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FINRA has initiated a targeted examination focusing on broker-dealers' participation in small-cap offerings involving foreign issuers, particularly those with business operations in foreign jurisdictions such as China. The review covers member firms that participated in IPOs that raised $25 million or less and priced between $4.00 and $8.00, between January 1, 2023, and September 30, 2025. The review also includes follow-on offerings and private placements tied to those transactions.
This initiative, announced last week, emphasizes FINRA's ongoing commitment to market integrity, due diligence and supervisory controls in cross-border small-cap transactions.
Scope of the Review
FINRA's review will encompass:
- Public and private offerings of small-cap exchange-listed issuers with business operations in foreign jurisdictions, such as China;
- Broker-dealers acting as underwriters, bookrunners, syndicate members, selling group members, or placement agents in these offerings; and
- Firms participating in initial and/or secondary market trading related to small-cap offerings, including those with omnibus accounts trading in these securities.
FINRA has requested that selected firms provide detailed documentation, including:
- Written supervisory procedures relevant to small-cap offerings;
- Compliance policies, manuals, training materials, bulletins and any other written guidance in place relevant to small-cap offerings;
- Due diligence processes conducted on issuers, officers and affiliates; and
- A comprehensive list of all small-cap offerings, including detailed information that includes the compensation received by the firm, names of other member firms involved in the offering and the identities of all individuals involved in the offering.
Regulatory Focus
FINRA's review is part of its broader efforts to mitigate risks associated with low-priced, thinly traded securities and microcap markets. FINRA remains particularly concerned about potential market manipulation or pump-and-dump schemes and offshore entities acting as intermediaries or promoters. The review also dovetails with FINRA's ever-present focus on weak or inconsistent anti-money laundering (AML) and know-your-customer (KYC) controls.
Implications for Broker-Dealers
FINRA's targeted examination offers a potential roadmap for firms participating in small-cap offerings involving foreign issuers to tighten their controls and compliance policies. Among other actions, firms would be well-advised to:
- Identify any transactions between January 2023 and September 2025 that would be captured by this targeted review;
- Reassess supervisory systems and procedures under FINRA Rules 2010, 3010 and 3110;
- Review due diligence frameworks for adequacy and documentation; and
- Ensure risk management and AML compliance systems are appropriately scaled to these types of offerings
Proactive review now can mitigate regulatory risk later, especially given FINRA's increasing coordination with the SEC on cross-border microcap investigations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
