Most of the securities rules that govern private offerings apply to the issuer. FINRA Rule 2310 applies to the firms that sell them, and it is the rule that most shapes how direct participation programs and related unlisted products actually reach investors.
Sponsors structure offerings around it even though it does not bind them, because the offerings are distributed by FINRA members who are bound by it.
What the rule addresses
Rule 2310 governs member participation in the distribution of covered programs, and its requirements fall into four areas.
Compensation limits. The rule imposes ceilings on organisation and offering expenses and on underwriting compensation payable in connection with a covered program, expressed as percentages of gross offering proceeds. The specific figures are set by the rule and have been amended over time; they should be read from current rule text rather than recalled.
The practical significance is large. These limits are a principal reason the front-end load on non-traded programs is structured the way it is, and a principal reason the industry shifted compensation toward ongoing shareholder servicing fees as perpetual structures became dominant — a shift that changed where the cost sits without necessarily reducing it. See non-traded REIT fees.
Due diligence. Before participating in a distribution, a member must obtain and review specified information about the program and the sponsor, and must have reasonable grounds to believe the information in the offering materials is adequate. This sits alongside the general obligation to conduct a reasonable investigation of any private placement it recommends. See reasonable-basis diligence.
Suitability. The rule imposes requirements on determining that a participation is suitable for a particular participant, including obtaining information about the investor and having reasonable grounds for the determination. This operates alongside Regulation Best Interest for retail customers rather than instead of it.
Disclosure and handling. Requirements addressing the information provided to investors and the treatment of funds, which interact with escrow arrangements in contingency offerings. See offering escrow requirements.
Why it exists
The rule origins are in the history of the products it covers. Direct participation programs — historically real estate and energy partnerships — were sold to retail investors through commission-based distribution, were illiquid, were complex, and in periods of the past were sold with compensation arrangements that consumed a very large share of investor capital before anything was invested.
The compensation limits exist to bound that. The diligence and suitability requirements exist because the products are opaque and the investor is generally not in a position to evaluate them.
Understanding this history explains why the rule is structured as it is, and why it focuses on the distributor rather than the issuer: the concern was never primarily that sponsors would design bad products, but that distribution economics would drive them to investors regardless of fit.
Who is covered and where the boundaries sit
Rule 2310 applies to FINRA members participating in the distribution of covered programs — both the dealer manager and the selling firms.
The scope of what counts as a covered program involves nuance, and the rule reach extends beyond the classic real estate partnership to related offerings including certain unlisted REIT and BDC programs distributed through members. Whether a particular product is within scope is a question for counsel rather than an assumption, and it is a question worth asking early in structuring rather than late.
A related consequence worth noting: because the rule binds members, an offering distributed outside the member channel — sold directly by a sponsor, or through registered investment advisers who are not FINRA members — is not subject to it. Those channels have their own obligations, including the adviser fiduciary duty, and they are different obligations. This asymmetry is one of the less-discussed reasons the economics of a program can differ by channel.
What firms actually do
For a firm distributing covered programs, satisfying the rule in practice means:
- A product approval process that obtains and reviews the required information before the firm agrees to distribute, with a documented record.
- Compensation review, confirming that total organisation and offering expenses and underwriting compensation fit within the applicable limits — including all forms of compensation, which is where the analysis is easiest to get wrong.
- A selling agreement with the dealer manager that allocates responsibilities clearly.
- Suitability and best interest procedures at the point of recommendation, including any concentration limits the firm imposes on its own platform, which are often stricter than any external requirement.
- Supervision under FINRA Rule 3110, including review of recommendations and periodic assessment of whether the product remains appropriate for the platform.
- Ongoing review for continuing offerings, since programs live for years and circumstances change.
- Records sufficient to demonstrate all of the above.
For sponsors
A sponsor structuring a program for member distribution needs to design within the rule from the outset, because retrofitting is expensive:
- Total compensation must fit the applicable limits, counting everything that qualifies as compensation.
- The information package must contain what members are required to obtain and review.
- The offering must be capable of supporting the suitability determinations firms will need to make, which means the disclosure has to be genuinely usable rather than merely complete.
- Firms will impose their own additional requirements, and those often bind before the rule does.
For investors
Rule 2310 is not a rule investors interact with directly, and knowing it exists is useful for one reason: it explains why non-traded programs are priced and sold the way they are.
The compensation limits are a ceiling, not a target, and they are a ceiling on a specific set of items rather than on total cost. A program can comply fully with Rule 2310 and still carry a fee load an investor would find unattractive if they saw it laid out — particularly once ongoing servicing fees compounding over a perpetual holding period are included alongside the upfront figures the rule addresses.
The rule constrains the distribution economics. It does not make a program a good investment, and it was never intended to.
This guide is educational and general; it is not legal or compliance advice. FINRA rules are amended over time; consult current rule text and qualified counsel.
Frequently Asked Questions
What is FINRA Rule 2310?
The FINRA rule governing member firm participation in the distribution of direct participation programs and certain related offerings. It addresses limits on organisation and offering expenses and on underwriting compensation, the information a member must obtain and review before participating, suitability determinations, and disclosure.
What is a direct participation program?
A program that passes through income, gains, losses, and tax benefits directly to participants. The category has historically covered real estate partnerships and similar vehicles, and the rule reaches related offerings including certain unlisted REIT and BDC programs distributed through member firms.
Does Rule 2310 cap fees?
It imposes limits on organisation and offering expenses and on underwriting compensation payable in connection with covered programs, expressed as percentages of gross proceeds. The specific figures are set by the rule and should be read from the current rule text rather than assumed.
Who does Rule 2310 apply to?
FINRA member firms participating in the distribution of covered programs — the dealer manager and the selling firms. It is an obligation of the distributor, not of the sponsor, although sponsors structure offerings to fit within it because the programs are distributed by members.
How does Rule 2310 relate to Regulation Best Interest?
They operate together rather than as alternatives. Rule 2310 imposes product-level and compensation requirements specific to these programs, while Regulation Best Interest governs recommendations to retail customers generally. A firm distributing a covered program must satisfy both.
Sources
- FINRA Rule 2310 (Direct Participation Programs)
- FINRA Rule 2111 (Suitability) and FINRA Rule 5123 (private placements)
- SEC Regulation Best Interest, Exchange Act Rule 15l-1
- FINRA Regulatory Notice 10-22 (reasonable investigation in Regulation D offerings)
