification.
2. Unreasonable letter: Terms and arrangements do not comply with the Corporate Financing Rule.
3. No Objections letter: The review process is complete and permits participation in the offering. This step is crucial in identifying non-compliance and catching unreasonable compensation terms before they’re embedded in public offerings.
Defining and Disclosing Underwriting Compensation
FINRA Rule 5110 doesn’t just require that compensation be disclosed. It sets clear definitions for what constitutes underwriting compensation.
These elements include cash commissions, advisory fees, legal reimbursements, finder’s fees, securities, and any other benefit tied to participation in the offering. Additionally, the rule captures both direct payments and indirect benefits, such as rights of first refusal on future deals or board advisory roles given to underwriters.
All compensation must be clearly disclosed in the prospectus or offering document. In some cases, this includes a line item on the cover page and cross-references to more detailed disclosures in the distribution section. Therefore, firms are obliged to be transparent and precise when characterizing and reporting each component of their compensation.
Valuation of Securities and Complex Instruments
Rule 5110 introduces an effective framework for valuing securities that underwriters receive as part of their compensation. It distinguishes between non-convertible securities, which are valued based on the difference between cost and market value, and more complex instruments like warrants or convertible securities, which are subject to a specific valuation formula.
For example, warrants are assigned a minimum value of 0.2% of the offering proceeds for each 1% of securities being offered, even if the calculated value is less. This prevents firms from understating the true economic value of what they receive. The rule also allows for reductions in valuation if firms voluntarily agree to lock-up periods, adding a layer of flexibility without compromising regulatory standards.
The valuation rules aim to eliminate ambiguity. When firms or issuers try to structure deals creatively to minimize disclosed compensation, Rule 5110 requires those instruments to be priced according to established models, maintaining fairness across all offerings.
Lock-Up Restrictions to Prevent Premature Monetization
To reinforce alignment with investor interests, Rule 5110 imposes a 180-day lock-up on most securities received as compensation.
This prevents underwriters from flipping their compensation into quick profits before the market has had time to fully evaluate the issuer’s performance. The lock-up is strictly enforced unless specific exemptions apply.
These exemptions are narrowly defined. For instance, securities acquired in a venture capital deal before the offering may be excluded, but only if the terms are identical to those offered to other investors and the member did not condition participation on receiving them. The intent is to preserve the integrity of the public offering while respecting legitimate pre-offering investments.
Prohibited and Unreasonable Terms
FINRA Rule 5110 actively prohibits various terms and practices considered unfair or abusive. These include excessive non-accountable expense allowances (anything above 3% of offering proceeds), payment of compensation before the offering begins (with few exceptions), and compensation linked to incomplete offerings, unless structured under strict contractual rules.
This prohibition also targets rights of first refusal regarding participation in the distribution of a future public offering, private placement, or other financing that extends beyond three years or has more than one opportunity to waive or terminate this right of first refusal in consideration of any payment/fee.
Options, warrants, or convertible securities granted as compensation cannot have an exercise or conversion period extending beyond five years from the start of sales. Additionally, terms that grant anti-dilution protections not equally available to public shareholders or allow participating members to receive or accrue cash dividends before conversion or exercise are not permitted.
This section of Rule 5110 is a checklist of what not to include in a compliant offering. For firms structuring deals, it is a boundary that discourages excessive risk-taking or favoritism toward underwriters at the expense of the issuer or investors.
Non-Cash Compensation and Recordkeeping
This rule governs non-cash compensation, which is permitted only under strict conditions. Non-cash compensation conditions allow gifts not contingent upon sales performance, below $100 per person, and properly documented. For example, a broker-dealer can pay for a training seminar or a modest dinner, but lavish trips or bonuses tied to hitting sales targets are prohibited.
Firms must maintain detailed records of non-cash compensation, including who provided it, the recipients, the nature and value of the non-cash compensation, the location of any training or education meetings, and any other information proving the firm’s compliance. This protects against conflicts of interest and helps prevent non-cash perks from becoming a covert channel for inappropriate influence over sales behavior.
Exemptions and Carve-Outs for Special Offerings
Rule 5110 includes a list of exemptions for offerings considered low-risk or already subject to extensive oversight. For example, public offerings of non-convertible investment-grade debt securities and preferred securities offerings registered on Forms S-3, F-3, or F-10, provided the registrant is an experienced issuer, and certain charitable or church-related offerings may be exempt from SEC registration. Although exempt from filing with FINRA, these offering types are still subject to the general principles of fair compensation.
In addition, carve-outs for venture capital investments and transactions occur well before a public offering. If the transaction involved institutional investors, followed standard terms, and wasn't conditioned on the underwriter’s future participation, FINRA may exclude the securities from being treated as underwriting compensation.
These exemptions instill flexibility and practicality into the rule, allowing the market to function efficiently while still policing areas of higher risk.
Insight from the Experts
"Rule 5110 isn’t just about compliance, it’s also about credibility. How firms structure and disclose compensation reflects their commitment to fairness, transparency, and long-term relationships with investors."
What Is the Purpose of Rule 5110?
FINRA Rule 5110 plays a key role in promoting fair compensation practices and protecting the integrity of capital markets during public offerings. By standardizing how underwriting terms are structured, disclosed, and reviewed, the rule promotes transparency, prevents excessive fees, and reinforces investor confidence in the fairness of securities offerings.
Here are the primary objectives of Rule 5110:
1. Prevent Unreasonable or Excessive Compensation
The rule sets clear limits on what broker-dealers can receive in exchange for underwriting services. By establishing formulas for valuing equity-based compensation and capping certain expense allowances, it supports fair compensation for underwriters without allowing excessive payouts. This helps maintain balanced economics between issuers, investors, and underwriters.
2. Promote Transparency in Public Offerings
FINRA Rule 5110 requires detailed disclosure of all cash and non-cash underwriting compensation. This includes direct fees, securities, advisory roles, and any rights tied to future deals. By requiring this level of transparency, the rule allows investors to fully understand how underwriters are incentivized and assess whether those incentives are aligned with market fairness.
3. Protect Investors from Hidden Conflicts
Compensation structures that aren’t fully disclosed or are too complex can create misaligned incentives between broker-dealers and investors. Rule 5110 mitigates this by scrutinizing indirect benefits, long-term rights, and preferential arrangements. This focus on clarity and disclosure helps investors trust the capital-raising process and prevents behind-the-scenes deals that could distort pricing or allocation.
4. Create a Consistent Framework Across Offerings
By applying a uniform standard to underwriting terms, Rule 5110 promotes consistency across issuers and industries. This levels the playing field, especially for smaller issuers lacking negotiating leverage. It also prevents competitive pressure from pushing underwriting terms beyond reasonable limits in pursuit of deals, maintaining stability across market cycles.
5. Strengthen Regulatory Oversight and Market Integrity
The required submission of offering materials to FINRA for review provides a proactive layer of oversight before securities are sold to the public. FINRA’s “no objections” process acts as a gatekeeper, identifying potential abuses before they reach the market. This regulatory check reinforces confidence in the fairness of public offerings and deters problematic compensation arrangements from going unnoticed.
Example 1
Inadequate Disclosure of Warrant Compensation
A mid-tier investment bank participated in a public offering where it received warrants to purchase shares at a discount. While the warrants were disclosed in the offering documents, the firm failed to include key terms in the distribution section. During FINRA’s review, this omission triggered a compliance flag, delaying the “no objections” letter and pushing back the offering timeline. The firm was required to amend its disclosures and implement a pre-review checklist for underwriting compensation going forward.
Example 2
Unreasonable Termination Fee in Underwriting Agreement
A technology issuer engaged a broker-dealer under an underwriting agreement that included a $1 million termination fee, payable even if the offering was canceled for cause. FINRA flagged this term as excessive and inconsistent with Rule 5110’s fairness standards. The firm revised the agreement to include a termination-for-cause clause and capped the fee at a more reasonable level aligned with services rendered. This avoided further regulatory friction and kept the offering on track.
Note: The practical examples are fictional and created solely to enhance understanding of FINRA Rule 1210. They are not based on actual events or individuals and should not be interpreted as real-life scenarios.
FINRA Rule 5110 Violations and Cases
Understanding how FINRA Rule 5110 is applied in real-world enforcement actions offers essential lessons for compliance professionals. These cases illustrate how lapses in disclosure, improper compensation arrangements, or failure to follow procedural requirements can result in significant regulatory penalties.
Below are examples of recent violations that highlight the consequences of non-compliance with Rule 5110.
01
Late Filings and Incomplete Disclosures in Public Offerings
In December 2024, a New York-based broker-dealer was censured and fined $900,000 for violating FINRA Rule 5110. The firm received underwriting compensation that was excessive and inaccurately described in offering documents. Additionally, it failed to make the necessary filings with FINRA, hindering regulatory review of the fairness of the underwriting arrangements.
The violations included providing underwriters with compensation structures that deviated from what was disclosed in the prospectus, such as allowing private warrant holders to exercise beyond the permitted five-year window and omitting required lock-up provisions. The firm also missed deadlines for submitting documents related to multiple public offerings, with delays extending beyond seven months in some cases. These failures reflected broader issues with the firm's inadequate supervisory systems and procedures for maintaining compliance with FINRA regulations.
To resolve the matter, the firm agreed to pay the fine in full and committed to revising its supervisory procedures to prevent future violations.
02
Failure to Submit Offering Terms and Lack of Supervisory Oversight
In 2025, FINRA sanctioned a financial services firm for multiple violations related to its role in several public offerings. The firm was fined over $90,000 after failing to submit required documents under FINRA Rule 5110 in a timely manner, even though these materials had already been filed with the SEC.
Some documents were delayed by as much as two years and included critical information such as underwriting agreements and compensation disclosures. These delays impeded FINRA’s ability to assess the fairness and structure of the offerings.
Further, the firm failed to disclose $14,000 in legal fees and omitted a 7% underwriting discount in one prospectus. These violations were attributed to inadequate supervisory systems and written procedures, which were subsequently revised to meet compliance standards.
Insight from the Experts
"FINRA Rule 5110 isn’t just about policing underwriting fees. It’s about promoting transparency and accountability in how capital is raised. When firms treat this rule as a framework for ethical deal-making, they gain long-term credibility with both regulators and the market."
Frequently Asked Questions About FINRA's Corporate Financing Rule Rule
Understanding how FINRA Rule 5110 is applied in real-world situations can provide valuable insights into compliance and regulatory expectations. Below are examples of violations and cases that illustrate the consequences of non-compliance and the importance of adhering to the rule's requirements.
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