an underwritten public offering; and (3) provides investors additional
liability protections for any misstatements in the disclosure. Davis
Polk requested clarification as to the specific disclosure requirements
for securities acquired by participating members that are deemed
underwriting compensation.
    As noted in Item II.A. above, recognizing commenters' conflicting
views, the proposed rule change would retain the current requirements
for itemized disclosure of underwriting compensation.\110\ The proposed
rule

change would make explicit the existing practice of disclosing
specified material terms and arrangements related to underwriting
compensation, such as exercise terms, in the prospectus.\111\
---------------------------------------------------------------------------

    \110\ See proposed Rule 5110(b)(1) and Supplementary Material
.05 to Rule 5110. See also proposed Rule 5110(e)(1)(B) requiring
disclosure of lock-ups.
    \111\ See proposed Supplementary Material .05 to Rule 5110.
---------------------------------------------------------------------------

Underwriting Compensation
    While removal of Rule 5110's references to ``items of value'' was
supported,\112\ commenters requested several clarifications or changes
to the proposed definition of underwriting compensation. Two commenters
suggested that the reference to compensation received from ``any
source'' in the proposed underwriting compensation definition was
overly broad and should be deleted to instead focus on benefits
received from or at the direction of the issuer.\113\ Alternatively, if
the phrase ``any source'' is not deleted, the commenters suggested that
the definition should, at a minimum, be more narrowly tailored to
address any specific concerns. Underwriting compensation typically is
paid by the issuer, but FINRA has charged violations of its Corporate
Financing Rules in connection with quid pro quo arrangements between
underwriters and institutional investors for the allocation of hot
issues that would make narrowing the source of compensation to issuers
in all cases problematic.\114\
---------------------------------------------------------------------------

    \112\ See SIFMA.
    \113\ See Davis Polk and SIFMA.
    \114\ See News Release, NASD, NASD Regulation Charges Credit
Suisse First Boston with Siphoning Tens of Millions of Dollars of
Customers' Profits in Exchange for ``Hot'' IPO Shares (January 22,
2002), http://www.finra.org/newsroom/2002/nasd-regulation-charges-credit-suisse-first-boston-siphoning-tens-millions-dollars. See also
News Release, SEC, SEC Charges CSFB with Abusive IPO Allocation
Practices CSFB Will Pay $100 Million to Settle SEC and NASD Actions;
Millions in IPO Profits Extracted from Customers in Exchange for
Allocations in ``Hot'' Deals (January 22, 2002), https://www.sec.gov/news/headlines/csfbipo.htm.
---------------------------------------------------------------------------

    Two commenters suggested revising the proposed underwriting
compensation definition to provide that only payments made or
securities received during the ``review period'' would be included in
underwriting compensation.\115\ In its reviews, FINRA typically only
considers payments and benefits received during the applicable review
period in evaluating underwriting compensation. However, if there is an
arrangement, in fact, to pay compensation related to the underwriting
outside the review period, the payment must be included under Rule
5110. Accordingly, the proposed rule change does not limit the proposed
underwriting compensation definition to payments and benefits received
during the review period.
---------------------------------------------------------------------------

    \115\ See Davis Polk and Rothwell.
---------------------------------------------------------------------------

    SIFMA suggested deleting the last sentence of the proposed
underwriting compensation definition, as that sentence would imply that
finder's fees and underwriter's counsel fees are counted as
compensation even if not reimbursed to the participating member. The
approach in the proposed underwriting compensation definition is
consistent with the treatment in the current Rule, which includes both
finder's fees and underwriter's counsel fees as items of value.\116\
The proposed rule change provides among the examples of payments that
would be underwriting compensation: (1) Fees and expenses of
participating members' counsel paid or reimbursed to, or paid on behalf
of, the participating members (except for reimbursement of ``blue sky''
fees); and (2) finder's fees paid or reimbursed to, or paid on behalf
of, the participating members.\117\
---------------------------------------------------------------------------

    \116\ See current Rule 5110(c)(3)(A)(iii)-(iv).
    \117\ See proposed Supplementary Material .01(a)(3) and (4).
---------------------------------------------------------------------------

    Davis Polk suggested revising the proposed underwriting
compensation definition to exclude securities of foreign (non-U.S.)
issuers acquired by participating members in the issuer's domestic
market if such market meets certain volume and float requirements. In
determining whether the securities are underwriting compensation, Davis
Polk suggested that considering whether the securities are traded on a
``designated offshore securities market'' (as defined in Rule 902(b) of
SEC Regulation S) is overly restrictive and not meaningful; rather, the
focus should be on whether the securities are freely trading so that
the price paid is the fair market price. For this reason, Davis Polk
also suggested that proposed Rule 5110(a)(4)(B)(iv) be modified so that
participating members need not provide information regarding issuer
securities they acquire during the review period in the issuer's
domestic market.
    The approach in the proposed rule change to provide that ``listed
securities'' purchased in public market transactions would not be
considered underwriting compensation is consistent with the treatment
of these securities in the current Rule.\118\ This treatment has not
been historically problematic, with any issues related to securities of
foreign (non-U.S.) issuers acquired by participating members in the
issuer's domestic market arising infrequently. However, the integrity
of foreign markets may vary significantly and information regarding
shares obtained in those markets may be important to FINRA's review.
While the proposed rule change does not propose to alter the treatment
for these securities, exemptive relief may be available on a case-by-
case basis as necessary and appropriate.
---------------------------------------------------------------------------

    \118\ See proposed Supplementary Material .01(b)(11) to Rule
5110. Substantively consistent with the current Rule, proposed
Supplementary Material .01(c)(1) to Rule 5110 would define listed
securities to mean ``securities that are traded on the national
securities exchanges identified in Securities Act Rule 146, on
markets registered with the SEC under Section 6 of the Exchange Act,
and on any ``designated offshore securities market'' as defined in
Rule 902(b) of SEC Regulation S.''
---------------------------------------------------------------------------

    Davis Polk requested clarification as to whether fees and other
compensation paid to foreign broker-dealers in connection with the
foreign (non-U.S.) distribution of the offering should be deemed
underwriting compensation. Rule 5110 does not apply to fees and other
compensation paid to underwriters for securities distributions made
exclusively in foreign markets. Notwithstanding that some shares may be
sold in foreign markets global offerings typically register shares in
the U.S. to accommodate the potential for flow back in the U.S. At the
time of FINRA's review, the exact amount of shares that will be sold in
the U.S. is not available. Therefore, FINRA's initial review is based
on the entire amount registered.
    Two commenters suggested that the lack of an express public
standard for determining when the aggregate amount of proposed
underwriting compensation is unfair and unreasonable under Rule 5110
has caused confusion on the part of issuers, underwriters and
counsel.\119\ In considering whether the aggregate underwriting
compensation that participating members receive in connection with a
public offering is fair and reasonable, FINRA takes into account the
following factors, as well as all other relevant facts and
circumstances: (1) The anticipated maximum amount of offering proceeds;
(2) whether the offering is being distributed on a firm commitment or
best efforts basis; and (3) whether the offering is an initial or
follow-on offering.\120\
---------------------------------------------------------------------------

    \119\ See EGS and Rothwell.
    \120\ These factors are set forth in current Rule 5110(c)(2)(D).
Because this guidance is more appropriate for a Regulatory Notice
than rule text, the proposed rule change would eliminate the factors
in the current Rule. However, FINRA will consider whether additional
discussion of this topic in a Regulatory Notice or frequently asked
questions would be helpful.
---------------------------------------------------------------------------

    The amount of permissible underwriting compensation for an offering
is typically expressed as a percentage of the proposed maximum

offering proceeds, and this percentage generally increases as the
offering size decreases. The maximum permissible compensation
percentage is typically higher for a firm commitment offering than a
best efforts offering of the same size, which recognizes the risks and
expenses of committing capital to an offering. The maximum permissible
compensation also is typically higher for an IPO than a follow-on
offering of the same size, which recognizes the higher cost of
underwriting an offering for an issuer without an established market
for its securities.
Examples of Payments or Benefits That Are or Are Not Considered
Underwriting Compensation
    Commenters requested clarification or expansion of the proposed
non-exhaustive lists of examples of payments or benefits that would be
and would not be considered underwriting compensation. SIFMA suggested
that the prefatory language to proposed Supplementary Material .01(a)
should state ``[t]he following are examples of payments or benefits
that are considered underwriting compensation `if received during the
review period for underwriting, allocation, distribution, advisory or
other investment banking services provided in connection with the
public offering.' '' The proposed rule change does not include a
reference to the review period in the prefatory language. As discussed
above, if there is an arrangement, in fact, to provide payments or
benefits for underwriting services outside the review period, the
payments or benefits must be included under Rule 5110. Moreover,
because the proposed definition of underwriting compensation already
refers to underwriting, allocation, distribution, advisory or other
investment banking services provided in connection with a public
offering, it is unclear how adding the language to the lists of
examples would be helpful.
    Two commenters suggested that the items in proposed Supplementary
Material .01(a)(3) and (4) to Rule 5110 be revised to clarify that such
items (i.e., finder's fees and counsel fees) are counted as
underwriting compensation solely to the extent they are reimbursed to,
or paid on behalf of, the participating members.\121\ This is
consistent with the approach in proposed Supplementary Material
.01(a)(2) to Rule 5110 for other fees and expenses, including, but not
limited to, road show fees and expenses and due diligence expenses.
Accordingly, FINRA made the suggested change.
---------------------------------------------------------------------------

    \121\ See ABA and SIFMA.
---------------------------------------------------------------------------

    SIFMA suggested that proposed Supplementary Material .01(a)(7) to
Rule 5110 be revised to provide that common stock and other equity
securities would not be considered underwriting compensation if
purchased or acquired in a transaction that complies with proposed Rule
5110(d) or is otherwise excluded as underwriting compensation pursuant
to other provisions of the proposed Rule (including Supplementary
Material .01(b) to Rule 5110). The list of examples of underwriting
compensation in proposed Supplementary Material .01(a) to Rule 5110 is
intended to be read in combination with the venture capital exceptions
and list of examples of what would not be considered underwriting
compensation. The proposed rule change does not incorporate the
suggested change because it is unclear how adding cross-references to
Supplementary Material .01(a)(7) to Rule 5110 would be beneficial.
Rather, adding the cross-reference to one example of underwriting
compensation as suggested would seem to add confusion, not clarity, to
the Rule's requirements.
    SIFMA suggested that proposed Supplementary Material .01(a)(9) to
Rule 5110 be revised to eliminate the one percent valuation assigned to
ROFRs. SIFMA suggested that ROFRs be deemed underwriting compensation
but be assigned zero compensation value (unless the agreement in which
the ROFR is granted contains a dollar amount contractually agreed to by
the parties to waive the ROFR, in which case that amount should be
included). ROFRs have historically been assigned a one percent
valuation for purposes of Rule 5110. FINRA continues to believe that
ROFRs are a valuable benefit that traditionally have been used in
combination with other forms of compensation to reward underwriters and
that this historical approach to valuing ROFRs is reasonable.
    SIFMA acknowledged that proposed Supplementary Material .01(a)(13)
to Rule 5110--which provides that any compensation paid to any
participating member in connection with a prior proposed public
offering that was not completed is considered underwriting
compensation, if the member participated in the revised public
offering--is consistent with the current Rule. However, SIFMA
questioned the rationale for the treatment of this compensation if it
was received in accordance with proposed Rule 5110(g)(5)--which sets
forth the requirements for termination fees. SIFMA suggested that
proposed Supplementary Material .01(a)(13) to Rule 5110 should make it
clear that the prior compensation would be treated as underwriting
compensation only if it is received within the review period for the
new public offering.
    Rule 5110's termination provisions were revised in 2014 to provide
members with greater flexibility in negotiating the terms of their
agreements for terminated offerings, while also providing protection
for issuers if a member fails materially to perform the underwriting
services contemplated in the written agreement.\122\ The proposed
Supplementary Material, which is consistent with the current Rule,
continues to fulfill this purpose. Furthermore, the compensation
received in a prior terminated offering would be considered
underwriting compensation under Rule 5110 only if the member
participates in the revised public offering.
---------------------------------------------------------------------------

    \122\ See Securities Exchange Act Release No. 72114 (May 7,
2014), 79 FR 27355 (May 13, 2014) (Order Approving File No. SR-
FINRA-2014-004).
---------------------------------------------------------------------------

    With respect to proposed Supplementary Material .01(a)(14) to Rule
5110, SIFMA stated that gifts and business entertainment provided in
compliance with the limits set forth in proposed Rule 5110(f)(2)(A) and
(B) (which allow for nominal gifts and occasional meals, sporting
events or comparable entertainment) should not be counted as
underwriting compensation as there is no rationale and investor
protection goal served by the imposition of this requirement. Non-cash
compensation, including gifts and business entertainment, in connection
with a public offering may be reasonably considered underwriting
compensation. To the extent that any gifts and business entertainment
are provided in compliance with the limits set forth in proposed Rule
5110(f)(2)(A) and (B), the amount of underwriting compensation
attributable to the gifts and business entertainment should not be
significant in practice. With that said, FINRA is currently reviewing
all of its non-cash compensation provisions in the context of a
separate retrospective rule review.\123\
---------------------------------------------------------------------------

    \123\ See Regulatory Notice 16-29 (August 2016).
---------------------------------------------------------------------------

    Davis Polk noted that proposed Supplementary Material .01(b)(1)
provides that fees of ``independent financial advisers'' would not be
underwriting compensation but questioned the treatment of fees paid to
members for acting solely as ``financial advisers.'' The proposed rule
change would define an independent financial

adviser consistent with the current Rule.\124\ Application of the Rule
to financial advisers was addressed when the defined term independent
financial adviser was added to Rule 5110 in 2014.\125\ The application
of the Rule to fees paid to financial advisers and the carve-out for
fees of independent financial advisers, as that term is defined,
continues to be appropriate.
---------------------------------------------------------------------------

    \124\ See current Rule 5110(a)(5)(B) and proposed Rule
5110(j)(9).
    \125\ See Securities Exchange Act Release No. 71372 (January 23,
2014), 79 FR 4793 (January 29, 2014) (Notice of Filing of File No.
SR-FINRA-2014-003). See also Letter from Kathryn M. Moore, Associate
General Counsel, FINRA, to Kevin O'Neill, Deputy Secretary, SEC,
(regarding File No. SR-FINRA-2014-003), dated April 16, 2014.
---------------------------------------------------------------------------

    SIFMA suggested that proposed Supplementary Material .01(b)(2) to
Rule 5110 should exclude from underwriting compensation ``cash
compensation received for providing services in a private placement,''
rather than being limited to acting as a placement agent. SIFMA stated
that limiting the provision to receipt of cash compensation solely for
acting in a placement agent capacity is unnecessarily narrow and should
be removed. Rule 5110 currently provides that cash compensation
received for acting only as a private placement agent would not be an
item of value. Member's roles in acting as a placement agent and in
providing services in a private placement similarly facilitate
offerings. Upon further review, FINRA agrees that this carve-out can be
expanded to include the provision of other services by a member for a
private placement without the risk of harm to investors. Accordingly,
the proposed rule change would expand the scope of proposed
Supplementary Material .01(b)(2) to Rule 5110 to include cash
compensation for providing services for a private placement.
    Two commenters suggested that proposed Supplementary Material
.01(b)(11) to Rule 5110 should be modified to remove the reference to
``listed'' securities (i.e., all securities purchased in public market
transactions should be excluded from underwriting compensation,
regardless of whether they are listed).\126\ The proposed approach is
consistent with the treatment in Rule 5110 currently, which provides
that listed securities acquired in public market transactions would not
be an item of value.\127\ The defined term ``listed securities'' in
Supplementary Material .01(c)(1) of Rule 5110 provides greater clarity
on the scope of covered securities than the commenters' suggestion.
---------------------------------------------------------------------------

    \126\ See ABA and SIFMA.
    \127\ See current Rule 5110(c)(3)(B)(iii).
---------------------------------------------------------------------------

    Three commenters suggested amending proposed Supplementary Material
.01(b)(12) to Rule 5110 to expressly provide that securities received
by directors or employees under any written compensatory benefit plan
would not be underwriting compensation.\128\ The commenters stated that
these types of plans are for the purpose of compensating directors and
employees and are unrelated to underwriting compensation in connection
with a public offering. FINRA would interpret the reference to a
``similar plan'' in proposed Supplementary Material .01(b)(12) to Rule
5110 to include a written compensatory benefit plan for directors and
employees that provides comparable grants of securities to similarly
situated persons (e.g., a written compensatory benefit plan that
provides comparable grants of securities to all qualifying employees)
and accordingly does not propose to change the Rule text. A ``similar
plan'' would not include a compensatory benefit plan that was developed
or structured to circumvent the requirements of Rule 5110.
---------------------------------------------------------------------------

    \128\ See ABA, Davis Polk and Rothwell.
---------------------------------------------------------------------------

    SIFMA suggested amending proposed Supplementary Material .01(b) to
Rule 5110 to expressly provide that underwriting compensation would not
include any cash compensation, securities or other benefit received by
a person who was not, at the time of the acquisition of the
compensation, an associated person, immediate family or affiliate of a
participating FINRA member. Because persons have previously transferred
from issuers to members around the time of securities acquisitions, the
proposed rule change would not provide an express carve-out provision
as suggested. However, exemptive relief may be available for bona fide
transfers on a case-by-case basis as necessary and appropriate.
    SIFMA suggested amending Supplementary Material .01(b) to Rule 5110
to expressly provide that underwriting compensation would not include
any cash compensation, securities or other benefit received by an
associated person, immediate family or affiliate of a participating
member if the member or its parent or other affiliate is issuing its
own securities in the public offering. Because a broad carve-out could
be used to circumvent the requirements of Rule 5110, the proposed rule
change would not provide an express provision as suggested. Exemptive
relief may be available on a case-by-case basis as necessary and
appropriate where a participating member or its parent or other
affiliate is issuing its own securities in the public offering.
    Several commenters suggested amending proposed Supplementary
Material .01(b) to Rule 5110 to expressly provide that underwriting
compensation would not include securities acquired pursuant to a
governmental or court-approved proceeding or plan of reorganization.
Specifically, SIFMA suggested amending proposed Supplementary Material
.01(b) to Rule 5110 to expressly provide that underwriting compensation
would not include acquisitions of securities before or after the
required filing date by participating members pursuant to a U.S. or
non-U.S. governmental or court-approved proceeding or plan of
reorganization in which new securities are issued to or are available
for purchase by existing securities holders (e.g., a bankruptcy or tax
court proceeding) where such participating members receive or purchase
such securities on the same terms as other similarly-situated security
holders. ABA supported amending Supplementary Material .01(b) to Rule
5110 to expressly provide that underwriting compensation would not
include securities acquired by a participating member in connection
with a court-approved bankruptcy process. In addition, Davis Polk
supported amending Supplementary Material .01(b) to Rule 5110 to
expressly provide that underwriting compensation would not include
securities issued pursuant to court order.
    Because these securities acquisitions would be overseen by the
government or court, the risk of intentional circumvention of Rule 5110
or investor harm is minimized. Accordingly, the proposed rule change
would provide that underwriting compensation would not include
securities acquired pursuant to a governmental or court-approved
proceeding or plan of reorganization as a result of action by the
government or court (e.g., bankruptcy or tax court proceeding).\129\
---------------------------------------------------------------------------

    \129\ See proposed Supplementary Material .01(b)(22) to Rule
5110.
---------------------------------------------------------------------------

Venture Capital Exceptions From Underwriting Compensation
    SIFMA requested that FINRA state affirmatively that Rule 5110's
venture capital exceptions are non-exclusive safe harbors and that
other securities acquisitions that do not meet one of the express safe
harbors (or fall within other exceptions provided elsewhere in Rule
5110) would also be excluded from

characterization as underwriting compensation (and the accompanying
lock-up restrictions) if the acquisition of the securities by the
participating member is not compensation for providing underwriting,
allocation, distribution, advisory or other investment banking services
in connection with the public offering. FINRA proposes to retain an
objective standard for distinguishing securities acquired in bona fide
venture capital transactions from those acquired as underwriting
compensation. While retaining this objective standard, the proposed
rule change provides additional flexibility for members via the
principles-based approach for significantly delayed offerings or the
examples in proposed Supplementary Material .01(b) in some securities
acquisitions not being underwriting compensation.
    ABA generally supported the proposed changes to the venture capital
exceptions but suggested that some additional changes be considered.
Specifically, ABA suggested that the requirement that the participating
member must acquire the issuer's securities ``at the same price and
with the same terms as securities purchased by all other investors'' be
revised such that the participating member may acquire its securities
``on no better terms'' than the other investors. ABA noted that members
may choose to forego voting rights or other indicia of control when
purchasing an issuer's securities and this detrimental variation in the
purchase terms should not deny a participating member the ability to
rely on the exceptions.
    Introducing the concept of securities acquisitions ``on no better
terms'' would introduce considerable uncertainty into the evaluation of
whether any of the venture capital exceptions would be available. The
``on no better terms'' concept would require a weighing and
consideration of all of the various terms of a securities acquisition,
which could be time consuming for members, counsel and FINRA staff.
Retaining the concept of ``at the same price and with the same terms,''
which is in the current Rule, provides objectivity and clarity.
    ABA also requested revising proposed Rule 5110(d)(1)(B) to read
``investment or loan'' rather than ``investment and loan'' to make
clear that the provision does not require a participating member or its
affiliate to make both an investment in and a loan to the issuer in
order to rely on the exception. To clarify that both an investment in
and a loan to the issuer are not required, the proposed rule change
would revert to the current use of ``or'' in current Rule
5110(d)(5)(A)(i)c.\130\
---------------------------------------------------------------------------

    \130\ See proposed Rule 5110(d)(1)(B).
---------------------------------------------------------------------------

    Two commenters supported amending the timing requirement for the
venture capital exceptions to allow for application to situations in
which the participating member or its affiliate has made its investment
in the issuer after the required filing date.\131\ If not so amended,
SIFMA suggested either: (1) Eliminating the pre-filing timing
restriction in proposed (d)(1) and (2), which address securities
acquired by certain affiliates of a participating member; or (2)
establishing for all of these exceptions a formal mechanism to reset
the required filing date for significantly delayed offerings.
---------------------------------------------------------------------------

    \131\ See ABA and SIFMA.
---------------------------------------------------------------------------

    When an offering has been significantly delayed, FINRA would
consider the factors in proposed Supplementary Material .02 to Rule
5110 discussed above to analyze whether securities acquired in a
transaction that occurs after the required filing date, but otherwise
meets the requirements of a venture capital exception, may be excluded
from underwriting compensation.
    SIFMA suggested that the venture capital exceptions be amended to
provide that the determination as to the availability of an exception
is to be made by the participating member at the time of the
acquisition of the securities and on the basis of the information then
known to the participating member. Except for the principles-based
approach for significantly delayed offerings, the venture capital
exceptions apply to the acquisition of securities before the required
filing date. Accordingly, whether an acquisition of the securities
meets an exception must be determined before the required filing date.
    NASAA expressed concern about removing the restriction in current
Rule 5110(d)(5)(A) and (B) that the exception from underwriting
compensation is available only to underwriters and their affiliates who
own less than 25 percent of the issuer's total equity, as the removal
of the restriction may increase the potential for conflicts of interest
to arise. NASAA questioned whether the proposed changes further
investor protection and whether the protections of Rule 5121 are
adequate. FINRA believes, however, the proposed rule change would
eliminate an unnecessary restriction in the relevant venture capital
exceptions. Post-2004 regulatory changes in other areas, such as the
2009 revision of Rule 5121 regarding public offerings with a conflict
of interest, have added protections to address acquisitions that create
control relationships. Moreover, in FINRA's experience control
transactions that result in ownership of more than 25 percent of an
issuer involve significant investment risks and are not designed to be
a means to obtain additional underwriting compensation.
    SIFMA stated that the addition of ``through a subsidiary it
controls'' in the venture capital exceptions in proposed Rule
5110(d)(1) and (2) is a useful clarification, but suggested that
provision be modified to require that ``the affiliate is `or will be'
primarily engaged in the business of making investments in or loans to
other companies, `or has been formed for the purpose of making this
investment or loan by a parent that is directly or indirectly engaged
in such activities.' '' SIFMA suggested that this modification would
address situations in which the investing entity is a newly formed
vehicle and does not, outside the present investment, have a history of
making such investments in other companies.
    Expanding the scope of the exceptions to cover direct, indirect or
newly formed entities that are in the business of making investments
and loans acknowledges the different structures that may be used to
participate in bona fide venture capital transactions. Expanding these
exceptions to cover entities that may be formed in the future could
undermine the protection that results from requiring an entity to be in
the business of making such acquisitions, rather than one simply formed
to participate in a compensation transaction.
    SIFMA supported increasing the participating members' aggregate
acquisition threshold from 20 percent to 40 percent of the total
offering in the venture capital exception in proposed Rule 5110(d)(3).
SIFMA suggested, however, that limiting this venture capital exception
to receipt of the securities for placement agent activities is too
narrow and should be removed (e.g., securities-related compensation
could be offered by an issuer in return for advisory or other services
provided by a participating member in connection with the private
placement, rather than for services as a placement agent).
    FINRA believes that the venture capital exception in proposed Rule
5110(d)(3) can be expanded to include the provision of other services
for a private placement without the risk of harm to investors.
Accordingly, the proposed rule change would expand the scope of
proposed Rule 5110(d)(3) to include providing services for a private

placement (rather than just acting as a placement agent). Proposed Rule
5110(d)(3) would also be clarified to refer to 51 percent of the
``total number of securities sold in the private placement.'' The
current rule text states ``at least 51 percent of the `total offering'
(comprised of the total number of securities sold in the private
placement and received or to be received as placement agent
compensation by any member).''
    SIFMA also suggested adding another venture capital exception from
underwriting compensation for securities acquired before or after the
required filing date by a participating member in connection with a
loan or a private placement in which securities (at the same price and
with the same terms) were also acquired by certain types of special
investors, including: (1) Registered investment companies; (2) a fund
or insurance company that meets the qualifications in proposed
paragraph (d)(1), (2) or (3); (3) a publicly traded company that is
listed on a national securities exchange or a non-U.S. issuer that
meets the quantitative designation criteria for listing on a national
securities exchange; (4) a benefit plan qualified under Section 401(a)
of the Internal Revenue Code (provided that such plan is not sponsored
by the participating member); (5) a state or municipality, or a state
or municipal government benefits plan that is subject to state and/or
municipal registration; (6) a sovereign wealth fund or similar
investment vehicle; (7) a bank as defined in Section 3(a)(6) of the
Exchange Act; or (8) an organization described in Rule 15a-6(a)(4)(ii),
provided no participating member manages such entity's investments or
otherwise controls of directs the management or policies of such entity
and such entity or entities acquire in the aggregate at least 10
percent of the total offering.
    Providing the suggested venture capital exception could result in a
significant expansion of the historical scope of Rule 5110's venture
capital exceptions, as the identified special investors represent much
of the traditional pool of pre-IPO investors. Providing such a broad
exception, without requirements comparable to those imposed by the
other exceptions, could result in most securities acquisitions by
participating members before the required filing date being excepted
from underwriting compensation. However, a participating member may
make a co-investment in an issuer in circumstances that do not fit the
conditions for the current venture capital exceptions. Where a highly
regulated entity with significant disclosure requirements and
independent directors who monitor investments is also making a
significant co-investment in the issuer and is receiving securities at
the same price and on the same terms as the participating member, the
securities acquired by the participating member in a private placement
are less likely to be underwriting compensation.
    To address such co-investments, the proposed rule change would
adopt a new venture capital exception from underwriting compensation
for securities acquired in a private placement before the required
filing date of the public offering by a participating member if at
least 15 percent of the total number of securities sold in the private
placement were acquired, at the same time and on the same terms, by one
or more entities that are open-end investment companies not traded on
an exchange, and no such entity is an affiliate of a FINRA member
participating in the offering. These conditions lessen the risk that
the co-investment would be made for the purpose of the participating
member avoiding the requirements of Rule 5110.
Treatment of Non-Convertible or Non-Exchangeable Debt Securities and
Derivatives
    Commenters requested clarifications and modifications to the
treatment of non-convertible or non-exchangeable debt securities and
derivatives. Rothwell stated that non-convertible or non-exchangeable
debt securities should not be underwriting compensation, regardless of
whether the securities were acquired in a transaction related to the
offering, as they are unlikely to be used as a payment for investment
banking services. If these debt securities continue to be treated as
underwriting compensation, Rothwell recommended adopting a narrower
exception from underwriting compensation for these debt securities
issued at par (if the purchaser is the sole purchaser) or purchased at
least at the same price as other purchasers at or about the same time
for the same issue of debt. Rothwell stated there would be no investor
protection benefit to including such securities in underwriting
compensation. Rothwell suggested that this valuation method would
provide an objective methodology that is appropriate to these debt
securities and is consistent with investor protection.
    SIFMA stated that non-convertible or non-exchangeable debt
securities and derivative instruments that are acquired or entered into
at a fair price in a transaction related to a public offering should
not be considered underwriting compensation. However, SIFMA suggested
that such arrangements should continue to be disclosed in the
prospectus because they are entered into in transactions related to the
public offering. As a secondary option, SIFMA suggested that proposed
Supplementary Material .06 to Rule 5110 be modified to provide that:
(1) ``non-convertible or non-exchangeable debt securities and
derivative instruments acquired `from or entered into with the issuer'
in a transaction related to the public offering and at a fair price
will be considered underwriting compensation but will have no
compensation value''; and (2) any securities or other payment received
by a participating member during the review period in connection with
the settlement or termination of a derivative instrument that was
entered into at a fair price in a transaction related to the public
offering will, like the derivative instrument itself, have no
compensation value. SIFMA further commented that if the suggested
change is not made, proposed Rule 5110(g)(8), which prohibits certain
terms in connection with ``the receipt of underwriting compensation
consisting of any option, warrant or convertible security,'' should be
modified to exclude fair price derivatives.
    Because ``related to the offering'' is not defined, Davis Polk
suggested that the test of whether the non-convertible or non-
exchangeable debt and derivative instruments were acquired at a fair
price provides a more meaningful standard. Rothwell stated that the
terms ``related to the public offering'' and ``unrelated to the public
offering'' as used in the Rule are confusing and that it would be more
appropriate to treat securities as underwriting compensation if not
acquired at a fair price or to apply the standards in the definition of
``underwriting compensation.''
    Rule 5110 distinguishes between whether the non-convertible or non-
exchangeable debt securities and derivative instruments were acquired
in a transaction related or unrelated to a public offering. The
proposed rule change would clarify that non-convertible or non-
exchangeable debt securities and derivative instruments acquired in a
transaction unrelated to a public offering would not be underwriting
compensation. Consistent with the current Rule, these debt securities
and derivative instruments would not be subject to Rule 5110 (i.e., a
description of the debt securities and derivative instruments need not
be filed with FINRA, there are no valuation-related requirements and
the lock-up restriction does not apply).

    In contrast, non-convertible or non-exchangeable debt securities
and derivative instruments acquired in a transaction related to a
public offering would be underwriting compensation and a description of
these debt securities or derivative instruments must be filed with
FINRA. The proposed rule change would clarify that these debt
securities and derivative instruments acquired at a fair price would be
considered underwriting compensation but would have no compensation
value, while these debt securities and derivative instruments acquired
not at a fair price would be considered underwriting compensation and
subject to the normal valuation requirements of Rule 5110.
    SIFMA also suggested the definition of fair price be revised to
clarify that securities or instruments that are intended to be
compensatory in nature for acting as a private placement agent for the
issuer, for providing a loan, credit facility, merger, acquisition or
any other service, including underwriting services, would not be viewed
as having been acquired or entered into at a fair price, otherwise the
reference to ``any other service'' could be read broadly as to render
the definition meaningless. To clarify the scope of the definition, the
proposed rule change would provide that a ``derivative instrument or
other security received as compensation for providing services for the
issuer, for providing or arranging a loan, credit facility, merger,
acquisition or any other service, including underwriting services will
not be deemed to be entered into or acquired at a fair price.'' \132\
---------------------------------------------------------------------------

    \132\ See proposed Supplementary Material .06(b) to Rule 5110.
---------------------------------------------------------------------------

Lock-Up Restrictions
    Commenters requested several changes to the lock-up restriction,
including the length of and securities subject to the restriction. Some
commenters agreed that a 180-day lock-up period would be appropriate
for IPOs but recommended a shorter (e.g., 30- to 45-day) lock-up period
for follow-on offerings.\133\ SIFMA also suggested that the lock-up
requirement not apply in connection with offerings of securities that
have a bona fide public market (as that term is defined in Rule 5121).
---------------------------------------------------------------------------

    \133\ See ADISA, Rothwell and SIFMA.
---------------------------------------------------------------------------

    In contrast, NASAA noted that the NASAA Promotional Shares
Statement of Policy requires a lock-up period that is much longer than
180 days (i.e., that promotional shares that are not fully paid will be
subject to a lock-up agreement for at least one or two years following
the completion of the offering) to ensure that investors and promoters
assume similar risks in the offering. Consequently, NASAA urged
requiring a longer lock-up period under Rule 5110 to more closely align
the interests of the underwriters with those of the investors in the
offering.
    The proposed rule change continues the historical approach of a
180-day lock-up period for both initial and follow-on public offerings.
While the insider lock-up period could be less than 180 days in a
follow-on offering, the insider lock-up period is commonly 180 days in
IPOs. Keeping the same lock-up period for underwriters and the issuer's
insiders provides equivalent protections for the secondary market.
While the insider lock-period may vary among follow-on offerings, a
consistent 180-day lock-up period for underwriters ensures that they do
not accept less investment risk than insiders subject to a 180-day
lock-up period.
    ABA commended FINRA for revising the lock-up restrictions under
proposed Rule 5110(e)(1) to clarify that the 180-day restricted period
begins with the date of commencement of sales in the public offering
and to minimize the impact of the lock-up restriction by including some
important additional exemptions. NASAA supported the lock-up
restriction being determined by the date of commencement of sales in
the public offering (rather than from the date of effectiveness) and
suggested that this change would provide increased protection for
investors. However, ADISA suggested that the lock-up restriction should
be determined using the date of effectiveness to provide clarity to all
participants as the term ``commencement of sales'' can be vaguer and
harder to determine rather than the definitive date of effectiveness.
    Because the approach in the Notice 17-15 Proposal provides clarity
in measuring the lock-up period, particularly with respect to
securities sold pursuant to a registration statement or amendment
thereto that does not have to be declared effective by the SEC, the
proposed rule change retains the approach that the lock-up restriction
is determined by the date of commencement of sales in the public
offering (rather than from the date of effectiveness).
    ABA stated that the lock-up restriction should apply only to equity
securities received in transactions that are not registered with the
SEC and that the lock-up restriction in the Notice 17-15 Proposal would
potentially expand the scope of the lock-up restriction to include all
public offerings. Rothwell stated that the lock-up restriction should
apply only to securities deemed underwriting compensation in the case
of public offerings of equity securities. Rothwell suggested revising
the lock-up restriction to state that the restriction applies only in
the case of a public equity offering of common or preferred stock,
options, warrants, and other equity securities, including debt
securities convertible to or exchangeable for equity securities of the
issuer, that are unregistered.
    The Notice 17-15 Proposal provided a broad lock-up requirement with
several delineated exceptions. FINRA agrees that the scope of the lock-
up requirement should be ``public equity offering'' as is used in the
current Rule. The proposed rule change simplifies, clarifies and
reduces the securities considered underwriting compensation and thus
subject to the lock-up restriction. To the extent that securities are
underwriting compensation and subject to lock-up restriction, exemptive
relief may be available on a case-by-case basis as necessary and
appropriate.
    ABA requested guidance with respect to whether it is intended that
the lock-up restriction would prevent participating members from
selling securities acquired as underwriting compensation in the public
offering itself. The proposed rule change would add an exception from
the lock-up restriction for securities that were received as
underwriting compensation, and are registered and sold as part of a
firm commitment offering.\134\ This is intended to give some
flexibility to members in selling securities received as underwriting
compensation, while limiting the proposed exception to firm commitment
offerings where the underwriter has assumed the risk of marketing and
distributing an offering that includes securities the underwriter
received as underwriting compensation. In addition, firm commitment
offerings are usually marketed and sold to institutional investors, who
typically purchase a majority of the shares in such offerings.
---------------------------------------------------------------------------

    \134\ See proposed Rule 5110(e)(2)(A)(viii).
---------------------------------------------------------------------------

    SIFMA stated that the Notice 17-15 Proposal appeared to subject
non-convertible or non-exchangeable debt securities and derivative
instruments acquired at a fair price in a transaction related to the
offering and non-listed securities of an issuer acquired in a public
market transaction to Rule 5110's lock-up restriction, unless the
security is of an issuer that meets the registration requirements of
current Forms S-3, F-3, F-10 (for brevity, referred to herein as
``current eligible issuers''). SIFMA supported the exception for
current

eligible issuers, but stated that the lock-up restriction should apply
only to public offerings of equity and equity-linked securities, should
cover only equity and equity-linked securities received as underwriting
compensation by participating members in offerings not registered under
the Securities Act and should provide an express exception for fair
price derivatives. Moreover, SIFMA suggested that the proposed
exception for current eligible issuers should be clarified to expressly
provide that the exclusion also applies to derivative instruments
entered into with such issuers.
    Davis Polk stated that application of the lock-up restriction to
non-convertible or non-exchangeable debt securities and derivative
instruments is not justified and may interfere with some derivative
transactions. Rothwell suggested that non-convertible or non-
exchangeable debt securities deemed to be underwriting compensation
should be excluded from the lock-up restriction as there is no investor
protection benefit to be received. Rothwell stated that these
securities that are included in the calculation of underwriting
compensation: (1) Are likely a different issue or series than those
sold to the public and will not have a public market; and (2) even if
the securities are from the same issue, the public secondary market
trading price of such debt securities is primarily determined by
fluctuating interest rates rather than the types of market forces that
affect the equity markets.
    The proposed rule change would provide clarity about the treatment
of non-convertible or non-exchangeable debt securities and derivative
instruments acquired in transactions related to a public offering. The
proposed rule change would retain the current approach for non-
convertible or non-exchangeable debt securities acquired in a
transaction related to the public offering and would provide an express
exception from the lock-up restriction for clarity (i.e., the exception
would provide that the lock-up restriction does not apply).\135\
---------------------------------------------------------------------------

    \135\ See proposed Rule 5110(e)(2)(A)(iv).
---------------------------------------------------------------------------

    However, derivative instruments are currently subject to Rule
5110's lock-up restriction. FINRA recognizes that members may acquire
derivative instruments in connection with a hedging transaction related
to the public offering and that, given the nature of these hedging
transactions, the lock-up restriction should not apply. Accordingly,
the proposed rule change would provide that the lock-up restriction
does not apply to derivative instruments acquired in connection with a
hedging transaction related to the public offering and at a fair
price.\136\ Derivative instruments acquired in transactions related to
the public offering that do not meet the requirements of the exception
would be subject to the lock-up restriction.
---------------------------------------------------------------------------

    \136\ See proposed Rule 5110(e)(2)(A)(v).
---------------------------------------------------------------------------

    SIFMA suggested expressly excluding from the lock-up restriction
any securities received in connection with the settlement or
termination of a derivative instrument received outside the review
period or during the review period in a transaction unrelated to the
public offering, such as by revising proposed Supplementary Material
.01(b)(14) to Rule 5110 to read ``securities acquired as the result of
a conversion `or exchange' of securities originally acquired prior to
the review period and securities acquired at termination or in
settlement of a derivative instrument entered into prior to the review
period or during the review period in a transaction unrelated to the
public offering.'' The lock-up restriction would not apply to
securities that were acquired in a transaction unrelated to the public
offering. However, because an ``exchange'' could relate to a wholly
different transaction, the suggested revision to proposed Supplementary
Material may be overly broad.
    SIFMA suggested that the one percent threshold in proposed Rule
5110(e)(2)(A)(ii)--which provides that the lock-up restrictions will
not apply if the aggregate amount of securities of the issuer
beneficially owned by a participating member does not exceed one
percent of the securities being offered--should be tied to the amount
of securities received as underwriting compensation during the review
period rather than more broadly to all securities held by the
participating member. Accordingly, SIFMA suggested that the lock-up
restriction should not apply to securities received during the review
period as underwriting compensation if the amount of such securities
does not exceed one percent of the securities being offered in the
public offering. FINRA believes that the aggregate amount of securities
beneficially owned by a participating member is a better measure of the
potential impact of sales by the participating member into the
secondary market.
    SIFMA suggested that the exception in proposed Rule
5110(e)(2)(A)(vii) should be modified to allow for the sale or other
disposition of the securities by registered investment advisers, even
if such advisers are affiliated with a participating FINRA member. To
accomplish this change, SIFMA suggested revising proposed Rule
5110(e)(2)(A)(vii) to state ``the security is beneficially owned on a
pro-rata basis by all equity owners of an investment fund, provided
that (a) no participating member `(other than a participating member
that is registered as an investment adviser under the U.S. Investment
Advisers Act of 1940 and is acting in accordance with its
responsibilities thereunder)' manages or otherwise directs investments
by the fund, and (b) participating members in the aggregate do not own
more than 10 percent of the equity of the fund.'' SIFMA stated that
participating members registered as investment advisers are separately
regulated and have a fiduciary duty to act in the best interests of
their clients, and the lock-up restriction may interfere with that
regulatory responsibility. FINRA believes that this lock-up exception
continues to be appropriate to securities received as underwriting
compensation by a fund controlled by a participating member.
Defined Terms
    The Notice 17-15 Proposal definition of ``public offering'' was
based on the definition in Rule 5121, but included the delineated
carve-outs in the Rule 5121 definition (which relate to certain types
of securities offerings that are commonly understood not to constitute
offerings to the public) separately in the list of securities offerings
exempted from Rule 5110's filing and substantive requirements. The
practical effect of this approach was that the carve-outs in Rule 5121
(e.g., securities exempt from registration under Securities Act Rule
144A or Regulation S) would not be subject to the filing or substantive
provisions of Rule 5110.
    Two commenters stated that the definition of public offering
proposed in Notice 17-15 eliminated the carve-outs currently in the
Rule 5121 definition of public offering, thus substantially broadening
the definition.\137\ The commenters requested a definition of public
offering be adopted that retains the carve-outs with the definition, as
such offerings would already be exempt from the Rule's coverage by
virtue of the definition of public offering itself. Because the
approach in the Notice 17-15 Proposal raised questions regarding the
intended scope of the public offering definition, the proposed rule
change incorporates the public offering definition from Rule 5121,
accompanied

by the delineated carve-outs, and correspondingly deletes those carve-
outs from the proposed list of exemptions from the filing and
substantive provisions of Rule 5110.\138\
---------------------------------------------------------------------------

    \137\ See ABA and SIFMA.
    \138\ See proposed Rule 5110(j)(18).
---------------------------------------------------------------------------

    ABA recommended revising the public offering definition to state
``any primary or secondary distribution of securities `made in whole or
in part in the United States' `to the public.' '' ABA suggested that
this approach would avoid circularity and more accurately reflect the
types of offerings intended to be covered by the Rule. To clarify the
jurisdictional scope, the proposed rule change would include ``in whole
or in part in the United States'' in the public offering definition.
However, because the addition of ``to the public'' may raise new
questions on the scope of covered offerings, the proposed definition
does not include that language.
    SIFMA suggested that because the defined term ``experienced
issuer'' differs from the terminology used by the SEC for purposes of
Form S-3, the term is likely to lead to confusion. Beyond the name,
commenters suggested modifying the definition substantively.
Specifically, SIFMA suggested that the definition mean: ``an issuer
that (i) meets the registrant requirements specified in paragraph I.A
of SEC Form S-3, except that for purposes of paragraph I.A.3 thereof,
the reference to twelve calendar months shall be deemed to refer
instead to 36 calendar months; and (ii) has an aggregate market value
of outstanding voting and non-voting common equity held by non-
affiliates (as calculated pursuant to General Instruction I.B.1 of Form
S-3) of (a) at least U.S. $150 million or (b) at least U.S. $100
million and the issuer has had an annual trading volume of its common
equity of at least three million shares (or share equivalent).''
Sullivan suggested that, at a minimum, the experienced issuer
definition should be revised to conform to existing Forms S-3 and F-3
because requiring an additional 24 months of reporting history does not
enhance the ability of these issuers to fend for themselves.
    ABA appreciated FINRA's attempt to streamline Rule 5110 by using
the defined term experienced issuer but suggested that the criteria is
outdated and the exemption should be available to any issuer who is
eligible to file a registration statement under the SEC's current
requirements for Forms S-3, F-3 and F-10. If limiting the exemption
beyond the current requirements for Forms S-3, F-3 and F-10 is
necessary for the protection of investors, ABA requested that FINRA
consider revising the definition to also cover issuers with a 12 month
reporting history if they have: (1) A public float of at least $75
million; and (2) average daily trading volume (as defined in SEC
Regulation M) in their common equity securities of at least $1 million
and also requested exempting issuers that meet these criteria that are
filing on SEC Form N-2.
    Rather than referring to the pre-1992 standards for Form S-3 and F-
3 and standards approved in 1991 for Form F-10, the proposed definition
of experienced issuer codifies those standards currently in Rule 5110
to simplify the analysis for the benefit of members. The continued
application of the Rule to these issuers continues to be
justified.\139\ The proposed rule change intentionally uses language
different from that used in other requirements (e.g., Form S-3's use of
``seasoned issuer'') to avoid confusion and make clear that the defined
term covers a different set of issuers.
---------------------------------------------------------------------------

    \139\ See supra discussion of previous problems associated with
shelf offerings in Item II.A.
---------------------------------------------------------------------------

    Two commenters stated that retaining the current definition of
``institutional investor'' is problematic and difficult to use, thereby
rendering the venture capital exceptions in proposed Rule 5110(d)(2)
and (3) largely unworkable.\140\ SIFMA stated that, given the expansive
definition of ``participating member,'' it is difficult to ascertain
whether an entity qualifies as an institutional investor and that the
focus of the definition should instead be on whether a participating
member manages the investor's investments or otherwise controls or
directs the investment decisions of the investor.
---------------------------------------------------------------------------

    \140\ See Davis Polk and SIFMA.
---------------------------------------------------------------------------

    SIFMA suggested defining the term ``institutional investor'' to
mean a ``person that has an aggregate of at least U.S. $50 million
invested in securities in its portfolio or under management, including
investments held by its wholly owned subsidiaries; provided that no
participating members manage the institutional investor's investments
or otherwise control or direct the investment decisions of such
investor.'' Alternatively, if the equity interest element of the
definition is not deleted, SIFMA proposed that the: (1) Reference to
``equity interest'' be changed to ``beneficial ownership'' as defined
in Rule 5121; (2) thresholds for both public and non-public entities be
raised to 15 percent and the reference to ``entity'' be changed to
``investor'' (due to the incorporation by reference of the specific
definition of ``entity'' in Rule 5121 which does not fit well in this
specific context in Rule 5110); and (3) calculation of the beneficial
ownership threshold be limited to ownership by the participating FINRA
member and its affiliates (i.e., the calculation should not include
associated persons that are not otherwise ``affiliates'' of the member
or immediate family of such persons).
    Revising the institutional investor definition as suggested to
focus on controlling or directing investment decisions would insert
uncertainty and subjectivity into the definition. The proposed rule
change retains this definition because the current definition is more
objective. Moreover, because Rule 5110's venture capital exceptions are
relied upon by members, FINRA does not agree that the institutional
investor definition makes the venture capital exceptions unworkable.
    Two commenters suggested that the Notice 17-15 Proposal's addition
of ``other than the issuer'' at the end of the definition of
``participating member'' does not make it clear that the issuer is
exempted from all categories of participating member.\141\ To make
clear that the definition does not include the issuer, the proposed
rule change would define participating member to mean ``any FINRA
member that is participating in a public offering, any affiliate or
associated person of the member, and any immediate family, but does not
include the issuer.'' \142\
---------------------------------------------------------------------------

    \141\ See ABA and Rothwell.
    \142\ See proposed Rule 5110(j)(15).
---------------------------------------------------------------------------

    Three commenters stated that the proposed carve-out of the
``issuer'' from the definition of ``participating member'' is useful
and would help with inadvertent overlap between the two
definitions.\143\ These commenters suggested that a comparable carve-
out to include participating members be included in the definition of
``issuer.'' The proposed rule change does not incorporate the suggested
change to the definition of ``issuer'' because a participating member
could also be the issuer of the securities.
---------------------------------------------------------------------------

    \143\ See ABA, Rothwell and SIFMA.
---------------------------------------------------------------------------

    SIFMA stated that the proposed definition of ``issuer'' referencing
an ``entity'' offering its securities to the public may be confusing
given that the defined term ``entity'' in Rule 5121 excludes certain
types of issuers such as DPPs and REITs. To address this issue, SIFMA
suggested that ``issuer'' be defined to mean the ``registrant or other
person offering its securities to the public, any selling security
holder offering securities to the public, any affiliate of the
registrant, such other person or selling security holder (other than an
affiliate that is a participating

member), and the officers or general partners, and directors thereof.''
To clarify the scope of covered persons, the proposed rule change would
revise the issuer definition to refer to the ``registrant or other
person'' (rather than ``entity'').\144\
---------------------------------------------------------------------------

    \144\ See proposed Rule 5110(j)(12).
---------------------------------------------------------------------------

    ABA stated that while proposed Rule 5110(j)(2) would define the
term ``bank'' for purposes of the Rule's venture capital exceptions,
the term ``bank'' is not defined for purposes of the exemption for
qualifying bank securities under proposed Rule 5110(h)(1). As the
purpose of the proposed Rule 5110(h)(1) exemption is to exempt
offerings by qualifying issuers, ABA stated that the exemption should
include non-U.S. bank issuers and should not be limited to banks as
defined in Exchange Act Section 3(a)(6), which definition is largely
limited to U.S. domiciled banks and U.S.-based branches of non-U.S.
banks.
    The proposed rule change would harmonize the definition of bank in
the proposed venture capital exceptions and the Rule 5110(h)(1)
exemption. Specifically, the proposed rule change would define bank for
purposes of Rule 5110 as ``a bank as defined in Exchange Act Section
3(a)(6) or is a foreign bank that has been granted an exemption under
this Rule and shall refer only to the regulated entity, not its
subsidiaries or other affiliates.'' \145\ This harmonized approach
combines the definition of bank currently in Rule 5110, with the scope
of banking entities currently covered by the venture capital
exceptions.
---------------------------------------------------------------------------

    \145\ See proposed Rule 5110(j)(2). Because of this expanded
definition, the proposed rule change would delete as unnecessarily
duplicative the conditions in the venture capital exceptions.
---------------------------------------------------------------------------

    ABA supported clarifying and codifying the relevant ``review
period'' through a defined term but requested additional guidance
regarding when the review period would end for offerings with an
indeterminate time period such as at-the-market offerings. An at-the-
market offering would be a takedown offering and the corresponding
review period is set forth in proposed Rule 5110(j)(20)(C). Additional
guidance regarding other offerings with indeterminate time periods may
be provided as necessary or appropriate.
    ABA questioned why the review period in proposed Rule
5110(j)(20)(C) would be limited to firm commitment or best efforts
takedowns or any other continuous offering ``on behalf of security
holders'' and requested that the definition be revised to include the
issuer. ABA suggested that as proposed ``on behalf of security
holders'' appears to qualify ``firm commitment,'' ``best efforts'' and
``other continuous offering'' for the purpose of the review period
definition. The reference to ``on behalf of securities holders'' was
not intended to limit proposed Rule 5110(j)(20)(C) as suggested. To
clarify the intended scope of the definition, the proposed rule change
deletes the reference to ``on behalf of security holders.''
    Davis Polk stated that because the review period is defined to
include the 60-day period following the effective date of a firm
commitment offering (or following the final closing for other
offerings), participating members would be required to provide FINRA
with information regarding any fees or other compensation received by
them, their affiliates, associated persons, and immediate family of
associated persons for 60 days following the offering, which represents
a significant diligence burden. Providing a specific time period gives
clarity to participating members. Moreover, the inclusion of a short
period of time following the offering prevents circumvention of the
Rule 5110 and is consistent with current rule, which has a 90-day
requirement.
    Davis Polk suggested that the definition of ``required filing
date'' be modified for offerings that are dormant for a period of six
months or more. Because the exceptions from underwriting compensation
are unavailable for securities acquired by participating members after
the first confidential submission to or public filing of the
registration statement with the SEC, an issuer may not be able to
accept financing from a participating member because of potentially
excessive underwriting compensation. Accordingly, Davis Polk suggested
either the definition of ``required filing date'' should be modified or
the exceptions from underwriting compensation should be modified to
apply to acquisitions by participating members of the issuer's
securities after the required filing date. If the former, Davis Polk
suggested that the definition provide that with respect to offerings
that are dormant for six months or more, the review period begin upon
the filing of the first amendment to the registration statement, which
has been confidentially or publicly filed with the SEC, following the
dormant period.
    Availability of a venture capital exception is contingent upon the
securities being acquired before the required filing date because after
that date, in FINRA's experience, securities acquisitions are more
likely to be underwriting compensation and issuers may be more
dependent on a particular underwriter or underwriters to raise
necessary capital. A public offering may be significantly delayed for
legitimate reasons (e.g., unfavorable market conditions) and during
this delay the issuer may require funding to operate its business or
continue as a going concern. Furthermore, a member may make bona fide
investments in or loans to the issuer during this delay to satisfy the
issuer's funding needs and any securities acquired as a result of this
funding may be unrelated to the anticipated public offering. The
proposed rule change would provide some additional flexibility in the
availability of the venture capital exceptions for securities acquired
where the public offering has been significantly delayed as discussed
above in a principles-based approach in proposed Supplementary Material
.02 to Rule 5110.
Valuation of Securities
    The Notice 17-15 Proposal removed the valuation formula for
convertible securities and instead allowed for convertible securities
to be valued based on a securities valuation method that is
commercially available and appropriate for the type of securities to be
valued, such as, for example, the Black-Scholes model for options.
NASAA stated that the NASAA Underwriting Expenses Statement of Policy
uses the same formula as current Rule 5110 for the valuation of
underwriter's warrants in calculating total underwriting expenses.
NASAA stated that the current valuation formula serves a useful purpose
by providing an objective valuation method that provides consistency
across different offerings and suggested that FINRA consider retaining
the existing formula as a continued optional method of valuation. NASAA
also urged FINRA to reexamine whether it is appropriate for an issuer
to grant any options or warrants to underwriters as potential conflicts
could impact the due diligence process.
    EGS stated that Rule 5110 should continue to have a single
valuation method to process filings in a consistent, predictable and
efficient manner. EGS's expressed concerns with the approach in Notice
17-15 Proposal included: (1) Varying methods will yield inconsistent
results from dealer to dealer and deal to deal; and (2) assessment of a
new valuation method during the pendency of a filing would delay
resolution of that filing and divert FINRA staff's time and attention
away from other filings.
    Rothwell supported removal of the current Rule 5110 formula for
valuing options but questioned whether, as a matter of policy, FINRA
would continue

to accept the warrant formula as a valuation method for securities that
have an exercise or conversion price. Rothwell stated that there are
situations where the warrant formula may continue to be a viable method
for valuing securities.
    SIFMA supported removal of the current Rule 5110 formula for
valuing options, warrants and convertible securities to instead allow
members to use a commercially available valuation method but requested
additional guidance as to what should be filed with respect to such
methodology. SIFMA stated that in addition to commercially available
valuation models, the use of proprietary valuation models should be
permitted if the member uses such a model in the ordinary course of its
business to value securities of a similar type and files a description
of the methodology with FINRA.
    The Notice 17-15 Proposal requested comment on whether the proposed
change to the valuation method was appropriate and whether the
valuation method should be limited to one that is commercially
available. Some commenters supported the proposed change, while others
did not. Commenters did not provide any information regarding use of
commercially available valuation methods, such as what methods are
available and their anticipated benefits. The proposed rule change
would retain the current Rule 5110 formula for valuing options,
warrants and convertible securities because of the conflicting views on
the proposed change to the valuation formula and the lack of
information regarding what commercially available valuation methods may
be used by members.
    Two commenters stated that, consistent with the current Rule,
members should be allowed to value non-convertible securities that are
currently trading in the secondary market based on the difference
between the market price at the time of acquisition (rather than the
public offering price) and the acquisition cost.\146\ The proposed rule
change would retain the current Rule 5110 formula and, consequently,
would allow members to value non-convertible securities that are
currently trading in the secondary market based on the difference
between the market price at the time of acquisition (rather than the
public offering price) and the acquisition cost.
---------------------------------------------------------------------------

    \146\ See Rothwell and SIFMA.
---------------------------------------------------------------------------

    Rothwell stated that the valuation of unit securities is not
addressed in either the current Rule 5110 or the proposed rule change.
Rothwell speculated that FINRA looks through the unit to value the
individual components and ascribe an additional value to the warrant
within the unit even though the purchaser may have paid the same price
for the unit as the public offering price. Rothwell stated that the
unit security should instead be valued as a non-convertible security
(as the unit is a security that does not itself have an exercise or
conversion price) and that the unit securities should have a zero value
and should not be ascribed an additional value when a participating
member acquires a non-convertible unit at the same price as the public
offering price of the unit. FINRA has previously provided guidance,
with accompanying examples, for valuing unit securities.\147\ This
guidance remains valid and illustrative. FINRA does not agree with the
commenter's proposed approach to valuing unit securities because a unit
given to an underwriter may include a warrant with unique terms, which
should be considered in evaluating underwriting compensation.
---------------------------------------------------------------------------

    \147\ See Notice to Members 92-28 (May 1992).
---------------------------------------------------------------------------

Numerical Stock Limit
    Prior to 2004, Rule 5110 contained a ``stock numerical limit'' that
prohibited underwriters and related persons from receiving securities
that constitute underwriting compensation in an aggregate amount
greater than 10 percent of the number or dollar amount of securities
being offered to the public. FINRA eliminated this requirement as
unnecessary as the convertible securities valuation formula in current
Rule 5110 results in a de facto stock numerical limit.\148\ Given the
proposed elimination of the convertible securities valuation formula in
the Notice 17-15 Proposal, that Proposal requested comment on whether a
new stock numerical limit should be included in Rule 5110.
---------------------------------------------------------------------------

    \148\ See Securities Exchange Act Release No. 48989 (December
23, 2003), 68 FR 75684 (December 31, 2003) (Order Approving File No.
SR-NASD-2000-04). See also Notice to Members 04-13 (February 2004).
---------------------------------------------------------------------------

    NASAA suggested reinstating the numerical stock limit if FINRA
determines to eliminate the convertible securities valuation formula.
Rothwell stated that FINRA should not now impose a limit in a manner
that would artificially restrict permissible venture, lending and other
services that benefit corporate financing clients. Rothwell also stated
that any numerical restriction on private placement purchases by a
member or affiliate of the securities of the issuer would be contrary
to the interest of issuers that look to the FINRA members that will
participate in its public offering to also purchase a significant
portion of any pre-IPO private placement. Similarly, Rothwell stated
that the customers of such members that purchase pre-IPO private
placement securities generally expect that the member will share the
risk of the investment by being a co-investor. With respect to
securities acquired in venture and lending activities where the
participating member must take a significant financial investment,
Rothwell stated that the current requirements of Rule 5110 have and
will continue to effectively limit the amount of securities acquired as
underwriting compensation.
    Because the proposed rule change would retain the current Rule 5110
formula for valuing options, warrants and convertible securities, the
proposed rule change does not incorporate a new stock numerical limit.
Exemptive Relief
    As set forth in the Notice 17-15 Proposal, Rule 5110 would have
been amended to provide that FINRA may in exceptional and unusual
circumstances exempt a member from any or all or the provisions in the
Rule that FINRA deems appropriate in lieu of the current approach that
appropriate FINRA staff, for good cause shown may grant a conditional
or unconditional exemption from any of the Rule's provisions. Two
commenters questioned whether the change from the exemptive relief
provision in the current Rule is intended to limit the circumstances in
which an exemption may be sought.\149\
---------------------------------------------------------------------------

    \149\ See ABA and SIFMA.
---------------------------------------------------------------------------

    The Notice 17-15 Proposal would have amended the exemptive relief
provision in Rule 5110 to be consistent with the exemptive relief
provision in the more recently amended Rule 5121. Because the change
was not intended to alter the circumstances in which exemptive relief
may be sought, the proposed rule change would revert to the language in
current Rule 5110 to avoid any confusion regarding the granting of
exemptive relief.
Non-Cash Compensation
    While acknowledging that the non-cash compensation-related
provisions in the Notice 17-15 Proposal are also in the current Rule,
SIFMA recommended clarifying these provisions and eliminating inherent
inconsistencies between the provisions and the rest of the Rule. To
this end, SIFMA suggested revising proposed Rule 5110(f)(2) to state
``in connection with the sale and distribution of a public offering of

securities, no member or person associated with a member shall directly
or indirectly accept or make payments or offers of payments of any non-
cash compensation, except as provided in this provision, `or as
permitted elsewhere in this Rule.' '' Alternatively, SIFMA suggested
adding guidance in the Supplementary Material providing that the
receipt of non-cash compensation items (including securities,
derivatives and ROFRs) that are permitted under other provisions of
Rule 5110 will not be prohibited by, or deemed inconsistent with, the
restrictions in Rule 5110(g).
    ABA also suggested addressing Rule 5110's non-cash compensation-
related provisions in this proposed rule change. ABA suggested that if
applied literally, the non-cash compensation provisions state that
members may not receive any non-cash compensation other than those
limited items set forth in the provision itself, and those items do not
include certain forms of non-cash compensation such as securities,
derivative instruments or ROFRs that are expressly permitted elsewhere
in the Rule.
    Consistent with the Notice 17-15 Proposal, because the provisions
are the subject of a separate consolidated approach to non-cash
compensation, the proposed rule change would incorporate the Rule's
current non-cash compensation provisions without modification.
Rule 5121
    ABA suggested some clarifications and amendments to Rule 5121.
Because any substantive changes to Rule 5121 are more appropriately
considered as part of FINRA's separate consideration of our rules and
programs governing the capital raising process and their effects on
capital formation, this proposed rule change does not include any
amendments to Rule 5121 beyond the conforming definitional amendments
discussed above.
Regulation A+
    ADISA stated that FINRA should be more responsive to the review and
clearance of filings made pursuant to SEC Regulation A+ as extensive
and long reviews of those offerings have impacted members' ability to
effectively raise capital through the public markets. FINRA will
continue to review our internal operations and administrative processes
to improve the review and clearing of these filings. Separate from this
proposed rule change, FINRA will consider the appropriateness of
issuing guidance regarding underwriting and related services and
financial services provided to issuers in offerings pursuant to
Regulation A+.
Guidance
    EGS requested that the Public Offering Frequently Asked Questions
available on FINRA's website be enhanced and that FINRA publish
informal interpretations more broadly and circulate guidance to members
and their counsel more frequently. If the proposed rule change is
approved, FINRA will consider providing additional guidance as
necessary and appropriate.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2019-012 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2019-012. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2019-012, and should be submitted
on or before May 22, 2019.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\150\
---------------------------------------------------------------------------

    \150\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-08774 Filed 4-30-19; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 88, Number 5 (Monday, January 9, 2023)]
[Notices]
[Page 1218]
[FR Doc No: 2023-00098]

-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Project No. 15289-000]

Peak Hour Power, LLC; Notice of Preliminary Permit Application
Accepted for Filing and Soliciting Comments, Motions To Intervene, and
Competing Applications

    On October 25, 2022, Peak Hour Power, LLC, filed an application for
a preliminary permit, pursuant to section 4(f) of the Federal Power Act
(FPA), proposing to study the feasibility of the Silver Creek Pumped
Storage Project to be located at Blythe Township in Schuylkill County,
Pennsylvania. The sole purpose of a preliminary permit, if issued, is
to grant the permit holder priority to file a license application
during the permit term. A preliminary permit does not authorize the
permit holder to perform any land-disturbing activities or otherwise
enter upon lands or waters owned by others without the owners' express
permission.
    The proposed project would consist of the following: (1) a new
upper reservoir with a surface area of 150 acres and a storage capacity
of 8,000 to 10,000 acre-feet at a pool elevation between 1,650 to 1,700
feet above sea level (asl) and 1,750 to 1,800 feet asl created through
construction of a roller-compacted concrete or rock-fill semi-circular
dam and/or dike; (2) a new lower reservoir with a surface area of 100
acres and a storage capacity of 10,000 acre-feet at a pool elevation
between 1,200 to 1,300 feet asl at the site of the existing Silver
Creek reservoir and neighboring abandoned mine land; (3) a new 3,000-
foot-long, 25-foot-diameter penstock connecting the upper reservoir and
the underground powerhouse; (4) a new 250-foot-long, 70-foot-wide, 120-
foot-high underground powerhouse containing two 125-megawatt (MW)
pumping-generating units with a total installed capacity of 250 MW; (5)
a new 2-mile-long, 230-kilovolt transmission line; and (6) appurtenant
facilities. The proposed project would have an annual generation of
784,750 megawatt-hours.
    Applicant Contact: Paul A. DiRenzo, Jr., Peak Hour Power, LLC, 214
Norwegian Woods Drive, Pottsville, PA 17901; email:
[email protected]; phone:<PHONE_NUMBER>.
    FERC Contact: Woohee Choi; email: [email protected]; phone:
(202) 502-6336.
    Deadline for filing comments, motions to intervene, competing
applications (without notices of intent), or notices of intent to file
competing applications: 60 days from the issuance of this notice.
Competing applications and notices of intent must meet the requirements
of 18 CFR 4.36.
    The Commission strongly encourages electronic filing. Please file
comments, motions to intervene, notices of intent, and competing
applications using the Commission's eFiling system at https://ferconline.ferc.gov/eFiling.aspx. Commenters can submit brief comments
up to 6,000 characters, without prior registration, using the eComment
system at https://ferconline.ferc.gov/QuickComment.aspx. You must
include your name and contact information at the end of your comments.
For assistance, please contact FERC Online Support. In lieu of
electronic filing, you may submit a paper copy. Submissions sent via
the U.S. Postal Service must be addressed to: Kimberly D. Bose,
Secretary, Federal Energy Regulatory Commission, 888 First Street NE,
Room 1A, Washington, DC 20426. Submissions sent via any other carrier
must be addressed to: Kimberly D. Bose, Secretary, Federal Energy
Regulatory Commission, 12225 Wilkins Avenue, Rockville, Maryland 20852.
The first page of any filing should include docket number P-15289-000.
    More information about this project, including a copy of the
application, can be viewed or printed on the ``eLibrary'' link of the
Commission's website at http://www.ferc.gov/docs-filing/elibrary.asp.
Enter the docket number (P-15289) in the docket number field to access
the document. For assistance, contact FERC Online Support.

    Dated: December 29, 2022.
Debbie-Anne A. Reese,
Deputy Secretary.
[FR Doc. 2023-00098 Filed 1-6-23; 8:45 am]
BILLING CODE 6717-01-P