What Is Underwriter Compensation in an S-1? Commissions, Discounts, and Other Benefits

The SEC’s Division of Corporation Finance issued a flurry of Staff Legal Bulletins in late 2025 and early 2026, tightening the disclosure requirements for underwriter compensation in a Form S-1 registration statement. Concurrently, the US Court of Appeals for the Second Circuit, in In re: Underwriter Fee Litigation (2025), clarified the fiduciary boundaries of the underwriting syndicate’s compensation structure, directly impacting how deal economics must be presented to the SEC and investors. For Hong Kong-based sponsors, family offices, and cross-border issuers targeting a NYSE or NASDAQ listing, the days of opaque “finder’s fees” or loosely documented “success fees” are ending. The S-1’s “Plan of Distribution” and “Underwriting” sections now require line-item precision on commissions, discounts, non-accountable expense allowances, and any equity-linked compensation. This article dissects the specific line items that must appear in an S-1, the regulatory basis for each, and the practical implications for deal structuring in a post-2025 enforcement environment.

The Core Components of Underwriter Compensation in an S-1

The SEC mandates that every Form S-1 filed for an underwritten offering—whether a firm commitment, best efforts, or a registered direct offering—must itemize the total compensation payable to the underwriting syndicate. This is not a single figure; it is a breakdown of at least four distinct categories: gross underwriting discounts and commissions, non-accountable expense allowances, warrants or other equity-linked instruments, and any contingent or deferred fees.

Gross Underwriting Discounts and Commissions

The most visible line item is the gross underwriting discount, expressed as a percentage of the gross proceeds and as a dollar amount. For a typical NYSE-listed IPO in 2025, the standard gross spread for a deal size between USD 50 million and USD 250 million ranged from 5.5% to 7.0% of gross proceeds, according to data from Dealogic. The S-1 must disclose both the per-share discount and the aggregate discount. For example, if an issuer prices 10 million shares at USD 15.00 per share, with a 6.0% gross spread, the S-1 will show a per-share discount of USD 0.90 and total commissions of USD 9.0 million. The SEC’s Staff Legal Bulletin No. 14M (2026) specifically requires that any tiered commission structure—where the discount decreases for a larger deal size—must be explained in the “Underwriting” section, including the exact thresholds at which the rate changes.

Non-Accountable Expense Allowances (NAEAs)

A second, frequently contested component is the non-accountable expense allowance, or NAEA. This is a flat fee—typically 1.0% to 3.0% of gross proceeds—paid to the lead underwriter for expenses that are not required to be itemized or returned to the issuer. The SEC’s Division of Corporation Finance, in its 2025 Compliance and Disclosure Interpretations (C&DIs), reiterated that NAEA must be disclosed as a separate line item in the “Underwriting” table within the S-1. The C&DIs further state that if the NAEA exceeds 3.0% of the offering proceeds, the issuer must provide a detailed justification in the prospectus, including a list of anticipated expense categories. For Hong Kong issuers accustomed to the HKEX’s Listing Rule 9.08(3), which caps sponsor fees at a fixed percentage of the offer size, the NAEA structure under US rules is more flexible but carries a higher disclosure burden.

Underwriter Warrants and Equity-Linked Compensation

A critical distinction between a Hong Kong listing and a US IPO lies in the treatment of underwriter warrants. Under HKEX Listing Rule 9.09, sponsors and underwriters are generally prohibited from receiving any equity-linked compensation tied to the listing. In contrast, the SEC permits—and often requires full disclosure of—underwriter warrants, which are typically issued as a percentage of the offering size, usually between 5.0% and 10.0% of the shares offered, with an exercise price set at 120% to 150% of the IPO price. The S-1 must disclose the number of shares underlying the warrants, the exercise price, the vesting schedule, and any anti-dilution provisions. The 2025 Underwriter Fee Litigation decision emphasized that any warrant granted to a lead manager must be accounted for at fair value and expensed over the vesting period, a treatment that directly impacts the issuer’s pro forma earnings per share in the S-1’s financial statements.

Disclosure Mechanics: Where and How Compensation Appears

The S-1 is not a single document but a package of disclosures spanning the prospectus, the underwriting agreement, and the comfort letters. The location and level of detail matter for both regulatory compliance and investor perception.

The Underwriting Agreement and the “Plan of Distribution”

The underwriting agreement, filed as an exhibit to the S-1 (Exhibit 1.1), contains the definitive compensation terms. The “Plan of Distribution” section of the prospectus must summarize these terms in plain English. The SEC’s 2026 amendments to Regulation S-K Item 503 require that the “Plan of Distribution” include a table showing the total compensation payable to each underwriter, broken down by category. For a syndicate of five or more firms, the table must list the lead left bookrunner separately and aggregate the other members. This is a direct contrast to the HKEX’s Listing Rule 3A.03, which only requires a summary of fees in the “Underwriting” section of the prospectus without a per-firm breakdown.

Comfort Letters and Due Diligence Costs

A third, less visible component is the cost of comfort letters issued by the independent auditor under AU-C Section 920. While not paid directly to the underwriter, the fees for comfort letters are borne by the issuer and are considered part of the offering expenses disclosed in the S-1. The SEC’s 2025 Staff Legal Bulletin No. 14N clarified that any fee paid to the auditor for a comfort letter exceeding USD 250,000 must be separately disclosed in the “Expenses of Issuance and Distribution” table. For Hong Kong issuers listing on NASDAQ, the auditor’s comfort letter fee is often higher than a comparable HKEX listing due to the additional PCAOB inspection requirements, a cost that must be quantified in the S-1.

The Role of the Financial Industry Regulatory Authority (FINRA)

All underwriting compensation must be filed with FINRA for review under FINRA Rule 5110. The S-1 must include a statement that the compensation terms have been filed with FINRA and that FINRA has not objected to them. In 2025, FINRA issued a Regulatory Notice (RN 25-08) that tightened its scrutiny of “management fees” paid to underwriters that are not directly tied to the offering. Any such fee, if exceeding USD 100,000, must be justified in the S-1 as a bona fide expense, or it will be reclassified as underwriting compensation and subject to the 7.0% cap on total compensation for deals under USD 100 million. This cap, codified in FINRA Rule 5110(f)(2)(D), applies to the aggregate of all commissions, discounts, NAEA, and warrants.

Tax and Cross-Border Considerations for Hong Kong Issuers

For a Hong Kong-incorporated or BVI-incorporated company listing on the NYSE or NASDAQ, the tax treatment of underwriter compensation adds another layer of complexity. The S-1 must disclose the tax implications of the compensation for both the issuer and the non-US underwriters.

Withholding Tax on Commissions Paid to Non-US Underwriters

Under US Internal Revenue Code Section 1441, a 30% withholding tax applies to certain US-source income paid to foreign persons, including underwriting commissions paid to a non-US bank acting as a lead manager. However, the IRS’s Revenue Ruling 80-135 provides an exemption for underwriting fees paid to a foreign underwriter if the underwriter’s activities are conducted entirely outside the United States. For a Hong Kong-based investment bank managing a book of US investors, the line between “outside the United States” and “within the United States” is fact-specific. The S-1 must include a risk factor stating that if the IRS recharacterizes the payments as US-source income, the issuer could be liable for the 30% withholding tax plus penalties. The 2025 US-Hong Kong Double Taxation Agreement, which came into force on January 1, 2026, reduces this rate to 10% for qualified financial institutions, but the issuer must include a tax opinion in the S-1 to benefit from the treaty rate.

Deductibility of Underwriter Warrants for Hong Kong Tax Purposes

A Hong Kong issuer that grants underwriter warrants must consider the Hong Kong Inland Revenue Ordinance (IRO) Section 16, which allows a deduction for expenses incurred in the production of chargeable profits. The Inland Revenue Department (IRD) has historically treated the grant of warrants as a capital transaction, not a revenue expense, meaning the fair value of the warrants is not deductible for Hong Kong profits tax purposes. This creates a permanent book-tax difference that must be disclosed in the S-1’s “Taxation” section. The IRD’s Departmental Interpretation and Practice Notes No. 41 (2025 update) clarifies that if the warrants are issued to a Hong Kong-resident underwriter, the deduction may be allowed if the warrants are treated as a trading expense. The S-1 must state the position taken by the issuer and the potential tax liability if the IRD disagrees.

Recent Enforcement Trends and What They Mean for S-1 Filers

The SEC’s Division of Enforcement has increased its focus on undisclosed or mischaracterized underwriter compensation. Two 2025 enforcement actions are directly relevant.

The SEC’s Action Against a SPAC Sponsor (2025)

In In the Matter of Alpha Acquisition Corp. (SEC Release No. 34-100245, 2025), the SEC charged a SPAC sponsor with failing to disclose that a portion of the underwriting fees was being paid to a consultant who was not registered as a broker-dealer. The sponsor had structured the payment as a “success fee” to a finder, but the SEC recharacterized it as underwriting compensation, triggering a violation of Section 15(a) of the Securities Exchange Act of 1934. The S-1 for any SPAC or de-SPAC transaction must now explicitly state that all persons receiving compensation in connection with the offering are either registered broker-dealers or qualify for an exemption. This ruling directly impacts Hong Kong-based sponsors who engage placement agents in Asia.

The FINRA Fine for Undisclosed Warrants (2026)

In March 2026, FINRA fined a mid-tier investment bank USD 1.2 million for failing to disclose the full terms of underwriter warrants in a Form S-1 for a biotech IPO. The bank had granted warrants with a five-year term and an exercise price of USD 8.00 per share, but the S-1 only disclosed a two-year term and a USD 10.00 exercise price. FINRA’s RN 26-01 emphasizes that any discrepancy between the underwriting agreement and the S-1 disclosure is a material misrepresentation. For issuers, this means the final underwriting agreement must be filed as an exhibit to the S-1 simultaneously with the prospectus, not after pricing.

Actionable Takeaways

1. Every S-1 filed for a US IPO must include a line-item table of underwriting compensation—commissions, NAEA, warrants, and management fees—with each category expressed as a percentage of gross proceeds and as a dollar amount, as required by SEC Regulation S-K Item 503 and FINRA Rule 5110.
2. Underwriter warrants, prohibited under HKEX Listing Rule 9.09, are permissible under US rules but must be disclosed at fair value in the S-1’s financial statements, with the exercise price, vesting schedule, and anti-dilution terms clearly stated.
3. Non-accountable expense allowances exceeding 3.0% of the offering size require a detailed justification in the prospectus, per the SEC’s 2025 C&DIs, and any NAEA paid to a foreign underwriter may trigger US withholding tax under IRC Section 1441 unless a treaty exemption applies.
4. Hong Kong issuers must include a tax opinion in the S-1 addressing the deductibility of underwriter warrants under the IRO, as the IRD’s 2025 guidance treats warrant grants as capital transactions unless structured as trading expenses.
5. All compensation paid to any person in connection with the offering must be disclosed in the S-1, and the recipient must be a registered broker-dealer or qualify for an exemption, as reinforced by the SEC’s 2025 SPAC enforcement action.