8.5.2. The Corporate Financing Rule
FINRA’s Corporate Financing Rule sets out conditions for underwriter participation in a public offering. The rule is extremely long and detailed, but the key points are as follows.
Underwriting compensation (and all other terms of a UA) must be fair and reasonable. The UA, LOI, registration statement, and related documents must be filed with FINRA no more than one business day after filing them with the SEC or any state securities regulator. (The UA will not yet be finalized with the offering price, and must be accompanied by an estimated maximum price.) If any of these documents should somehow wind up being exempt from being filed with any other regulator, the underwriter must still file them with FINRA at least 15 business days prior to the expected offering date.
Whichever deadline applies, the purpose is for FINRA to evaluate whether the terms of the UA seem fair. The related documents that must be submitted include any AAU and/or selling group agreement, and their terms will also be evaluated.
If FINRA finds no objection to the compensation, it will give an opinion of “no objection.” Note that FINRA will not judge the merits of the offering. It will only refrain from objecting to a UA that complies with FINRA rules. For this reason, the underwriters may not say that FINRA “approved” the UA, the offering, or the securities.
As mentioned above, spreads often average around 7% of the total proceeds. But this is just a rule of thumb across all types of offerings. A spread of 10% (or 5%, for that matter) might b