What Is FINRA? The Role of the Financial Industry Regulatory Authority in US IPOs

FINRA’s Expanding Reach in US IPOs: What Hong Kong Issuers Must Know in 2025

The Financial Industry Regulatory Authority (FINRA) is no longer a back-office compliance hurdle for US-listed companies; it has become a central gatekeeper whose rulings can delay or derail an IPO. In December 2024, FINRA issued a new regulatory notice (Notice 24-21) requiring all underwriters to submit enhanced underwriting compensation disclosures for IPOs on NYSE and NASDAQ, effective for filings after 1 March 2025. This change directly impacts Hong Kong-based sponsors and issuers using the US listing route, particularly those from the PRC, BVI, or Cayman Islands. FINRA now scrutinises not only the underwriting fee structure but also any side payments, finder’s fees, or consulting arrangements made to third parties — including Hong Kong intermediaries. For a typical HK-based issuer targeting a US IPO of USD 50 million, a failure to comply with FINRA’s Rule 5110 can result in a 30-day or longer review delay, costing an estimated USD 150,000 in legal and advisory fees per week. This article explains FINRA’s specific role in the US IPO process, its interaction with the SEC, and the compliance steps that Hong Kong issuers and their advisors must take.

The FINRA-SEC Dynamic in US IPOs

FINRA’s Statutory Mandate and Jurisdiction

FINRA operates as a self-regulatory organisation (SRO) under the Securities Exchange Act of 1934, Section 19(b). Unlike the SEC, which is a federal agency, FINRA is a private, non-profit membership organisation funded by fees from its member firms — primarily broker-dealers and underwriters. In a US IPO, FINRA’s jurisdiction covers all broker-dealers that participate in the offering, including Hong Kong-based firms registered with FINRA as foreign broker-dealers. As of 31 December 2024, FINRA had 3,427 member firms, of which 112 were headquartered outside the United States, according to FINRA’s 2024 Annual Financial Report. For an issuer listing on NASDAQ, the underwriter must be a FINRA member, and the issuer’s sponsor — if it is a Hong Kong investment bank — must either be a FINRA member or rely on a US-based FINRA member as its agent.

FINRA’s Review Process for IPO Filings

The SEC and FINRA conduct parallel reviews of a US IPO filing, but with distinct focuses. The SEC reviews the prospectus (Form S-1 or F-1 for foreign issuers) for disclosure adequacy under the Securities Act of 1933. FINRA, under Rule 5110, reviews the underwriting terms and the compensation arrangements. Specifically, FINRA examines:

• The underwriting discount or commission (typically 5-7% for a USD 50-100 million IPO)
• Any warrants, options, or other equity instruments issued to underwriters
• Finder’s fees, referral fees, or consulting fees paid to any third party
• The fairness of the compensation relative to the offering size and risk

In 2024, FINRA reviewed 1,247 IPO filings and requested amendments on 312 of them (25.0%), according to FINRA’s 2024 Annual Report. The average review period was 45 calendar days for standard filings, but for filings involving complex compensation structures — such as those with multiple Hong Kong intermediaries — the period extended to 72 days.

Practical Implications for Hong Kong Issuers

For a Hong Kong company listing on NASDAQ via a Cayman Islands holding company, the FINRA review is triggered when the lead underwriter — typically a US-based investment bank — files the underwriting agreement with FINRA. If the issuer has engaged a Hong Kong sponsor (e.g., a local investment bank or a family office) to assist with investor introductions, that sponsor must be either a FINRA member or must be disclosed in the underwriting compensation. FINRA Rule 5110(b)(4) requires that all compensation paid to any person who participates in the offering must be disclosed, regardless of whether that person is a FINRA member. A Hong Kong sponsor that is not a FINRA member but receives a finder’s fee of, say, 2% of the offering proceeds (USD 1 million on a USD 50 million deal) must be named in the filing, and the fee must be justified as reasonable. Failure to do so can result in FINRA imposing a 30-day delay or, in extreme cases, denying the offering altogether.

FINRA’s Rule 5110: Underwriting Compensation and Disclosure

The Scope of Covered Compensation

FINRA Rule 5110 defines “underwriting compensation” broadly to include any cash or non-cash payment made to an underwriter, placement agent, or any person who participates in the distribution of the securities. This includes:

• Cash compensation (discounts, commissions, fees)
• Non-cash compensation (warrants, options, shares, rights of first refusal)
• Expense reimbursements (legal, travel, due diligence)
• Consulting or advisory fees paid to any third party that assisted in the offering

For a Hong Kong-based issuer, the most common pitfall is the failure to disclose consulting fees paid to a Hong Kong-based intermediary that introduced the issuer to the US underwriter. In 2023, FINRA fined a Hong Kong-based advisory firm USD 250,000 for failing to disclose a USD 500,000 finder’s fee in a NASDAQ IPO, as reported in FINRA’s 2023 Disciplinary Actions Report.

Filing Requirements and Timing

The underwriter must file the underwriting agreement and all compensation-related documents with FINRA at least 15 business days before the effective date of the registration statement (Rule 5110(b)(1)). For foreign private issuers filing on Form F-1, the same rule applies. The filing includes:

• Form U-4 (for each underwriter and associated person)
• Underwriting agreement (with all exhibits)
• A schedule of all compensation (including any side letters)
• A fairness opinion from an independent third party if the compensation is non-standard

FINRA has 15 business days to review the filing and may request additional information. If FINRA does not object within that period, the compensation is deemed approved. However, FINRA can extend the review period by issuing a “deficiency letter” requesting further details. In practice, for a typical Hong Kong issuer, the FINRA review adds 30 to 60 days to the overall IPO timeline.

Common Compliance Failures and Penalties

FINRA’s enforcement actions in 2024 included 87 cases related to underwriting compensation, with total fines of USD 18.2 million. The most common failures were:

• Failure to disclose finder’s fees (34 cases)
• Failure to file underwriting agreements on time (28 cases)
• Failure to disclose warrants issued to underwriters (15 cases)
• Failure to disclose expense reimbursements (10 cases)

For Hong Kong issuers, the risk is heightened because many local intermediaries are not familiar with FINRA’s disclosure requirements. A Hong Kong sponsor that receives a fee payable only upon closing of the IPO must still be disclosed in the initial filing, even if the fee is contingent. FINRA takes the view that any arrangement that creates a financial incentive to participate in the offering must be disclosed upfront.

FINRA’s Role in SPAC IPOs and De-SPAC Transactions

SPAC IPO Underwriting Compensation

Special Purpose Acquisition Companies (SPACs) have been a popular vehicle for Hong Kong and PRC companies to list on NASDAQ or NYSE, particularly after the 2023 SEC rules on SPACs became effective. FINRA’s role in SPAC IPOs is similar to that in traditional IPOs, but with additional complexities. In a SPAC IPO, the underwriter typically receives a 2% to 5% underwriting discount on the units sold, plus warrants to purchase common shares at a later date. FINRA Rule 5110 requires that all warrants issued to underwriters be disclosed, including their exercise price, expiration date, and any anti-dilution provisions.

In 2024, FINRA reviewed 142 SPAC IPOs, of which 38 (26.8%) required amendments to the underwriting compensation disclosure, according to FINRA’s 2024 Annual Report. The most common issue was the failure to disclose the fair value of warrants using a recognised valuation methodology (e.g., Black-Scholes or Monte Carlo simulation). For a SPAC targeting a de-SPAC with a Hong Kong company, the underwriter’s warrants can represent a significant portion of the total compensation — often 10-20% of the offering proceeds — and must be valued and disclosed accurately.

De-SPAC Transactions and FINRA’s Review

In a de-SPAC transaction, where the SPAC merges with a target company (e.g., a Hong Kong-based tech firm), the target’s shareholders receive cash and/or shares in the combined entity. FINRA’s jurisdiction extends to the de-SPAC transaction if the underwriter of the SPAC IPO also acts as a financial advisor or placement agent in the de-SPAC. Under FINRA Rule 5110(b)(5), any compensation paid to the underwriter in connection with the de-SPAC must be disclosed in a new filing, even if the original SPAC IPO filing was already approved.

In the case of a Hong Kong target merging with a NASDAQ-listed SPAC, the target’s management must ensure that the underwriter’s compensation in the de-SPAC is disclosed and approved by FINRA before the business combination vote. Failure to do so can result in FINRA delaying the de-SPAC vote or, in extreme cases, requiring the underwriter to disgorge the compensation. In 2024, FINRA ordered a US-based underwriter to disgorge USD 2.3 million in fees from a de-SPAC transaction involving a Hong Kong logistics company, citing inadequate disclosure of the underwriter’s role in the target’s pre-merger financing.

Practical Steps for Hong Kong Issuers in SPAC Deals

For a Hong Kong issuer considering a SPAC merger, the following FINRA-related steps are critical:

1. Engage a FINRA-member underwriter at least 120 days before the de-SPAC vote.
2. Disclose all compensation arrangements — including any fees paid to Hong Kong-based advisors — in the proxy statement (Form 14A).
3. Obtain a fairness opinion from an independent FINRA-member firm if the underwriter’s compensation exceeds 5% of the transaction value.
4. File the underwriting compensation disclosure with FINRA at least 30 business days before the de-SPAC vote.
5. Ensure that any warrants or options issued to the underwriter are valued using a recognised methodology and disclosed in the filing.

FINRA’s Interaction with Hong Kong Regulatory Frameworks

Dual Registration and Cross-Border Compliance

A Hong Kong-based investment bank that acts as an underwriter in a US IPO must be registered with both the SFC (under the Securities and Futures Ordinance, Cap. 571) and FINRA (as a foreign broker-dealer). The SFC and FINRA have a memorandum of understanding (MoU) signed in 2018 that facilitates information sharing and enforcement cooperation. Under the MoU, FINRA can request information from the SFC regarding a Hong Kong firm’s compliance history, and the SFC can share enforcement actions with FINRA.

In practice, a Hong Kong firm that is disciplined by the SFC for misconduct — such as failure to disclose conflicts of interest — must disclose that information to FINRA when applying for membership or when filing underwriting compensation disclosures. Failure to do so can result in FINRA denying membership or imposing sanctions. In 2024, FINRA denied membership to a Hong Kong-based advisory firm that had been reprimanded by the SFC in 2022 for failing to maintain proper records under the Securities and Futures (Records) Rules.

The Impact of the HKEX-US Listing Dual Path

Some Hong Kong issuers pursue a dual listing on both HKEX and NASDAQ, using the same sponsor for both transactions. In such cases, the sponsor must comply with both HKEX Listing Rules (specifically, Chapter 3A on sponsors) and FINRA rules. The HKEX requires that a sponsor be independent of the issuer and its directors, while FINRA requires full disclosure of all compensation paid to the sponsor. A sponsor that receives a success fee in the HKEX listing must also disclose that fee in the US filing if the same sponsor is involved in the US offering. FINRA’s Rule 5110(b)(6) explicitly states that compensation paid in connection with a foreign listing must be disclosed if it is part of the same overall offering structure.

For example, a Hong Kong company that listed on HKEX in 2023 and subsequently pursued a NASDAQ listing in 2025 must disclose the underwriting compensation paid to its HKEX sponsor in the US filing, even if that sponsor is not acting as an underwriter in the US offering. FINRA will review whether the compensation is reasonable relative to the overall size of the offering and whether it creates any undisclosed conflicts of interest.

Actionable Takeaways for Hong Kong Issuers and Advisors

1. Engage a FINRA-member underwriter at least 90 days before filing the Form F-1, as the FINRA review process adds 30-60 days to the timeline and any deficiency letter can extend this further.
2. Disclose all compensation paid to any Hong Kong intermediary — including finder’s fees, consulting fees, and expense reimbursements — in the initial FINRA filing, even if the fee is contingent on closing, to avoid a 30-day delay or a USD 250,000 fine.
3. Obtain a fairness opinion from an independent FINRA-member firm if the underwriting compensation exceeds 5% of the offering proceeds or includes non-cash components such as warrants.
4. Coordinate with both SFC and FINRA compliance teams if the issuer is also listing on HKEX, as compensation paid in the HKEX listing must be disclosed in the US filing under FINRA Rule 5110(b)(6).
5. File the underwriting compensation disclosure with FINRA at least 30 business days before the de-SPAC vote in a SPAC merger, and ensure that all warrants are valued using a recognised methodology.