We noted earlier some key changes FINRA was proposing to the Corporate Financing Rule. Here at Stinson Leonard Street we all gave each other the “high five” because the proposals made so much sense and made it easier for our clients to comply. Now FINRA has proposed more changes to the Corporate Financing Rule. In the latest proposal, FINRA proposes to amend the Rule’s provisions regarding unfair arrangements to:

  • expand the circumstances under which members and issuers may negotiate termination fees and rights of first refusal, or ROFR, with specified conditions;
  • exempt from the filing requirements exchange-traded funds formed as grantor or statutory trusts; and
  • codify the electronic filing requirement

FINRA has reevaluated its rules around termination fees and believes it is appropriate to update the Rule to provide members with a greater degree of flexibility and expand the circumstances under which participating members and issuers may negotiate termination fee arrangements. Specifically, FINRA is proposing to amend Rule 5110(f)(2) (Prohibited Arrangements) to generally permit termination fees where:

  • the agreement between the participating member and the issuer specifies that the issuer has a right of “termination for cause” (i.e., where a member fails materially to perform the underwriting services contemplated in the written agreement);
  • the agreement specifies that an issuer’s exercise of its right of “termination for cause” eliminates any obligations with respect to the payment of any termination fee;
  • the amount of any specified termination fee is reasonable in relation to the services contemplated in the written agreement; and
  • the agreement specifies that the issuer is not responsible for paying the termination fee unless an offering or other type of transaction is consummated by the issuer (without involvement of the member) within two years of the date the engagement is terminated with the member by the issuer.

Current Rule 5110(f)(2)(F) and (G) address ROFRs, which provide a member with the right to underwrite or participate in future public offerings, private placements or other financings of the issuer. FINRA also has reevaluated its rules around ROFRs and proposes amendments to permit ROFRs in the case of both successful as well as terminated offerings. FINRA proposes that ROFRs would be permissible where:

  • the agreement between the participating member and issuer specifies that the issuer has a right of termination for cause (i.e., where a member fails materially to perform the underwriting services contemplated in the written agreement);
  • an issuer’s exercise of its right of “termination for cause” eliminates any obligations with respect to the provision of any ROFR; and
  • any fees arising from services provided under a ROFR are customary for those types of services.

As is currently the case, the Rule would continue to provide that the duration of any ROFR may not be for more than three years from the date of commencement of sales of the public offering (in the case of a successful offering). In the case of a terminated offering, the duration may not be for more than three years from the date the engagement is terminated by the issuer. In both cases, the agreement may not provide for more than one opportunity to waive or terminate the ROFR in consideration of any payment or fee.