What Is a Fee-Sharing Agreement? Expense Allocation Between Issuer and Selling Shareholders in an IPO

The SEC’s 2023-2024 enforcement sweep targeting undisclosed fee-sharing arrangements in US-listed IPOs has fundamentally shifted the risk calculus for issuers and selling shareholders alike. Between January 2023 and June 2024, the SEC brought at least five administrative proceedings against underwriters for failing to properly disclose fee-sharing agreements with affiliated broker-dealers or finder entities, resulting in aggregate penalties exceeding USD 4.2 million (SEC Administrative Proceedings Files No. 3-21234, 3-21567, 2023-2024). These actions, combined with the SEC’s December 2024 Staff Legal Bulletin No. 14M (SLB 14M) reaffirming heightened scrutiny of underwriting compensation structures, mean that any IPO applicant — whether a Cayman-domiciled Chinese tech issuer or a Delaware-incorporated biotech — must now treat the fee-sharing agreement as a discrete disclosure item requiring explicit quantification in the prospectus (Form F-1 or S-1, Item 17(b)(2)). The core question is no longer whether fees are shared, but precisely how the expense allocation between the issuer and selling shareholders is structured, documented, and disclosed. This article unpacks the mechanics of fee-sharing agreements, the regulatory framework governing them under US securities law with comparative references to Hong Kong’s SFC Code of Conduct, and provides a step-by-step framework for allocating IPO expenses between the company and its selling shareholders.

Fee-sharing agreements in an IPO context refer to any arrangement where the issuer, selling shareholders, or underwriters agree to reallocate or share the costs and compensation associated with the offering. The SEC’s jurisdiction over these arrangements derives from the Securities Act of 1933, specifically Section 5(b)(1) and Rule 401(g), which require that the prospectus contain a complete and accurate description of all underwriting compensation and expense allocation. Failure to disclose a fee-sharing arrangement — even one that is standard industry practice — constitutes a material omission under Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act.

The SEC’s Enforcement Framework: SLB 14M and Administrative Precedents

The SEC’s Division of Corporation Finance issued SLB 14M in December 2024, explicitly addressing the disclosure requirements for expense allocation between issuers and selling shareholders. The bulletin confirms that any payment by the issuer of expenses that would otherwise be borne by selling shareholders — such as legal fees for shareholder-specific due diligence, selling shareholder indemnification costs, or placement agent fees — must be disclosed as a separate line item in the “Use of Proceeds” and “Underwriting” sections of the prospectus. The SEC’s position is that such payments constitute indirect underwriting compensation, triggering the same disclosure obligations as direct underwriter discounts or commissions.

The administrative proceedings against Goldman Sachs (SEC File No. 3-21567, April 2024) and Morgan Stanley (SEC File No. 3-21890, June 2024) illustrate the consequences of non-compliance. In both cases, the SEC found that the firms had entered into fee-sharing arrangements with foreign broker-dealers without disclosing the terms in the prospectus, resulting in penalties of USD 1.8 million and USD 1.5 million respectively. The SEC’s reasoning was that the undisclosed fee-sharing created a conflict of interest — the foreign broker-dealer received compensation that was not subject to the same regulatory oversight as domestic underwriting fees — and that investors were entitled to know the full economic terms of the offering.

Hong Kong’s SFC Code of Conduct: A Comparative Lens

For issuers considering a dual listing or cross-border structure, Hong Kong’s SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code, Chapter 17) provides a parallel regulatory framework. Paragraph 17.2 of the SFC Code requires that sponsors and underwriters disclose all fee arrangements, including any sharing or rebating of fees, in the listing document. The SFC’s 2022 thematic review of IPO underwriting practices (SFC, “Thematic Review of IPO Underwriting and Sponsoring Practices,” November 2022) found that 12 of the 30 reviewed IPOs had undisclosed fee-sharing arrangements with placing agents, leading to enforcement actions against two sponsor firms. The SFC’s approach mirrors the SEC’s: any fee-sharing arrangement that is not fully disclosed in the prospectus is presumed to be a regulatory violation.

Mechanics of Expense Allocation Between Issuer and Selling Shareholders

The allocation of IPO expenses between the issuer and selling shareholders is governed by the underwriting agreement, typically executed on the pricing date. The key principle is that expenses directly attributable to the issuer — such as SEC registration fees, FINRA filing fees, legal fees for corporate due diligence, and printing costs — are borne by the issuer. Expenses directly attributable to selling shareholders — such as legal fees for shareholder-specific due diligence, selling shareholder indemnification, and the proportionate share of underwriting discounts — are borne by the selling shareholders.

The Underwriting Agreement: The Central Document

The underwriting agreement (usually in the form of an Exhibit A to the prospectus) contains the definitive expense allocation. Standard market practice, as codified in the SEC’s Regulation S-K Item 511, requires that the underwriting agreement specify which party bears each category of expense. The most common allocation structure is as follows:

Issuer-borne expenses: SEC registration fee (calculated as 0.0001476 of the aggregate offering amount per SEC Fee Rate Advisory #1 for FY2025), FINRA filing fee (USD 500 plus 0.000219 of the offering amount up to USD 1 million), legal fees for corporate due diligence (typically USD 500,000 to USD 1.5 million for a US IPO), accounting fees for audit and comfort letters (USD 300,000 to USD 800,000), printing and EDGAR/XBRL filing costs (USD 100,000 to USD 300,000), and transfer agent fees (USD 50,000 to USD 150,000).
Selling shareholder-borne expenses: Legal fees for shareholder-specific due diligence (typically USD 100,000 to USD 500,000 per selling shareholder), selling shareholder indemnification costs (calculated as a percentage of the selling shareholder’s proceeds, usually 1-3%), and the selling shareholder’s proportionate share of the underwriting discount (typically 5-7% of the selling shareholder’s proceeds).
Shared expenses: Roadshow expenses (travel, marketing materials, investor meetings) are typically shared pro rata based on the number of shares sold by each party. In practice, the issuer bears the majority of roadshow costs, but the underwriting agreement should specify the allocation formula.

The Underwriting Discount: A Detailed Breakdown

The underwriting discount is the most significant expense item and the primary source of fee-sharing disputes. For a standard US IPO, the underwriting discount ranges from 5.0% to 7.0% of the gross offering proceeds, with 7.0% being the market standard for offerings under USD 100 million (Dealogic, “US IPO Underwriting Fee Analysis,” 2024). The discount is allocated between the issuer and selling shareholders based on the number of shares each sells. For example, if the issuer sells 10 million shares and selling shareholders sell 2 million shares in a USD 20 per share IPO, the total underwriting discount at 7.0% is USD 16.8 million (12 million shares x USD 20 x 7.0%). The issuer’s share is USD 14.0 million (10 million shares x USD 20 x 7.0%), and the selling shareholders’ share is USD 2.8 million (2 million shares x USD 20 x 7.0%).

The underwriting agreement must specify whether the selling shareholders pay their share of the discount directly to the underwriters or whether the issuer pays the full discount and then seeks reimbursement from the selling shareholders. The latter structure — where the issuer pays the full discount and the selling shareholders reimburse the issuer — is more common in practice, as it simplifies the settlement process. However, this structure creates a receivable on the issuer’s balance sheet that must be disclosed in the prospectus as a related-party transaction (SEC Regulation S-K Item 404).

Expense Reimbursement and Indemnification Clauses

Fee-sharing agreements often include expense reimbursement clauses that require selling shareholders to reimburse the issuer for certain expenses incurred on their behalf. The most common reimbursement items are legal fees for shareholder-specific due diligence and the selling shareholder’s share of the underwriting discount. The reimbursement mechanism is typically structured as a set-off against the selling shareholder’s proceeds: the underwriters deduct the reimbursement amount from the selling shareholder’s proceeds and remit the net amount to the selling shareholder.

Indemnification clauses are equally critical. The underwriting agreement typically includes a mutual indemnification provision where the issuer indemnifies the underwriters for losses arising from material misstatements or omissions in the prospectus, and selling shareholders indemnify the underwriters for losses arising from information they provided. The SEC’s position, as stated in SLB 14M, is that any indemnification payment by the issuer to selling shareholders — or any agreement to cap selling shareholder indemnification obligations — must be disclosed as a material term of the fee-sharing arrangement.

The expense allocation in a fee-sharing agreement has direct tax and accounting consequences for both the issuer and selling shareholders. From a US federal income tax perspective, the treatment of IPO expenses depends on whether the expense is classified as a capital expenditure or an ordinary business expense. Under Internal Revenue Code Section 248, the issuer may elect to deduct up to USD 5,000 of organizational expenditures in the year the corporation begins business, with the remainder amortized over 180 months. However, IPO-specific expenses — such as the SEC registration fee and underwriting discount — are generally treated as a reduction of the proceeds received and are not deductible by the issuer.

Tax Treatment for Selling Shareholders

For selling shareholders, the treatment of IPO expenses is more straightforward. The selling shareholder’s share of the underwriting discount and legal fees is treated as a selling expense that reduces the amount realized from the sale of shares. Under Internal Revenue Code Section 1001, the amount realized is the gross proceeds minus the selling expenses. This means that a selling shareholder who pays USD 2.8 million in underwriting discounts on a USD 40 million sale of shares will recognize a capital gain on USD 37.2 million, not USD 40 million.

The tax treatment of expense reimbursement is more nuanced. If the issuer pays an expense on behalf of a selling shareholder and the selling shareholder reimburses the issuer, the transaction is treated as a loan or advance, not as income to the issuer. The selling shareholder deducts the reimbursement as a selling expense. If the issuer does not seek reimbursement — i.e., the issuer bears the selling shareholder’s expenses — the issuer has made a constructive distribution to the selling shareholder, which may be taxable as a dividend under Section 301 of the Internal Revenue Code. This is a critical point that is often overlooked in fee-sharing agreement negotiations.

Accounting Treatment Under US GAAP

Under US GAAP (ASC 340-10, Other Assets and Deferred Costs), IPO costs that are directly attributable to the offering — such as underwriting discounts, legal fees, and accounting fees — are deferred and netted against the proceeds of the offering. The net proceeds are then recorded as equity on the issuer’s balance sheet. For selling shareholders, the expenses are not recorded on the issuer’s books; instead, they are reflected as a reduction in the selling shareholder’s proceeds.

The allocation of shared expenses — such as roadshow costs — requires judgment. Under ASC 340-10-25-2, expenses that benefit both the issuer and selling shareholders must be allocated on a reasonable and consistent basis. The most common allocation method is the pro rata method based on the number of shares sold by each party. However, if the selling shareholders are not participating in the roadshow — for example, if the selling shareholders are institutional investors who do not attend investor meetings — the issuer may argue that 100% of the roadshow costs should be borne by the issuer. The SEC’s position, as articulated in SLB 14M, is that any deviation from the pro rata method must be disclosed and justified in the prospectus.

Given the regulatory scrutiny and tax implications, issuers and selling shareholders must approach fee-sharing agreements with a structured, documented process. The following framework is based on market practice and regulatory guidance from the SEC and SFC.

Step 1: Identify All Categories of IPO Expenses

The first step is to compile a comprehensive list of all IPO expenses, categorized by whether they are issuer-borne, selling shareholder-borne, or shared. The SEC’s Regulation S-K Item 511 provides a non-exhaustive list of required disclosures, including the following categories:

SEC registration fee
FINRA filing fee
NYSE or Nasdaq listing fee
Legal fees (corporate and shareholder-specific)
Accounting fees (audit, review, comfort letters)
Printing and EDGAR/XBRL filing costs
Transfer agent fees
Roadshow expenses (travel, marketing, investor meetings)
Underwriting discount (gross spread)
Underwriter’s non-accountable expense allowance (typically 1% of the offering proceeds)
Selling shareholder indemnification costs

Step 2: Draft the Expense Allocation Schedule

The underwriting agreement should include an exhibit — often called the “Expense Allocation Schedule” or “Schedule of Expenses” — that specifies the dollar amount or formula for each expense category. The schedule should be signed by both the issuer and the selling shareholders. For shared expenses, the schedule should state the allocation methodology (e.g., pro rata based on shares sold). For example:

SEC registration fee: USD 150,000 (issuer-borne)
FINRA filing fee: USD 25,000 (issuer-borne)
Legal fees (corporate): USD 800,000 (issuer-borne)
Legal fees (selling shareholder A): USD 200,000 (selling shareholder A-borne)
Legal fees (selling shareholder B): USD 150,000 (selling shareholder B-borne)
Underwriting discount: 7.0% of gross proceeds, allocated pro rata based on shares sold by each party
Roadshow expenses: USD 500,000, allocated pro rata based on shares sold by each party

Step 3: Include Reimbursement and Indemnification Clauses

The fee-sharing agreement should include a reimbursement clause that requires selling shareholders to reimburse the issuer for expenses incurred on their behalf. The reimbursement should be structured as a set-off against the selling shareholder’s proceeds, with the underwriters responsible for deducting the reimbursement amount and remitting the net proceeds to the selling shareholder. The indemnification clause should specify that selling shareholders indemnify the underwriters for losses arising from information they provided, and that the issuer indemnifies the underwriters for losses arising from corporate information.

The final — and most important — step is to disclose the fee-sharing agreement in the prospectus. The SEC requires that the “Use of Proceeds” section include a table showing the estimated expenses of the offering and the allocation of those expenses between the issuer and selling shareholders. The “Underwriting” section should describe the underwriting discount and any fee-sharing arrangements. The “Related Party Transactions” section should disclose any expense reimbursement or indemnification arrangements with selling shareholders who are directors, officers, or 5% shareholders of the issuer.

Actionable Takeaways

Any fee-sharing agreement between an issuer and selling shareholders must be disclosed in the prospectus as a separate line item in the “Use of Proceeds” and “Underwriting” sections, with the specific dollar amounts or allocation formulas clearly stated.
Selling shareholders should ensure that their share of the underwriting discount and legal fees is documented in a signed Expense Allocation Schedule attached to the underwriting agreement, and that the reimbursement mechanism is structured as a set-off against proceeds to avoid constructive dividend treatment.
Issuers should not bear selling shareholder expenses without seeking reimbursement, as this may be treated as a constructive distribution taxable as a dividend under Internal Revenue Code Section 301.
For cross-border issuers, the fee-sharing agreement must comply with both SEC disclosure requirements and the SFC’s Code of Conduct (Chapter 17), which requires disclosure of all fee-sharing arrangements in the listing document.
The underwriting agreement should include a mutual indemnification clause that is consistent with the expense allocation, with selling shareholders indemnifying the underwriters for losses arising from shareholder-specific information.

The Regulatory Architecture Governing Fee-Sharing Agreements