Although my blogs and articles will never be accused of being “light”, I do try to keep them at fairly high level. So forgive me for getting a little closer to ground-level with this one, as it’s an important topic to discuss given all the new activity in Reg A+.

Question: does an issuer have to prefile their offering with FINRA under Rule 5110 (Corporate Financing Rule)
=> It depends upon the exemption being used. In Reg A offerings, it’s a clear “yes” (b)(9)(G). In 506-D offerings, it’s a clear “no” provided the securities are restricted (b)(8)(A). In other offerings it starts to get complicated, such as a 504-D where it’s a “yes” unless securities are restricted, in which case it’s a “no” (b)(9)(E).

Question: do we have to include our platform fees as part of the “underwriting compensation” disclosure?
=> Here’s where it can get tricky. The short answer is “no, as long as nobody at the platform is a registered rep”. A platform is just a marketing vehicle, and an issuers marketing fees are no more disclosable than the issuers legal fees, accounting fees, or other fees they pay in preparing and conducting their offering. You do have to disclose any and all fees paid to broker-dealers (such as FundAmerica Securities for the services it provides, or to any other BD’s who are helping sell the offering or who provide other services). So, for instance, if FundAmerica Securities is charging, say, 1% AND the issuer is allocating or including a provision for other broker-dealers to get commission for helping sell an offering (usually between 5% – 8% plus warrants), then all of that needs to be disclosed (all fees, including the estimated value of the warrants). FINRA will generally calculate these based upon worst-case (max fee) scenario’s in making their determination as to whether or not the total offering comp is excessive.

HOWEVER, if the platform is operated by any people who are registered representatives of a broker-dealer (such as those who do business as branch offices of BD’s) then FINRA is likely to require that the platform fees should be included in underwriting comp since it’s a related business. So be very careful, as this can quickly take an offering well outside of what’s acceptable. If you are not operating as a branch office (no registered reps, just using a BD like FundAmerica Securities to execute transactions) then you don’t have anything to worry about as your platform fees are just marketing expenses of the issuer (as long as they are paid by the issuer directly and not by the BD).

READ: Rule 5110 on FINRA Complinet

Remember, “if” you, the issuer, are subject to Rule 5110 you have to file your materials with FINRA within 1 business day of your filing with the SEC. And I’ll restate the obvious…securities regulations are complicated. And the penalties for doing something wrong, even if unintentional, are severe. You should not conduct any offering without getting advice from an experienced securities attorney.

Special thanks to the people who contributed to bringing this issue up, including Joan Adler at Ellenoff, Grossman & Schole, Fay Matsukage at Dill Dill Carr Stonbraker & Hutchings, Jonathan Self at FundAmerica Securities (and a former FINRA Examiner), and Ron Miller at StartEngine.


Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. Neither I, nor the persons I credit for bringing this issue up to me, are providing legal advice to you by nature of this article. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.