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1008-00002 · Lumos Analytics Inc · Underwriting

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MEMORANDUM

TO: Robert Adeyemi, Responsible Partner, Capital Markets Group Audrey Zhou, Lead Associate, Capital Markets Group

FROM: Brendan Walsh, Working Associate, Capital Markets Group

DATE: March 7, 2022

RE: Review of Form Agreement Among Underwriters — Pinnacle Securities LLC (Lumos Analytics Inc. IPO)

Matter Number: 1008-00002

Client: Lumos Analytics Inc.

I. Executive Summary and Purpose

Calderwood & Harkness LLP serves as issuer's counsel to Lumos Analytics Inc. ("Lumos" or the "Company") in connection with the proposed initial public offering (the "IPO" or the "Offering") of shares of the Company's Class A Common Stock, par value $0.001 per share (the "Shares"), to be listed on the Nasdaq Global Select Market under the ticker symbol "LMOS." This memorandum has been prepared for the purpose of reviewing the form Agreement Among Underwriters (the "AAU") circulated by Pinnacle Securities LLC ("Pinnacle"), which has been designated as the lead left book-running managing underwriter and representative of the several underwriters (in such capacity, the "Representative") in connection with the Offering.

The AAU governs the syndicate relationship among the three underwriting firms participating in the Offering: (i) Pinnacle Securities LLC, serving as lead left book-running managing underwriter; (ii) Whitfield & Company LLC ("Whitfield"), serving as joint book-running managing underwriter; and (iii) Graystone Capital Markets Inc. ("Graystone"), serving as co-manager (collectively, the "Underwriters" or the "Syndicate"). The AAU was circulated by Pinnacle's outside counsel, Hargrove & Liddell LLP, on March 3, 2022, and bears the caption "Standard Form Agreement Among Underwriters — Pinnacle Securities LLC (February 2022 Revision)."

The purpose of this memorandum is threefold. First, we identify provisions of the AAU that are of note for issuer's counsel and that merit attention in the context of the Company's broader Offering process. Second, we flag areas where the terms of the AAU intersect with the Company's interests or create potential conflicts or inconsistencies with the Underwriting Agreement (the "Underwriting Agreement") to be entered into among the Company, the selling stockholders, and the several underwriters. Third, we recommend specific comments or protective positions that the Company should consider raising with Pinnacle, either directly or through the Underwriting Agreement negotiation process.

At the outset, it is important to note that the AAU is primarily a contract among the Underwriters themselves. The Company is not a party to, and will not execute, the AAU. Nevertheless, certain provisions of the AAU have direct or indirect consequences for Lumos and its stockholders, particularly provisions relating to allocation mechanics, stabilization and short-covering activities, selling restrictions, lock-up administration and waiver authority, and liability sharing among the Underwriters. As issuer's counsel, we bear a responsibility to review the AAU for consistency with the Underwriting Agreement and the Company's disclosure obligations under the Registration Statement on Form S-1 filed with the Securities and Exchange Commission (the "SEC").

The proposed Offering contemplates the sale of 16,441,176 base Shares, consisting of 12,941,176 primary Shares to be issued and sold by the Company and 3,500,000 secondary Shares to be sold by the selling stockholders, Velthryn Venture Partners Fund IV, L.P. ("Velthryn") and Arclight Equity Group Fund VII, L.P. ("Arclight" and, together with Velthryn, the "Selling Stockholders"). In addition, the Underwriters will be granted an overallotment option (the "Overallotment Option") to purchase up to 2,466,176 additional Shares (representing 15% of the base Shares) from the Company, exercisable within 30 days of the date of the final prospectus. The preliminary price range for the Offering is $16.00 to $18.00 per Share, and the underwriting discount has been set at 6.5% of the public offering price per Share. At the midpoint of the preliminary price range ($17.00 per Share), the aggregate gross proceeds of the base Offering would be approximately $279.5 million, and the total underwriting discount would be approximately $18.2 million.

II. Parties to the AAU and Syndicate Structure

A. Representative / Lead Manager

Pinnacle Securities LLC, with its principal offices located at 399 Park Avenue, New York, New York 10022, serves as the lead left book-running managing underwriter for the Offering. In such capacity, Pinnacle also serves as the "Representative" of the several Underwriters under both the AAU and the Underwriting Agreement. The primary contacts at Pinnacle for purposes of the Offering are Andrew Castellano, Managing Director, Investment Banking Coverage Group, and Lisa Drummond, Managing Director, Equity Capital Markets.

As Representative, Pinnacle has been granted sole authority under the AAU to act on behalf of the Syndicate in all dealings with the Company and the Selling Stockholders. This authority encompasses, among other things, the right to negotiate the terms of the Underwriting Agreement, to communicate with the Company's board of directors and management regarding pricing and allocation, to manage the book-building process, to execute the Underwriting Agreement on behalf of the several Underwriters, and to coordinate the closing and settlement of the Offering. The designation of Pinnacle as lead left book-runner is consistent with the engagement letter executed between the Company and Pinnacle dated September 14, 2021, as amended on January 22, 2022 (the "Engagement Letter"), copies of which are maintained in the deal file.

The practical significance of Pinnacle's role as Representative cannot be overstated. Under the AAU, Pinnacle exercises dominant control over the Offering process, including final allocation decisions, stabilization activities, and lock-up waiver authority. While the other Syndicate members participate in distribution and, in Whitfield's case, in certain aspects of book-building, the AAU structure reflects the standard market practice in which the lead left book-runner exercises primary decision-making authority over the Offering.

B. Joint Book-Running Managing Underwriter

Whitfield & Company LLC, with its principal offices located at 200 Vesey Street, 38th Floor, New York, New York 10281, serves as joint book-running managing underwriter for the Offering. The primary contact at Whitfield is Derek Kaplan, Managing Director, Equity Capital Markets. As a joint book-runner, Whitfield participates in book-building, pricing discussions, and allocation decisions, though such participation is in all cases subject to Pinnacle's overriding authority as Representative. Under the AAU, Whitfield's role is described as being "subject to the direction and coordination of the Representative," which is consistent with the typical allocation of responsibilities in a multi-book-runner syndicate structure.

Whitfield's participation in the Offering reflects the Company's desire to ensure broad distribution coverage and institutional investor access. Whitfield maintains significant equity distribution capabilities, particularly among mid-cap technology-focused institutional investors, and the Company's management has expressed a preference for including Whitfield as a joint book-runner to maximize the breadth of investor outreach during the road show process.

C. Co-Manager

Graystone Capital Markets Inc., with its principal offices located at 140 Broadway, 30th Floor, New York, New York 10005, serves as co-manager for the Offering. The primary contact at Graystone is Hannah Morales, Managing Director. As co-manager, Graystone participates in distribution activities but has a significantly more limited role in book-building and allocation decisions compared to the two book-runners. Under the AAU, the co-manager's role is primarily one of selling group participation, with a smaller underwriting commitment and correspondingly smaller share of the underwriting discount.

Graystone's inclusion in the Syndicate was recommended by Pinnacle as part of the overall Syndicate formation process. Graystone maintains relationships with certain regional institutional investors and high-net-worth retail accounts that complement the distribution capabilities of Pinnacle and Whitfield.

D. FINRA Membership

All three Syndicate members — Pinnacle, Whitfield, and Graystone — are registered broker-dealers under Section 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are members of the Financial Industry Regulatory Authority, Inc. ("FINRA"). Accordingly, the AAU is subject to, and the Syndicate members' conduct in connection with the Offering is governed by, the applicable FINRA rules, including without limitation FINRA Rule 5110 (Corporate Financing Rule — Underwriting Terms and Arrangements) and FINRA Rule 5131 (New Issue Allocations and Distributions). Each Syndicate member represents in the AAU that it is, and will remain throughout the term of the AAU, a registered broker-dealer in good standing and a FINRA member. The FINRA compliance aspects of the AAU are discussed in further detail in Section X of this memorandum.

III. Underwriting Commitment and Allocation Mechanics

A. Syndicate Allocation Among Underwriters

The AAU specifies each Underwriter's percentage commitment of the total base Offering (16,441,176 Shares) and the Overallotment Option (2,466,176 additional Shares). These allocation percentages are set forth in Schedule I to the AAU, which is to be completed and finalized at the time of pricing. The AAU provides that Schedule I will be agreed upon by the Syndicate members and confirmed by the Representative no later than the date on which the Underwriting Agreement is executed.

While the specific percentage allocations have not yet been finalized as of the date of this memorandum, the AAU contemplates a structure that is typical for an IPO of this size: Pinnacle, as lead left book-runner, is expected to receive the largest allocation of the total Shares (customarily in the range of 50–60% of the base Offering for a lead left position in a three-underwriter syndicate); Whitfield, as joint book-runner, is expected to receive the second-largest allocation (customarily in the range of 25–35%); and Graystone, as co-manager, is expected to receive the smallest allocation (customarily in the range of 8–15%). These ranges are consistent with market practice for technology company IPOs of comparable size.

The allocation schedule directly affects several aspects of the Offering that are of interest to the Company. First, the breadth and diversity of the institutional investor base is influenced by the allocation among Syndicate members, as each underwriter brings its own institutional client relationships and distribution capabilities. Second, the allocation schedule determines each Underwriter's underwriting risk exposure and, correspondingly, its share of the underwriting discount. Third, the allocation schedule establishes each Underwriter's pro rata share of liability under both the AAU and the Underwriting Agreement. We recommend confirming, once the allocation schedule is finalized, that the allocation among Syndicate members is consistent with the Company's stated goal of broad institutional distribution and diversified stock ownership following the IPO.

B. Institutional vs. Retail Allocation

The AAU grants Pinnacle, as Representative, primary authority over the final allocation of Shares among institutional and retail orders received during the book-building process. This authority is consistent with Pinnacle's role as the lead left book-runner and manager of the order book. Under the AAU, Pinnacle retains "sole discretion" over the book-building process and the final investor allocation, including the authority to determine the number of Shares allocated to each investor, the allocation among institutional and retail accounts, and the treatment of any oversubscription in the order book.

Pinnacle's allocation authority under the AAU is subject to the requirements of FINRA Rule 5131, which prohibits certain allocation practices, including "spinning" (allocating IPO shares to executive officers and directors of public companies as an inducement for future investment banking business), "quid pro quo" allocations (conditioning allocations on the receipt of excessive compensation in the form of commissions or other payments), and allocations to executive officers and directors of the issuer or other companies for the purpose of influencing the award of investment banking mandates.

It is important to note that, while the Company is not a party to the AAU, the Underwriting Agreement is expected to contain provisions granting the Company and the Selling Stockholders certain rights to be consulted regarding the allocation of Shares. Specifically, Section 3(b) of the current draft of the Underwriting Agreement provides that the Representative will, "to the extent reasonably practicable, consult with the Company regarding the allocation of Shares among investors, taking into account the Company's expressed preferences regarding the composition of its post-IPO stockholder base." We recommend confirming that nothing in the AAU conflicts with, undermines, or purports to override the Company's consultation rights under the Underwriting Agreement. In particular, the AAU's grant of "sole discretion" to Pinnacle over allocation should be read in conjunction with, and subject to, the consultation obligation in the Underwriting Agreement.

C. Overallotment Option Allocation

The AAU addresses the mechanics of the Overallotment Option, which permits the Underwriters to purchase up to 2,466,176 additional Shares from the Company at the public offering price less the underwriting discount. The Overallotment Option is exercisable by Pinnacle, acting on behalf of the several Underwriters, at any time within 30 calendar days following the date of the final prospectus. The Overallotment Option serves dual purposes: it provides the Underwriters with flexibility to meet excess demand and it functions as a covering mechanism for the syndicate short position established in connection with stabilization activities (discussed in greater detail in Section VI below).

Under the AAU, Overallotment Option Shares are to be allocated pro rata among the Underwriters in proportion to their respective base underwriting commitments as set forth in Schedule I. This pro rata allocation ensures that each Underwriter's share of the Overallotment Option is proportionate to its share of the base Offering risk. The AAU provides that Pinnacle, as Representative, has the sole authority to determine the timing and size of any exercise of the Overallotment Option, and that partial exercises are permitted.

The interaction between the Overallotment Option and stabilization activities is a key feature of the AAU. As discussed in Section VI, Pinnacle may create a syndicate short position of up to 2,466,176 Shares to facilitate stabilization of the aftermarket trading price. The Overallotment Option serves as the primary mechanism for covering this short position, with the net effect that the full exercise of the Overallotment Option results in the issuance of additional primary Shares by the Company, while a partial exercise or non-exercise results in the syndicate's covering of the short position through open market purchases (syndicate covering transactions).

IV. Compensation and Fee Sharing

A. Underwriting discount

The total underwriting discount for the Offering has been set at 6.5% of the public offering price per Share. This discount level is within the range customarily observed for technology company IPOs of this size, though it is at the higher end of the spectrum (with many recent comparable transactions pricing at discounts between 5.5% and 7.0%). The 6.5% discount was negotiated between the Company and Pinnacle as part of the original Engagement Letter and is reflected in both the AAU and the draft Underwriting Agreement.

At the midpoint of the preliminary price range of $17.00 per Share, the per-share underwriting discount is $1.105. The aggregate underwriting discount across the various components of the Offering is calculated as follows:

The AAU provides for the distribution of the underwriting discount among the Syndicate members according to a fee-split schedule to be attached as Schedule II to the AAU. The fee-split schedule determines how the total underwriting discount is allocated among the three Underwriters.

B. Fee Split Components

The AAU divides the total underwriting discount into three distinct components, each of which serves a different compensatory function:

Management Fee. The management fee is the portion of the underwriting discount payable to the managing underwriters — specifically, Pinnacle and Whitfield in their capacities as book-running managing underwriters — as compensation for structuring, documenting, and managing the Offering process. The management fee typically represents approximately 20% of the total underwriting discount. The AAU provides that the management fee is shared between Pinnacle and Whitfield in a ratio to be specified in Schedule II, with Pinnacle receiving the larger share reflecting its role as lead left book-runner.

Underwriting Fee. The underwriting fee is the portion of the underwriting discount payable to all Syndicate members on a pro rata basis in proportion to their respective underwriting commitments, as compensation for the underwriting risk assumed by each Underwriter. The underwriting fee typically represents approximately 20% of the total underwriting discount. This component reflects the several liability that each Underwriter assumes for its committed portion of the Offering.

Selling Concession. The selling concession is the portion of the underwriting discount payable to each Underwriter based on the number of Shares actually sold or placed by such Underwriter to investors. The selling concession typically represents approximately 60% of the total underwriting discount and is the largest component of the fee split. The selling concession incentivizes each Underwriter to maximize its distribution efforts and rewards successful placement of Shares with investors. Under the AAU, the selling concession is payable net of any penalty bid recaptures (as discussed in Section VI.C below).

We note for the record that the internal fee-split among the Underwriters is generally not a matter of direct concern to the Company, as the Company's obligation is limited to paying the aggregate underwriting discount of 6.5% as specified in the Underwriting Agreement. However, we should confirm that the total underwriting discount of 6.5% as reflected in the AAU is consistent with the corresponding provision of the Underwriting Agreement and that the AAU does not contemplate any additional fees, commissions, or reimbursements that would be chargeable to the Company or the Selling Stockholders beyond what is disclosed in the Registration Statement on Form S-1. Any such additional charges would need to be disclosed in the S-1 and would be subject to the FINRA Rule 5110 compensation limitations discussed in Section X below.

C. Expense Reimbursement Among Underwriters

The AAU contains provisions governing the allocation of Offering-related expenses among the Syndicate members. These expenses include, among other things, road show costs, syndicate administrative expenses, FINRA filing fees, DTC processing fees, and legal fees incurred by underwriters' counsel in connection with the Offering.

The legal fees of Hargrove & Liddell LLP, which is serving as underwriters' counsel for the Offering (with Michael Sorrentino as the lead partner on the engagement), are estimated at approximately $750,000. Under the AAU, these legal fees are borne by the Underwriters collectively and are allocated among the Syndicate members in proportion to their respective underwriting commitments. We confirm that, consistent with Section 7(a) of the draft Underwriting Agreement, the fees and expenses of underwriters' counsel are the responsibility of the Underwriters and are not chargeable to the Company. This is an important distinction, and we recommend verifying that the expense provisions of the AAU and the Underwriting Agreement are fully aligned on this point to avoid any ambiguity regarding which expenses are borne by the Company and which are borne by the Underwriters.

With respect to road show expenses, the AAU provides that certain categories of road show expenses — including travel, lodging, and entertainment costs incurred by the Underwriters' personnel in connection with investor meetings — are shared among the Syndicate members. Separately, certain road show expenses that are customarily borne by the issuer (such as the preparation of the road show presentation, printing costs for investor materials, and the cost of the electronic road show hosted on Thackeray Services Inc. or a similar platform) are addressed under the expense reimbursement provisions of the Underwriting Agreement. We recommend cross-referencing these provisions to ensure that there is no overlap or double-counting of road show expenses between the AAU and the Underwriting Agreement.

V. Liability Sharing and Indemnification Among Underwriters

A. Several (Not Joint) Liability

Section 5.1 of the AAU confirms that the obligations of each Underwriter under the AAU are several and not joint. Each Underwriter is liable only for its own respective underwriting commitment — that is, the number of Shares allocated to it under Schedule I — and no Underwriter is liable for the failure of any other Underwriter to purchase its committed Shares or otherwise to perform its obligations under the AAU or the Underwriting Agreement. This several liability structure is consistent with the corresponding provisions of the Underwriting Agreement and reflects the standard market practice for underwritten public offerings.

The AAU contains default provisions that address the situation in which one or more Underwriters fail to purchase their respective committed Shares at the time of closing. Under Section 5.2 of the AAU, if any Underwriter defaults on its commitment, the non-defaulting Underwriters may, but are not required to, assume the defaulting Underwriter's Shares. However, this assumption is subject to a cap: no non-defaulting Underwriter is required to purchase more than 110% of its original underwriting commitment (i.e., an increase of no more than approximately 10% over its original committed Shares). If the aggregate default exceeds the amount that can be absorbed by the non-defaulting Underwriters within this cap, the Representative has the right to terminate the Offering and the AAU.

The default cap of approximately 10% is within the range typically seen in AAUs for IPOs of this size (customarily 9–11%). The cap provides protection for non-defaulting Underwriters against being required to assume disproportionate risk in the event of a significant default.

B. Default Mechanism — Implications for the Company

The default mechanism in the AAU has direct implications for the Company and the Selling Stockholders, because the Underwriting Agreement contains corresponding provisions addressing the treatment of a defaulting Underwriter. Under Section 10 of the draft Underwriting Agreement, if the aggregate number of Shares with respect to which one or more Underwriters default exceeds 10% of the total base Offering (approximately 1,644,118 Shares), the Company and the Selling Stockholders have the right to terminate the Underwriting Agreement.

It is critical that the default provisions in the AAU and the Underwriting Agreement are fully aligned. Specifically, we recommend cross-referencing the following elements: (i) the threshold percentage for triggering termination rights; (ii) the mechanism for notice and cure (if any) in the event of a default; (iii) the time period for non-defaulting Underwriters to elect to assume defaulting Shares; and (iv) the consequences of termination for any expenses or liabilities already incurred. Any inconsistency between the AAU and the Underwriting Agreement in these respects could create confusion or unintended consequences in the event of an actual default scenario.

C. Indemnification and Contribution Among Underwriters

Article 6 of the AAU establishes a comprehensive framework for indemnification and contribution among the Syndicate members. The key provisions are as follows:

Indemnification. Each Underwriter agrees to indemnify and hold harmless the other Syndicate members, and their respective directors, officers, employees, agents, and controlling persons, against any and all losses, claims, damages, liabilities, and expenses (including reasonable attorneys' fees and litigation costs) arising out of or based upon (a) any material misstatement or omission attributable to written information furnished by the indemnifying Underwriter for inclusion in the Registration Statement, the Prospectus, or any related offering documents, or (b) any breach by the indemnifying Underwriter of its representations, warranties, or obligations under the AAU.

Contribution. To the extent that indemnification is unavailable or insufficient, the AAU provides for contribution among the Syndicate members in proportion to their respective underwriting commitment percentages. The contribution provisions include a "relative benefits" test (contribution in proportion to relative benefits received from the Offering) and a "relative fault" test (contribution in proportion to relative fault in causing the loss), with the relative benefits test serving as the primary allocation methodology and the relative fault test serving as a secondary adjustment.

For issuer's counsel, the principal concern with the inter-Underwriter indemnification and contribution provisions is ensuring that they do not undermine, conflict with, or dilute the indemnification and contribution rights that run between (a) the Company and the Selling Stockholders, on the one hand, and (b) the several Underwriters, on the other hand, under Article 8 of the draft Underwriting Agreement. In particular, we recommend reviewing whether the AAU's internal contribution mechanics could have the practical effect of reducing the amount that the Company could recover from any individual Underwriter under the Underwriting Agreement's contribution provisions. For example, if an Underwriter were to exhaust its financial resources through contributions to other Syndicate members under the AAU before satisfying its contribution obligations to the Company under the Underwriting Agreement, the Company's recovery could be impaired. While this scenario is unlikely in practice given the financial resources of the Syndicate members, it is a theoretical concern that merits attention, and we recommend confirming that the Underwriting Agreement's indemnification and contribution provisions are not subordinated to the AAU's corresponding provisions.

VI. Stabilization and Short-Covering Activities

A. Stabilization Authority

Article 7 of the AAU authorizes Pinnacle, as Representative, to engage in stabilization transactions in the Class A Common Stock on the Nasdaq Global Select Market in accordance with Regulation M under the Exchange Act (Rules 100 through 105). Stabilization transactions are a standard feature of underwritten IPOs and serve the purpose of preventing or retarding a decline in the market price of the newly issued Shares during the period immediately following the IPO.

Under the AAU, stabilization activities may include the following:

• Stabilizing bids — bids for or purchases of Shares in the open market for the purpose of pegging, fixing, or maintaining the price of the Shares;

• Short sales — sales of Shares in excess of the number of Shares that the Underwriters are obligated to purchase, creating a syndicate short position;

• Syndicate covering transactions — purchases of Shares in the open market to cover the syndicate short position;

• Penalty bids — the reclamation of selling concessions from Syndicate members whose customers sell Shares purchased in the Offering shortly after the IPO; and

• Passive market making — bids at or below the highest independent bid for the Shares, as permitted under Rule 103 of Regulation M.

Pinnacle has sole discretion under the AAU over the timing, pricing, and extent of all stabilization activities. No other Syndicate member is permitted to engage in stabilization transactions independently or without the prior written consent of Pinnacle. This concentration of stabilization authority in the Representative is both customary and necessary to ensure coordinated aftermarket support and compliance with the regulatory requirements of Regulation M.

B. Short Position and Syndicate Short Account

The AAU establishes a syndicate short account (the "Syndicate Short Account") to be managed by Pinnacle. The Syndicate Short Account is the mechanism through which Pinnacle manages the syndicate short position and records all stabilization transactions, covering purchases, and related trading activity.

Under the AAU, Pinnacle is authorized to create a short position of up to 2,466,176 Shares — a number equal to the size of the Overallotment Option — to facilitate stabilization of the aftermarket trading price. The creation of a short position of this size is accomplished through the allocation of Shares to investors in excess of the 16,441,176 base Shares that the Underwriters are committed to purchase under the Underwriting Agreement, with the excess Shares being borrowed or delivered through the Overallotment Option mechanism.

The Overallotment Option, exercisable within 30 calendar days of the date of the final prospectus, serves as the primary covering mechanism for the syndicate short position. If the market price of the Shares trades above the public offering price during the stabilization period, Pinnacle would typically exercise the Overallotment Option in full, delivering additional Shares to cover the short position and generating additional underwriting fees. If the market price of the Shares trades below the public offering price, Pinnacle may elect to cover all or a portion of the short position through open market purchases (syndicate covering transactions) at prices below the public offering price, thereby realizing a profit on the short position, and exercise the Overallotment Option only partially or not at all.

Profits and losses from the Syndicate Short Account, including gains or losses from stabilization activities, covering transactions, and the exercise (or non-exercise) of the Overallotment Option, are shared among the Underwriters on a pro rata basis in proportion to their respective underwriting commitments. The AAU provides that Pinnacle will provide periodic accountings of the Syndicate Short Account to the other Syndicate members and will distribute any net proceeds or assess any net charges within 90 days following the conclusion of the stabilization period.

C. Penalty Bids

Section 7.4 of the AAU authorizes Pinnacle to impose penalty bids during the stabilization period. A penalty bid is a mechanism by which the Representative reclaims the selling concession from a Syndicate member if Shares initially placed with a customer of that Syndicate member are resold (or "flipped") in the secondary market shortly after the IPO. Penalty bids serve as a disincentive against flipping and encourage Syndicate members to place Shares with long-term investors rather than short-term traders.

Under the AAU, Pinnacle has the sole authority to determine whether and when to impose penalty bids, and the determination is made on a case-by-case basis depending on the level of flipping activity observed in the aftermarket. The reclaimed selling concession is credited to the Syndicate Short Account and shared among the Underwriters pro rata.

For issuer's counsel, the stabilization and penalty bid mechanisms are relevant for two principal reasons. First, these activities directly affect the post-IPO trading dynamics in the Company's stock, including the extent to which the stock price is supported (or not) in the initial days and weeks of trading. The Company's management and board of directors should understand how these mechanisms operate, even though the Company does not control or direct stabilization activities. Second, stabilization activities and penalty bids are required to be disclosed in the "Underwriting" section of the Registration Statement on Form S-1 and the final prospectus. We recommend confirming that the current S-1 disclosure accurately and completely describes these mechanisms, including the potential for stabilizing bids, syndicate covering transactions, the imposition of penalty bids, and the effect of such activities on the market price of the Shares.

D. Regulation M Compliance

Article 7 of the AAU includes representations and covenants from each Underwriter regarding compliance with Regulation M under the Exchange Act. Each Underwriter represents that it will comply with the restrictions on bids and purchases during the applicable restricted period (which, for an IPO, begins on the later of (i) the business day prior to the date of the pricing of the Offering and (ii) the business day prior to the date on which the Underwriter's participation in the distribution begins) and will not engage in any activity that would constitute a violation of Rules 101 through 105 of Regulation M.

In addition, each Underwriter certifies its FINRA membership and represents that it will comply with all applicable FINRA rules in connection with the Offering, including the rules governing underwriting compensation, new issue allocations, and market-making activities.

VII. Selling Restrictions and Distribution Compliance

A. Offering Restrictions — Domestic

Article 8 of the AAU requires each Underwriter to offer and sell Shares only in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities (or "blue sky") laws. Specifically, each Underwriter agrees that it will offer Shares only by means of a prospectus meeting the requirements of Section 10 of the Securities Act and will not engage in any offer or sale of Shares that would not be covered by the Registration Statement.

With respect to blue sky compliance, Calderwood & Harkness LLP has separately prepared a comprehensive Blue Sky Survey Memorandum (see blue-sky-survey-memo.docx in the deal file) covering all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Blue Sky Survey Memorandum analyzes the availability of exemptions from state registration requirements for the Offering and concludes that the Shares will qualify as "covered securities" under Section 18 of the Securities Act by virtue of their listing on the Nasdaq Global Select Market, which is a "national securities exchange" for purposes of Section 18(b)(1)(A). As covered securities, the Shares are preempted from state registration and qualification requirements in all jurisdictions, though certain state filing and fee obligations may still apply.

The domestic selling restriction provisions in the AAU should be consistent with the conclusions of the Blue Sky Survey Memorandum, and we have confirmed that the AAU's domestic selling restrictions reference the Section 18 preemption for covered securities listed on a national securities exchange. No inconsistencies have been identified.

B. Offering Restrictions — International

The AAU contains customary international selling restrictions for jurisdictions in which the Underwriters may offer Shares to investors outside the United States. Article 9 of the AAU includes jurisdiction-specific selling restriction provisions for the following countries and regions:

• United Kingdom: Compliance with the Financial Services and Markets Act 2000, as amended, including restrictions on financial promotions and the requirement that offers be made only to "qualified investors" within the meaning of Article 2(e) of the UK Prospectus Regulation.

• European Economic Area (MiFID II/Prospectus Regulation): Compliance with Regulation (EU) 2017/1129 (the Prospectus Regulation) and Directive 2014/65/EU (MiFID II), including the requirement that offers in EEA member states be limited to "qualified investors" as defined in Article 2(e) of the Prospectus Regulation.

• Canada: Compliance with National Instrument 45-106 – Prospectus Exemptions and applicable provincial securities laws, with offers limited to "accredited investors" or purchasers purchasing as principal under an applicable prospectus exemption.

• Hong Kong: Compliance with the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), with offers limited to "professional investors" as defined in the Securities and Futures Ordinance.

• Japan: Compliance with the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended, the "FIEA") and offers restricted accordingly.

• Australia: Compliance with the Corporations Act 2001 (Cth), with offers limited to "sophisticated investors" or "professional investors" as defined in sections 708(8) and 708(11) of the Corporations Act, or otherwise exempt from the requirement to provide a disclosure document.

Each Underwriter represents in the AAU that it will comply with the applicable local securities laws and regulations of each jurisdiction in which it offers or sells Shares and that it will not take any action that would require the filing of a prospectus or equivalent disclosure document in any jurisdiction outside the United States.

For issuer's counsel, the international selling restrictions in the AAU should be reviewed for consistency with (i) any corresponding selling restriction legends or notices included in the preliminary and final prospectus, (ii) the representations made by the Underwriters in the Underwriting Agreement regarding international selling practices, and (iii) any jurisdiction-specific legal opinions or compliance memoranda that have been prepared in connection with the Offering. Any discrepancies among these documents should be flagged and resolved prior to the execution of the Underwriting Agreement.

We have conducted a preliminary comparison of the AAU's international selling restrictions against the corresponding provisions of the current draft of the Underwriting Agreement and the selling restriction legends in the most recent draft of the prospectus. No material discrepancies have been identified, though we note that the AAU's Japan selling restriction references the 2020 amendments to the FIEA, while the prospectus legend references the statute generally without specifying the amendment year. We recommend conforming these references for consistency.

C. Directed Share Program

Article 10 of the AAU addresses the allocation and sale of directed shares, which are Shares reserved for purchase by designated persons such as employees, friends, and family members of the Company. The directed share program ("DSP") provisions in the AAU contemplate that a portion of the Offering may be allocated to a DSP administered by one of the Syndicate members (typically the lead left book-runner or the co-manager) and sold at the public offering price without the application of a selling concession.

We note that the Company has not yet made a final determination regarding whether to implement a DSP in connection with the IPO. The Company's management has indicated that it is considering a DSP of up to 5% of the base Offering Shares (approximately 822,000 Shares) to be allocated to employees and other designated persons, but a final decision has not been communicated. We recommend confirming the Company's intentions regarding a DSP as soon as practicable, as the DSP provisions will need to be reflected in the Underwriting Agreement, the S-1 disclosure, and certain ancillary documents (including a separate DSP agreement and participant questionnaires). If the Company determines not to implement a DSP, the corresponding provisions in the AAU will be inapplicable but should remain in the form for completeness and in the event the Company changes its position prior to pricing.

VIII. Lock-Up Provisions in the AAU Context

A. Relationship to Lock-Up Agreements

Article 11 of the AAU references the form of Lock-Up Agreement (the "Lock-Up Agreement") to be executed by each director, executive officer, and stockholder holding more than 1% of the outstanding shares of Lumos (on an as-converted, fully diluted basis) in favor of Pinnacle Securities LLC, as Representative. The Lock-Up Agreements are separate agreements executed by the individual lock-up signatories and delivered to Pinnacle; they are not part of the AAU itself. However, the AAU contains provisions governing the administration and enforcement of the Lock-Up Agreements among the Syndicate members.

The key terms of the Lock-Up Agreement, as referenced in the AAU and as reflected in the current form circulated by Pinnacle, are as follows:

• Lock-Up Period: 180 calendar days following the date of the final prospectus (the "Lock-Up Period").

• Scope of Restrictions: During the Lock-Up Period, each lock-up signatory agrees not to, directly or indirectly, (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of Common Stock, or (c) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock.

• Customary Carve-Outs: The Lock-Up Agreement includes customary exceptions for (i) transfers as bona fide gifts to immediate family members or to a trust for the benefit of the lock-up signatory or immediate family members, (ii) transfers by operation of law, such as pursuant to a qualified domestic relations order, (iii) transfers to charitable organizations in an amount not exceeding a specified threshold, (iv) establishment of Rule 10b5-1 trading plans (provided no sales occur during the Lock-Up Period), and (v) transfers to affiliates or equity holders of the lock-up signatory, in each case subject to the requirement that the transferee execute a lock-up agreement on substantially similar terms.

• Early Release Authority: Early release from the Lock-Up Agreement is at the sole discretion of Pinnacle Securities LLC. Pinnacle may, in its sole and absolute discretion, waive or modify the lock-up restrictions for any signatory, at any time, without prior notice to or consent of any other Syndicate member, the Company, or any other person.

The AAU's grant of sole authority to Pinnacle over lock-up waiver decisions is consistent with market practice for underwritten IPOs and reflects the Representative's role as the gatekeeper for aftermarket supply management. However, we note that this arrangement has the practical consequence that Pinnacle may release lock-up signatories — including, potentially, the Selling Stockholders and members of the Company's management team — without the Company having any consent right or advance notice. While the Company is not typically granted a consent right over lock-up releases under the AAU (as the lock-up runs in favor of the Underwriters, not the Company), the Underwriting Agreement may be negotiated to include a provision requiring the Representative to provide advance notice to the Company before granting any lock-up waiver or early release. This is one of our key issuer-protective recommendations, as discussed in Section XI.C below.

B. Underwriter Lock-Up

In addition to the lock-up obligations imposed on Company insiders, the AAU itself may contain restrictions on Syndicate members' ability to sell Shares from their own accounts or proprietary trading accounts for a specified period following the IPO. We have reviewed the AAU and confirm that Section 11.3 includes a restriction on each Underwriter from selling Shares from its own account (other than in connection with stabilization activities or the exercise of the Overallotment Option) for a period of 25 calendar days following the date of the final prospectus.

Additionally, we have reviewed whether the AAU includes restrictions on the timing of research publication by the Syndicate members' research analysts. Under FINRA Rules and the Global Research Analyst Settlement, there are established restrictions on the publication of research reports in connection with IPOs, including blackout periods around the offering. Section 11.4 of the AAU includes an acknowledgment by each Syndicate member that it will comply with applicable research blackout rules, including the FINRA rules governing the initiation of research coverage following an IPO. Under current FINRA rules (as amended in 2015), the mandatory 25-day research quiet period for managing underwriters has been eliminated, though individual firms may maintain internal policies regarding research initiation timing. We recommend confirming with the Company that it is aware of the potential timing of research initiation by the Syndicate members' research analysts following the IPO, as this may have implications for post-IPO trading dynamics and the Company's investor relations strategy.

IX. Termination and Withdrawal Provisions

A. Termination of the AAU

Article 12 of the AAU addresses the circumstances under which the AAU may be terminated. The AAU provides for the following termination triggers:

Automatic Termination. The AAU terminates automatically, without further action by any party, upon the termination of the Underwriting Agreement for any reason, including termination by the Company, termination by the Representative, or mutual termination.

Termination by the Representative. Pinnacle, as Representative, may terminate the AAU upon the occurrence of any of the following events: (a) a material adverse change in general economic, political, or financial conditions, including without limitation a material disruption in the U.S. equity capital markets; (b) a material adverse change in the business, financial condition, or prospects of the Company; (c) the occurrence of any event of force majeure (including war, terrorism, pandemic, natural disaster, or other similar event) that, in the reasonable judgment of the Representative, makes it impracticable or inadvisable to proceed with the Offering; (d) a material breach by any Syndicate member of its obligations under the AAU; or (e) a downgrade or withdrawal of the credit rating of any Syndicate member that, in the reasonable judgment of the Representative, materially impairs such member's ability to perform its underwriting obligations.

We note that the force majeure and market disruption termination provisions are particularly relevant in the current market environment. As of the date of this memorandum, the Nasdaq Composite Index has experienced a significant decline from its highs in late 2021, with heightened volatility in the technology sector driven by concerns about rising interest rates, inflation, and geopolitical developments (including the ongoing conflict in Ukraine). If these market conditions persist or worsen, there is a meaningful risk that the Offering could be delayed or withdrawn, in which case the AAU would terminate and any open syndicate positions would need to be unwound. The Company and its management should be aware of these provisions and the implications of a potential termination scenario, including the allocation of expenses incurred prior to termination and the treatment of any syndicate positions or stabilization activities that may have been initiated.

B. Survival

Section 12.3 of the AAU provides that certain provisions survive the termination or expiration of the AAU, including:

• Indemnification and contribution obligations (Article 6);

• Confidentiality obligations (Article 14);

• Expense-sharing and payment obligations (Sections 4.3 and 4.4);

• Governing law and dispute resolution provisions (Article 15); and

• Any other provisions that by their nature are intended to survive termination.

The survival of these provisions ensures that the Syndicate members' post-termination rights and obligations are preserved, including the right to seek indemnification or contribution for losses arising from pre-termination activities and the obligation to share in expenses incurred prior to termination.

X. FINRA Compliance Matters

A. FINRA Rule 5110 (Underwriting Compensation)

The AAU must comply with FINRA Rule 5110, which regulates the terms and arrangements of underwriting compensation in connection with public offerings of securities. Rule 5110 establishes a maximum cap on total underwriting compensation, including all items of value received by the Underwriters in connection with the Offering. Items of value subject to the Rule 5110 cap include the underwriting discount, management fees, expense reimbursements (to the extent deemed compensation), non-cash compensation (such as gifts, meals, and entertainment), and any other fees or payments made to the Underwriters or their associated persons in connection with the Offering.

The total underwriting discount of 6.5%, which at the midpoint pricing yields aggregate compensation of approximately $18.2 million on the base Offering (or approximately $20.9 million if the Overallotment Option is exercised in full), must be evaluated under Rule 5110 in conjunction with all other items of value to determine whether the total compensation falls within the permissible limits. Hargrove & Liddell LLP, as underwriters' counsel, is typically responsible for preparing the FINRA filing (Form BR) and conducting the comprehensive Rule 5110 compliance review. However, as issuer's counsel, we have an independent obligation to confirm that no issuer-borne expenses or other items of value are being improperly characterized or omitted from the Rule 5110 compensation calculation.

In particular, we recommend reviewing the following items for potential inclusion in the Rule 5110 compensation calculation: (i) any reimbursement of Underwriter expenses by the Company under the Underwriting Agreement; (ii) any non-cash compensation provided to the Underwriters or their associated persons by the Company (including meals, entertainment, or gifts during the road show); (iii) any warrants, options, or other equity-linked compensation granted to the Underwriters; and (iv) any right of first refusal or similar arrangement in favor of any Underwriter for future offerings by the Company. We note that the Engagement Letter between the Company and Pinnacle does not include a right of first refusal for future offerings, which eliminates one common source of additional compensation under Rule 5110.

B. FINRA Rule 5131 (New Issue Allocations and Distributions)

The AAU incorporates the requirements of FINRA Rule 5131, which governs the allocation and distribution of shares in new issue offerings (including IPOs). Rule 5131 prohibits several allocation practices that are deemed abusive or contrary to the interests of public investors, including:

• Spinning. The allocation of IPO shares to executive officers and directors of public companies (or persons materially supported by such individuals) as an inducement for the award of investment banking business to the Underwriter.

• Quid Pro Quo Allocations. The conditioning of IPO allocations on the receipt of excessive compensation from the investor, such as above-market commissions on unrelated transactions.

• Allocations to Executive Officers and Directors of the Issuer. Rule 5131 restricts the allocation of new issue shares to executive officers and directors of the issuer (other than through a bona fide directed share program). The AAU includes representations from each Underwriter that it will not allocate Shares to any executive officer or director of the Company in violation of Rule 5131.

The AAU's incorporation of these restrictions is standard and does not raise any concerns from the perspective of issuer's counsel. However, we note that if the Company implements a DSP, the allocation of Shares to Company officers, directors, and employees through the DSP must be structured to comply with the Rule 5131 exceptions for directed share programs, including the requirement that the DSP be disclosed in the prospectus and that the allocation decisions be made by the Company (not the Underwriters).

XI. Key Observations and Recommendations for Issuer's Counsel

A. Consistency with Underwriting Agreement

The most critical task for issuer's counsel in reviewing the AAU is to ensure that its provisions are consistent with, and do not conflict with or undermine, the corresponding provisions of the Underwriting Agreement. We recommend cross-referencing the following provisions between the two agreements:

1. Underwriting commitment percentages and share allocations. Confirm that the allocation schedule in Schedule I to the AAU is consistent with the corresponding schedule in the Underwriting Agreement, including the total number of base Shares (16,441,176), the primary/secondary split (12,941,176 primary / 3,500,000 secondary), and each Underwriter's individual commitment.

2. Overallotment Option mechanics. Confirm that the AAU's provisions regarding the Overallotment Option — including the total number of option Shares (2,466,176), the 30-day exercise period, the pro rata allocation among Underwriters, and the exercise notice provisions — are consistent with the corresponding provisions in the Underwriting Agreement and the Company's obligations to issue additional Shares upon exercise.

3. Default provisions and termination rights. Confirm that the default threshold (currently set at approximately 10% of the base Offering), the cure period (if any), and the termination triggers in the AAU are aligned with the corresponding provisions in the Underwriting Agreement, particularly the Company's and Selling Stockholders' right to terminate the Underwriting Agreement in the event of an Underwriter default.

4. Indemnification and contribution. Confirm that the inter-Underwriter indemnification and contribution provisions in the AAU do not create inconsistencies with, or dilute, the Company's indemnification and contribution rights under the Underwriting Agreement. In particular, verify that no provision of the AAU purports to subordinate the Underwriting Agreement's indemnification obligations to the AAU's inter-Underwriter obligations.

5. Stabilization disclosure obligations. Confirm that the stabilization and short-covering activities authorized by the AAU are accurately and completely described in the "Underwriting" section of the S-1, including the potential for stabilizing bids, syndicate covering transactions, penalty bids, and the use of the Overallotment Option as a covering mechanism.

6. Lock-up administration and waiver authority. Confirm that the AAU's provisions granting Pinnacle sole authority over lock-up waivers are consistent with any lock-up-related provisions in the Underwriting Agreement, including any notice or consultation requirements negotiated for the Company's benefit.

7. Expense allocation. Confirm that the expense allocation provisions of the AAU and the Underwriting Agreement are consistent, with no overlap, double-counting, or unexpected charges to the Company. In particular, verify that the fees and expenses of Hargrove & Liddell LLP are borne solely by the Underwriters and that no portion of such fees is charged to the Company.

B. S-1 Disclosure Consistency

We recommend confirming that the "Underwriting" section of the Registration Statement on Form S-1/A (Amendment No. 1) (SEC File Number 333-264518; CIK 0001923847), as publicly filed on April 14, 2022, accurately describes the following items, each of which is addressed in the AAU:

• Syndicate composition, including the identification of Pinnacle as lead left book-running managing underwriter, Whitfield as joint book-running managing underwriter, and Graystone as co-manager;

• Underwriting discount of 6.5% of the public offering price per Share, including the aggregate dollar amount of the discount on the base Offering and the overallotment;

• Overallotment Option of up to 2,466,176 additional Shares, exercisable within 30 days of the date of the final prospectus;

• Stabilization and penalty bid mechanics, including a description of the types of stabilization transactions that may be conducted, the potential effect on the market price of the Shares, and the disclaimer that stabilization activities, if commenced, may be discontinued at any time;

• Lock-up provisions, including the 180-day Lock-Up Period, the scope of restrictions, the customary carve-outs, and the disclosure that the Representative may waive or modify the lock-up restrictions at any time in its sole discretion; and

• Selling restrictions, both domestic and international, including jurisdiction-specific legends for the United Kingdom, the European Economic Area, Canada, Hong Kong, Japan, and Australia.

Any discrepancies between the AAU and the S-1 disclosure should be identified and resolved prior to the pricing of the Offering and the filing of the final prospectus pursuant to Rule 424(b) of the Securities Act.

C. Issuer-Protective Comments

Based on our review of the AAU, we recommend that the Company, through issuer's counsel, raise the following comments or requests with Pinnacle Securities LLC:

1. Notice of Lock-Up Waiver or Early Release. Request that the Underwriting Agreement include a provision requiring the Representative to provide the Company with at least three (3) business days' advance written notice before granting any waiver or early release of the lock-up restrictions applicable to any director, executive officer, or stockholder holding more than 1% of the Company's outstanding shares. This notice requirement would enable the Company to make any necessary public disclosures (including a Form 8-K filing, if appropriate) and to manage investor communications in advance of any lock-up release. We note that this request is consistent with the recommendations of the SEC's Division of Corporation Finance regarding lock-up disclosure practices.

2. Confirmation of Expense Allocation. Request written confirmation from Pinnacle (or from Hargrove & Liddell LLP on behalf of the Underwriters) that the expense reimbursement provisions of the AAU do not include, and will not result in the inclusion of, any items of expense that are separately chargeable to the Company under the Underwriting Agreement. This confirmation will mitigate the risk of double-counting or unexpected issuer charges.

3. Notice of Material Amendments to the AAU. Request that Pinnacle agree to communic

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for use by the attorneys and client personnel identified herein in connection with the representation described below. Any unauthorized disclosure, distribution, or copying of this memorandum is strictly prohibited.
MEMORANDUM
TO: Robert Adeyemi, Responsible Partner, Capital Markets Group Audrey Zhou, Lead Associate, Capital Markets Group
FROM: Brendan Walsh, Working Associate, Capital Markets Group
DATE: March 7, 2022
RE: Review of Form Agreement Among Underwriters — Pinnacle Securities LLC (Lumos Analytics Inc. IPO)
Matter Number: 1008-00002
Client: Lumos Analytics Inc.
I. Executive Summary and Purpose
Calderwood & Harkness LLP serves as issuer's counsel to Lumos Analytics Inc. ("Lumos" or the "Company") in connection with the proposed initial public offering (the "IPO" or the "Offering") of shares of the Company's Class A Common Stock, par value $0.001 per share (the "Shares"), to be listed on the Nasdaq Global Select Market under the ticker symbol "LMOS." This memorandum has been prepared for the purpose of reviewing the form Agreement Among Underwriters (the "AAU") circulated by Pinnacle Securities LLC ("Pinnacle"), which has been designated as the lead left book-running managing underwriter and representative of the several underwriters (in such capacity, the "Representative") in connection with the Offering.
The AAU governs the syndicate relationship among the three underwriting firms participating in the Offering: (i) Pinnacle Securities LLC, serving as lead left book-running managing underwriter; (ii) Whitfield & Company LLC ("Whitfield"), serving as joint book-running managing underwriter; and (iii) Graystone Capital Markets Inc. ("Graystone"), serving as co-manager (collectively, the "Underwriters" or the "Syndicate"). The AAU was circulated by Pinnacle's outside counsel, Hargrove & Liddell LLP, on March 3, 2022, and bears the caption "Standard Form Agreement Among Underwriters — Pinnacle Securities LLC (February 2022 Revision)."
The purpose of this memorandum is threefold. First, we identify provisions of the AAU that are of note for issuer's counsel and that merit attention in the context of the Company's broader Offering process. Second, we flag areas where the terms of the AAU intersect with the Company's interests or create potential conflicts or inconsistencies with the Underwriting Agreement (the "Underwriting Agreement") to be entered into among the Company, the selling stockholders, and the several underwriters. Third, we recommend specific comments or protective positions that the Company should consider raising with Pinnacle, either directly or through the Underwriting Agreement negotiation process.
At the outset, it is important to note that the AAU is primarily a contract among the Underwriters themselves. The Company is not a party to, and will not execute, the AAU. Nevertheless, certain provisions of the AAU have direct or indirect consequences for Lumos and its stockholders, particularly provisions relating to allocation mechanics, stabilization and short-covering activities, selling restrictions, lock-up administration and waiver authority, and liability sharing among the Underwriters. As issuer's counsel, we bear a responsibility to review the AAU for consistency with the Underwriting Agreement and the Company's disclosure obligations under the Registration Statement on Form S-1 filed with the Securities and Exchange Commission (the "SEC").
The proposed Offering contemplates the sale of 16,441,176 base Shares, consisting of 12,941,176 primary Shares to be issued and sold by the Company and 3,500,000 secondary Shares to be sold by the selling stockholders, Velthryn Venture Partners Fund IV, L.P. ("Velthryn") and Arclight Equity Group Fund VII, L.P. ("Arclight" and, together with Velthryn, the "Selling Stockholders"). In addition, the Underwriters will be granted an overallotment option (the "Overallotment Option") to purchase up to 2,466,176 additional Shares (representing 15% of the base Shares) from the Company, exercisable within 30 days of the date of the final prospectus. The preliminary price range for the Offering is $16.00 to $18.00 per Share, and the underwriting discount has been set at 6.5% of the public offering price per Share. At the midpoint of the preliminary price range ($17.00 per Share), the aggregate gross proceeds of the base Offering would be approximately $279.5 million, and the total underwriting discount would be approximately $18.2 million.
II. Parties to the AAU and Syndicate Structure
A. Representative / Lead Manager
Pinnacle Securities LLC, with its principal offices located at 399 Park Avenue, New York, New York 10022, serves as the lead left book-running managing underwriter for the Offering. In such capacity, Pinnacle also serves as the "Representative" of the several Underwriters under both the AAU and the Underwriting Agreement. The primary contacts at Pinnacle for purposes of the Offering are Andrew Castellano, Managing Director, Investment Banking Coverage Group, and Lisa Drummond, Managing Director, Equity Capital Markets.
As Representative, Pinnacle has been granted sole authority under the AAU to act on behalf of the Syndicate in all dealings with the Company and the Selling Stockholders. This authority encompasses, among other things, the right to negotiate the terms of the Underwriting Agreement, to communicate with the Company's board of directors and management regarding pricing and allocation, to manage the book-building process, to execute the Underwriting Agreement on behalf of the several Underwriters, and to coordinate the closing and settlement of the Offering. The designation of Pinnacle as lead left book-runner is consistent with the engagement letter executed between the Company and Pinnacle dated September 14, 2021, as amended on January 22, 2022 (the "Engagement Letter"), copies of which are maintained in the deal file.
The practical significance of Pinnacle's role as Representative cannot be overstated. Under the AAU, Pinnacle exercises dominant control over the Offering process, including final allocation decisions, stabilization activities, and lock-up waiver authority. While the other Syndicate members participate in distribution and, in Whitfield's case, in certain aspects of book-building, the AAU structure reflects the standard market practice in which the lead left book-runner exercises primary decision-making authority over the Offering.
B. Joint Book-Running Managing Underwriter
Whitfield & Company LLC, with its principal offices located at 200 Vesey Street, 38th Floor, New York, New York 10281, serves as joint book-running managing underwriter for the Offering. The primary contact at Whitfield is Derek Kaplan, Managing Director, Equity Capital Markets. As a joint book-runner, Whitfield participates in book-building, pricing discussions, and allocation decisions, though such participation is in all cases subject to Pinnacle's overriding authority as Representative. Under the AAU, Whitfield's role is described as being "subject to the direction and coordination of the Representative," which is consistent with the typical allocation of responsibilities in a multi-book-runner syndicate structure.
Whitfield's participation in the Offering reflects the Company's desire to ensure broad distribution coverage and institutional investor access. Whitfield maintains significant equity distribution capabilities, particularly among mid-cap technology-focused institutional investors, and the Company's management has expressed a preference for including Whitfield as a joint book-runner to maximize the breadth of investor outreach during the road show process.
C. Co-Manager
Graystone Capital Markets Inc., with its principal offices located at 140 Broadway, 30th Floor, New York, New York 10005, serves as co-manager for the Offering. The primary contact at Graystone is Hannah Morales, Managing Director. As co-manager, Graystone participates in distribution activities but has a significantly more limited role in book-building and allocation decisions compared to the two book-runners. Under the AAU, the co-manager's role is primarily one of selling group participation, with a smaller underwriting commitment and correspondingly smaller share of the underwriting discount.
Graystone's inclusion in the Syndicate was recommended by Pinnacle as part of the overall Syndicate formation process. Graystone maintains relationships with certain regional institutional investors and high-net-worth retail accounts that complement the distribution capabilities of Pinnacle and Whitfield.
D. FINRA Membership
All three Syndicate members — Pinnacle, Whitfield, and Graystone — are registered broker-dealers under Section 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are members of the Financial Industry Regulatory Authority, Inc. ("FINRA"). Accordingly, the AAU is subject to, and the Syndicate members' conduct in connection with the Offering is governed by, the applicable FINRA rules, including without limitation FINRA Rule 5110 (Corporate Financing Rule — Underwriting Terms and Arrangements) and FINRA Rule 5131 (New Issue Allocations and Distributions). Each Syndicate member represents in the AAU that it is, and will remain throughout the term of the AAU, a registered broker-dealer in good standing and a FINRA member. The FINRA compliance aspects of the AAU are discussed in further detail in Section X of this memorandum.
III. Underwriting Commitment and Allocation Mechanics
A. Syndicate Allocation Among Underwriters
The AAU specifies each Underwriter's percentage commitment of the total base Offering (16,441,176 Shares) and the Overallotment Option (2,466,176 additional Shares). These allocation percentages are set forth in Schedule I to the AAU, which is to be completed and finalized at the time of pricing. The AAU provides that Schedule I will be agreed upon by the Syndicate members and confirmed by the Representative no later than the date on which the Underwriting Agreement is executed.
While the specific percentage allocations have not yet been finalized as of the date of this memorandum, the AAU contemplates a structure that is typical for an IPO of this size: Pinnacle, as lead left book-runner, is expected to receive the largest allocation of the total Shares (customarily in the range of 50–60% of the base Offering for a lead left position in a three-underwriter syndicate); Whitfield, as joint book-runner, is expected to receive the second-largest allocation (customarily in the range of 25–35%); and Graystone, as co-manager, is expected to receive the smallest allocation (customarily in the range of 8–15%). These ranges are consistent with market practice for technology company IPOs of comparable size.
The allocation schedule directly affects several aspects of the Offering that are of interest to the Company. First, the breadth and diversity of the institutional investor base is influenced by the allocation among Syndicate members, as each underwriter brings its own institutional client relationships and distribution capabilities. Second, the allocation schedule determines each Underwriter's underwriting risk exposure and, correspondingly, its share of the underwriting discount. Third, the allocation schedule establishes each Underwriter's pro rata share of liability under both the AAU and the Underwriting Agreement. We recommend confirming, once the allocation schedule is finalized, that the allocation among Syndicate members is consistent with the Company's stated goal of broad institutional distribution and diversified stock ownership following the IPO.
B. Institutional vs. Retail Allocation
The AAU grants Pinnacle, as Representative, primary authority over the final allocation of Shares among institutional and retail orders received during the book-building process. This authority is consistent with Pinnacle's role as the lead left book-runner and manager of the order book. Under the AAU, Pinnacle retains "sole discretion" over the book-building process and the final investor allocation, including the authority to determine the number of Shares allocated to each investor, the allocation among institutional and retail accounts, and the treatment of any oversubscription in the order book.
Pinnacle's allocation authority under the AAU is subject to the requirements of FINRA Rule 5131, which prohibits certain allocation practices, including "spinning" (allocating IPO shares to executive officers and directors of public companies as an inducement for future investment banking business), "quid pro quo" allocations (conditioning allocations on the receipt of excessive compensation in the form of commissions or other payments), and allocations to executive officers and directors of the issuer or other companies for the purpose of influencing the award of investment banking mandates.
It is important to note that, while the Company is not a party to the AAU, the Underwriting Agreement is expected to contain provisions granting the Company and the Selling Stockholders certain rights to be consulted regarding the allocation of Shares. Specifically, Section 3(b) of the current draft of the Underwriting Agreement provides that the Representative will, "to the extent reasonably practicable, consult with the Company regarding the allocation of Shares among investors, taking into account the Company's expressed preferences regarding the composition of its post-IPO stockholder base." We recommend confirming that nothing in the AAU conflicts with, undermines, or purports to override the Company's consultation rights under the Underwriting Agreement. In particular, the AAU's grant of "sole discretion" to Pinnacle over allocation should be read in conjunction with, and subject to, the consultation obligation in the Underwriting Agreement.
C. Overallotment Option Allocation
The AAU addresses the mechanics of the Overallotment Option, which permits the Underwriters to purchase up to 2,466,176 additional Shares from the Company at the public offering price less the underwriting discount. The Overallotment Option is exercisable by Pinnacle, acting on behalf of the several Underwriters, at any time within 30 calendar days following the date of the final prospectus. The Overallotment Option serves dual purposes: it provides the Underwriters with flexibility to meet excess demand and it functions as a covering mechanism for the syndicate short position established in connection with stabilization activities (discussed in greater detail in Section VI below).
Under the AAU, Overallotment Option Shares are to be allocated pro rata among the Underwriters in proportion to their respective base underwriting commitments as set forth in Schedule I. This pro rata allocation ensures that each Underwriter's share of the Overallotment Option is proportionate to its share of the base Offering risk. The AAU provides that Pinnacle, as Representative, has the sole authority to determine the timing and size of any exercise of the Overallotment Option, and that partial exercises are permitted.
The interaction between the Overallotment Option and stabilization activities is a key feature of the AAU. As discussed in Section VI, Pinnacle may create a syndicate short position of up to 2,466,176 Shares to facilitate stabilization of the aftermarket trading price. The Overallotment Option serves as the primary mechanism for covering this short position, with the net effect that the full exercise of the Overallotment Option results in the issuance of additional primary Shares by the Company, while a partial exercise or non-exercise results in the syndicate's covering of the short position through open market purchases (syndicate covering transactions).
IV. Compensation and Fee Sharing
A. Underwriting discount
The total underwriting discount for the Offering has been set at 6.5% of the public offering price per Share. This discount level is within the range customarily observed for technology company IPOs of this size, though it is at the higher end of the spectrum (with many recent comparable transactions pricing at discounts between 5.5% and 7.0%). The 6.5% discount was negotiated between the Company and Pinnacle as part of the original Engagement Letter and is reflected in both the AAU and the draft Underwriting Agreement.
At the midpoint of the preliminary price range of $17.00 per Share, the per-share underwriting discount is $1.105. The aggregate underwriting discount across the various components of the Offering is calculated as follows:
The AAU provides for the distribution of the underwriting discount among the Syndicate members according to a fee-split schedule to be attached as Schedule II to the AAU. The fee-split schedule determines how the total underwriting discount is allocated among the three Underwriters.
B. Fee Split Components
The AAU divides the total underwriting discount into three distinct components, each of which serves a different compensatory function:
Management Fee. The management fee is the portion of the underwriting discount payable to the managing underwriters — specifically, Pinnacle and Whitfield in their capacities as book-running managing underwriters — as compensation for structuring, documenting, and managing the Offering process. The management fee typically represents approximately 20% of the total underwriting discount. The AAU provides that the management fee is shared between Pinnacle and Whitfield in a ratio to be specified in Schedule II, with Pinnacle receiving the larger share reflecting its role as lead left book-runner.
Underwriting Fee. The underwriting fee is the portion of the underwriting discount payable to all Syndicate members on a pro rata basis in proportion to their respective underwriting commitments, as compensation for the underwriting risk assumed by each Underwriter. The underwriting fee typically represents approximately 20% of the total underwriting discount. This component reflects the several liability that each Underwriter assumes for its committed portion of the Offering.
Selling Concession. The selling concession is the portion of the underwriting discount payable to each Underwriter based on the number of Shares actually sold or placed by such Underwriter to investors. The selling concession typically represents approximately 60% of the total underwriting discount and is the largest component of the fee split. The selling concession incentivizes each Underwriter to maximize its distribution efforts and rewards successful placement of Shares with investors. Under the AAU, the selling concession is payable net of any penalty bid recaptures (as discussed in Section VI.C below).
We note for the record that the internal fee-split among the Underwriters is generally not a matter of direct concern to the Company, as the Company's obligation is limited to paying the aggregate underwriting discount of 6.5% as specified in the Underwriting Agreement. However, we should confirm that the total underwriting discount of 6.5% as reflected in the AAU is consistent with the corresponding provision of the Underwriting Agreement and that the AAU does not contemplate any additional fees, commissions, or reimbursements that would be chargeable to the Company or the Selling Stockholders beyond what is disclosed in the Registration Statement on Form S-1. Any such additional charges would need to be disclosed in the S-1 and would be subject to the FINRA Rule 5110 compensation limitations discussed in Section X below.
C. Expense Reimbursement Among Underwriters
The AAU contains provisions governing the allocation of Offering-related expenses among the Syndicate members. These expenses include, among other things, road show costs, syndicate administrative expenses, FINRA filing fees, DTC processing fees, and legal fees incurred by underwriters' counsel in connection with the Offering.
The legal fees of Hargrove & Liddell LLP, which is serving as underwriters' counsel for the Offering (with Michael Sorrentino as the lead partner on the engagement), are estimated at approximately $750,000. Under the AAU, these legal fees are borne by the Underwriters collectively and are allocated among the Syndicate members in proportion to their respective underwriting commitments. We confirm that, consistent with Section 7(a) of the draft Underwriting Agreement, the fees and expenses of underwriters' counsel are the responsibility of the Underwriters and are not chargeable to the Company. This is an important distinction, and we recommend verifying that the expense provisions of the AAU and the Underwriting Agreement are fully aligned on this point to avoid any ambiguity regarding which expenses are borne by the Company and which are borne by the Underwriters.
With respect to road show expenses, the AAU provides that certain categories of road show expenses — including travel, lodging, and entertainment costs incurred by the Underwriters' personnel in connection with investor meetings — are shared among the Syndicate members. Separately, certain road show expenses that are customarily borne by the issuer (such as the preparation of the road show presentation, printing costs for investor materials, and the cost of the electronic road show hosted on Thackeray Services Inc. or a similar platform) are addressed under the expense reimbursement provisions of the Underwriting Agreement. We recommend cross-referencing these provisions to ensure that there is no overlap or double-counting of road show expenses between the AAU and the Underwriting Agreement.
V. Liability Sharing and Indemnification Among Underwriters
A. Several (Not Joint) Liability
Section 5.1 of the AAU confirms that the obligations of each Underwriter under the AAU are several and not joint. Each Underwriter is liable only for its own respective underwriting commitment — that is, the number of Shares allocated to it under Schedule I — and no Underwriter is liable for the failure of any other Underwriter to purchase its committed Shares or otherwise to perform its obligations under the AAU or the Underwriting Agreement. This several liability structure is consistent with the corresponding provisions of the Underwriting Agreement and reflects the standard market practice for underwritten public offerings.
The AAU contains default provisions that address the situation in which one or more Underwriters fail to purchase their respective committed Shares at the time of closing. Under Section 5.2 of the AAU, if any Underwriter defaults on its commitment, the non-defaulting Underwriters may, but are not required to, assume the defaulting Underwriter's Shares. However, this assumption is subject to a cap: no non-defaulting Underwriter is required to purchase more than 110% of its original underwriting commitment (i.e., an increase of no more than approximately 10% over its original committed Shares). If the aggregate default exceeds the amount that can be absorbed by the non-defaulting Underwriters within this cap, the Representative has the right to terminate the Offering and the AAU.
The default cap of approximately 10% is within the range typically seen in AAUs for IPOs of this size (customarily 9–11%). The cap provides protection for non-defaulting Underwriters against being required to assume disproportionate risk in the event of a significant default.
B. Default Mechanism — Implications for the Company
The default mechanism in the AAU has direct implications for the Company and the Selling Stockholders, because the Underwriting Agreement contains corresponding provisions addressing the treatment of a defaulting Underwriter. Under Section 10 of the draft Underwriting Agreement, if the aggregate number of Shares with respect to which one or more Underwriters default exceeds 10% of the total base Offering (approximately 1,644,118 Shares), the Company and the Selling Stockholders have the right to terminate the Underwriting Agreement.
It is critical that the default provisions in the AAU and the Underwriting Agreement are fully aligned. Specifically, we recommend cross-referencing the following elements: (i) the threshold percentage for triggering termination rights; (ii) the mechanism for notice and cure (if any) in the event of a default; (iii) the time period for non-defaulting Underwriters to elect to assume defaulting Shares; and (iv) the consequences of termination for any expenses or liabilities already incurred. Any inconsistency between the AAU and the Underwriting Agreement in these respects could create confusion or unintended consequences in the event of an actual default scenario.
C. Indemnification and Contribution Among Underwriters
Article 6 of the AAU establishes a comprehensive framework for indemnification and contribution among the Syndicate members. The key provisions are as follows:
Indemnification. Each Underwriter agrees to indemnify and hold harmless the other Syndicate members, and their respective directors, officers, employees, agents, and controlling persons, against any and all losses, claims, damages, liabilities, and expenses (including reasonable attorneys' fees and litigation costs) arising out of or based upon (a) any material misstatement or omission attributable to written information furnished by the indemnifying Underwriter for inclusion in the Registration Statement, the Prospectus, or any related offering documents, or (b) any breach by the indemnifying Underwriter of its representations, warranties, or obligations under the AAU.
Contribution. To the extent that indemnification is unavailable or insufficient, the AAU provides for contribution among the Syndicate members in proportion to their respective underwriting commitment percentages. The contribution provisions include a "relative benefits" test (contribution in proportion to relative benefits received from the Offering) and a "relative fault" test (contribution in proportion to relative fault in causing the loss), with the relative benefits test serving as the primary allocation methodology and the relative fault test serving as a secondary adjustment.
For issuer's counsel, the principal concern with the inter-Underwriter indemnification and contribution provisions is ensuring that they do not undermine, conflict with, or dilute the indemnification and contribution rights that run between (a) the Company and the Selling Stockholders, on the one hand, and (b) the several Underwriters, on the other hand, under Article 8 of the draft Underwriting Agreement. In particular, we recommend reviewing whether the AAU's internal contribution mechanics could have the practical effect of reducing the amount that the Company could recover from any individual Underwriter under the Underwriting Agreement's contribution provisions. For example, if an Underwriter were to exhaust its financial resources through contributions to other Syndicate members under the AAU before satisfying its contribution obligations to the Company under the Underwriting Agreement, the Company's recovery could be impaired. While this scenario is unlikely in practice given the financial resources of the Syndicate members, it is a theoretical concern that merits attention, and we recommend confirming that the Underwriting Agreement's indemnification and contribution provisions are not subordinated to the AAU's corresponding provisions.
VI. Stabilization and Short-Covering Activities
A. Stabilization Authority
Article 7 of the AAU authorizes Pinnacle, as Representative, to engage in stabilization transactions in the Class A Common Stock on the Nasdaq Global Select Market in accordance with Regulation M under the Exchange Act (Rules 100 through 105). Stabilization transactions are a standard feature of underwritten IPOs and serve the purpose of preventing or retarding a decline in the market price of the newly issued Shares during the period immediately following the IPO.
Under the AAU, stabilization activities may include the following:
• Stabilizing bids — bids for or purchases of Shares in the open market for the purpose of pegging, fixing, or maintaining the price of the Shares;
• Short sales — sales of Shares in excess of the number of Shares that the Underwriters are obligated to purchase, creating a syndicate short position;
• Syndicate covering transactions — purchases of Shares in the open market to cover the syndicate short position;
• Penalty bids — the reclamation of selling concessions from Syndicate members whose customers sell Shares purchased in the Offering shortly after the IPO; and
• Passive market making — bids at or below the highest independent bid for the Shares, as permitted under Rule 103 of Regulation M.
Pinnacle has sole discretion under the AAU over the timing, pricing, and extent of all stabilization activities. No other Syndicate member is permitted to engage in stabilization transactions independently or without the prior written consent of Pinnacle. This concentration of stabilization authority in the Representative is both customary and necessary to ensure coordinated aftermarket support and compliance with the regulatory requirements of Regulation M.
B. Short Position and Syndicate Short Account
The AAU establishes a syndicate short account (the "Syndicate Short Account") to be managed by Pinnacle. The Syndicate Short Account is the mechanism through which Pinnacle manages the syndicate short position and records all stabilization transactions, covering purchases, and related trading activity.
Under the AAU, Pinnacle is authorized to create a short position of up to 2,466,176 Shares — a number equal to the size of the Overallotment Option — to facilitate stabilization of the aftermarket trading price. The creation of a short position of this size is accomplished through the allocation of Shares to investors in excess of the 16,441,176 base Shares that the Underwriters are committed to purchase under the Underwriting Agreement, with the excess Shares being borrowed or delivered through the Overallotment Option mechanism.
The Overallotment Option, exercisable within 30 calendar days of the date of the final prospectus, serves as the primary covering mechanism for the syndicate short position. If the market price of the Shares trades above the public offering price during the stabilization period, Pinnacle would typically exercise the Overallotment Option in full, delivering additional Shares to cover the short position and generating additional underwriting fees. If the market price of the Shares trades below the public offering price, Pinnacle may elect to cover all or a portion of the short position through open market purchases (syndicate covering transactions) at prices below the public offering price, thereby realizing a profit on the short position, and exercise the Overallotment Option only partially or not at all.
Profits and losses from the Syndicate Short Account, including gains or losses from stabilization activities, covering transactions, and the exercise (or non-exercise) of the Overallotment Option, are shared among the Underwriters on a pro rata basis in proportion to their respective underwriting commitments. The AAU provides that Pinnacle will provide periodic accountings of the Syndicate Short Account to the other Syndicate members and will distribute any net proceeds or assess any net charges within 90 days following the conclusion of the stabilization period.
C. Penalty Bids
Section 7.4 of the AAU authorizes Pinnacle to impose penalty bids during the stabilization period. A penalty bid is a mechanism by which the Representative reclaims the selling concession from a Syndicate member if Shares initially placed with a customer of that Syndicate member are resold (or "flipped") in the secondary market shortly after the IPO. Penalty bids serve as a disincentive against flipping and encourage Syndicate members to place Shares with long-term investors rather than short-term traders.
Under the AAU, Pinnacle has the sole authority to determine whether and when to impose penalty bids, and the determination is made on a case-by-case basis depending on the level of flipping activity observed in the aftermarket. The reclaimed selling concession is credited to the Syndicate Short Account and shared among the Underwriters pro rata.
For issuer's counsel, the stabilization and penalty bid mechanisms are relevant for two principal reasons. First, these activities directly affect the post-IPO trading dynamics in the Company's stock, including the extent to which the stock price is supported (or not) in the initial days and weeks of trading. The Company's management and board of directors should understand how these mechanisms operate, even though the Company does not control or direct stabilization activities. Second, stabilization activities and penalty bids are required to be disclosed in the "Underwriting" section of the Registration Statement on Form S-1 and the final prospectus. We recommend confirming that the current S-1 disclosure accurately and completely describes these mechanisms, including the potential for stabilizing bids, syndicate covering transactions, the imposition of penalty bids, and the effect of such activities on the market price of the Shares.
D. Regulation M Compliance
Article 7 of the AAU includes representations and covenants from each Underwriter regarding compliance with Regulation M under the Exchange Act. Each Underwriter represents that it will comply with the restrictions on bids and purchases during the applicable restricted period (which, for an IPO, begins on the later of (i) the business day prior to the date of the pricing of the Offering and (ii) the business day prior to the date on which the Underwriter's participation in the distribution begins) and will not engage in any activity that would constitute a violation of Rules 101 through 105 of Regulation M.
In addition, each Underwriter certifies its FINRA membership and represents that it will comply with all applicable FINRA rules in connection with the Offering, including the rules governing underwriting compensation, new issue allocations, and market-making activities.
VII. Selling Restrictions and Distribution Compliance
A. Offering Restrictions — Domestic
Article 8 of the AAU requires each Underwriter to offer and sell Shares only in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities (or "blue sky") laws. Specifically, each Underwriter agrees that it will offer Shares only by means of a prospectus meeting the requirements of Section 10 of the Securities Act and will not engage in any offer or sale of Shares that would not be covered by the Registration Statement.
With respect to blue sky compliance, Calderwood & Harkness LLP has separately prepared a comprehensive Blue Sky Survey Memorandum (see blue-sky-survey-memo.docx in the deal file) covering all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The Blue Sky Survey Memorandum analyzes the availability of exemptions from state registration requirements for the Offering and concludes that the Shares will qualify as "covered securities" under Section 18 of the Securities Act by virtue of their listing on the Nasdaq Global Select Market, which is a "national securities exchange" for purposes of Section 18(b)(1)(A). As covered securities, the Shares are preempted from state registration and qualification requirements in all jurisdictions, though certain state filing and fee obligations may still apply.
The domestic selling restriction provisions in the AAU should be consistent with the conclusions of the Blue Sky Survey Memorandum, and we have confirmed that the AAU's domestic selling restrictions reference the Section 18 preemption for covered securities listed on a national securities exchange. No inconsistencies have been identified.
B. Offering Restrictions — International
The AAU contains customary international selling restrictions for jurisdictions in which the Underwriters may offer Shares to investors outside the United States. Article 9 of the AAU includes jurisdiction-specific selling restriction provisions for the following countries and regions:
• United Kingdom: Compliance with the Financial Services and Markets Act 2000, as amended, including restrictions on financial promotions and the requirement that offers be made only to "qualified investors" within the meaning of Article 2(e) of the UK Prospectus Regulation.
• European Economic Area (MiFID II/Prospectus Regulation): Compliance with Regulation (EU) 2017/1129 (the Prospectus Regulation) and Directive 2014/65/EU (MiFID II), including the requirement that offers in EEA member states be limited to "qualified investors" as defined in Article 2(e) of the Prospectus Regulation.
• Canada: Compliance with National Instrument 45-106 – Prospectus Exemptions and applicable provincial securities laws, with offers limited to "accredited investors" or purchasers purchasing as principal under an applicable prospectus exemption.
• Hong Kong: Compliance with the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), with offers limited to "professional investors" as defined in the Securities and Futures Ordinance.
• Japan: Compliance with the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended, the "FIEA") and offers restricted accordingly.
• Australia: Compliance with the Corporations Act 2001 (Cth), with offers limited to "sophisticated investors" or "professional investors" as defined in sections 708(8) and 708(11) of the Corporations Act, or otherwise exempt from the requirement to provide a disclosure document.
Each Underwriter represents in the AAU that it will comply with the applicable local securities laws and regulations of each jurisdiction in which it offers or sells Shares and that it will not take any action that would require the filing of a prospectus or equivalent disclosure document in any jurisdiction outside the United States.
For issuer's counsel, the international selling restrictions in the AAU should be reviewed for consistency with (i) any corresponding selling restriction legends or notices included in the preliminary and final prospectus, (ii) the representations made by the Underwriters in the Underwriting Agreement regarding international selling practices, and (iii) any jurisdiction-specific legal opinions or compliance memoranda that have been prepared in connection with the Offering. Any discrepancies among these documents should be flagged and resolved prior to the execution of the Underwriting Agreement.
We have conducted a preliminary comparison of the AAU's international selling restrictions against the corresponding provisions of the current draft of the Underwriting Agreement and the selling restriction legends in the most recent draft of the prospectus. No material discrepancies have been identified, though we note that the AAU's Japan selling restriction references the 2020 amendments to the FIEA, while the prospectus legend references the statute generally without specifying the amendment year. We recommend conforming these references for consistency.
C. Directed Share Program
Article 10 of the AAU addresses the allocation and sale of directed shares, which are Shares reserved for purchase by designated persons such as employees, friends, and family members of the Company. The directed share program ("DSP") provisions in the AAU contemplate that a portion of the Offering may be allocated to a DSP administered by one of the Syndicate members (typically the lead left book-runner or the co-manager) and sold at the public offering price without the application of a selling concession.
We note that the Company has not yet made a final determination regarding whether to implement a DSP in connection with the IPO. The Company's management has indicated that it is considering a DSP of up to 5% of the base Offering Shares (approximately 822,000 Shares) to be allocated to employees and other designated persons, but a final decision has not been communicated. We recommend confirming the Company's intentions regarding a DSP as soon as practicable, as the DSP provisions will need to be reflected in the Underwriting Agreement, the S-1 disclosure, and certain ancillary documents (including a separate DSP agreement and participant questionnaires). If the Company determines not to implement a DSP, the corresponding provisions in the AAU will be inapplicable but should remain in the form for completeness and in the event the Company changes its position prior to pricing.
VIII. Lock-Up Provisions in the AAU Context
A. Relationship to Lock-Up Agreements
Article 11 of the AAU references the form of Lock-Up Agreement (the "Lock-Up Agreement") to be executed by each director, executive officer, and stockholder holding more than 1% of the outstanding shares of Lumos (on an as-converted, fully diluted basis) in favor of Pinnacle Securities LLC, as Representative. The Lock-Up Agreements are separate agreements executed by the individual lock-up signatories and delivered to Pinnacle; they are not part of the AAU itself. However, the AAU contains provisions governing the administration and enforcement of the Lock-Up Agreements among the Syndicate members.
The key terms of the Lock-Up Agreement, as referenced in the AAU and as reflected in the current form circulated by Pinnacle, are as follows:
• Lock-Up Period: 180 calendar days following the date of the final prospectus (the "Lock-Up Period").
• Scope of Restrictions: During the Lock-Up Period, each lock-up signatory agrees not to, directly or indirectly, (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of Common Stock, or (c) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock.
• Customary Carve-Outs: The Lock-Up Agreement includes customary exceptions for (i) transfers as bona fide gifts to immediate family members or to a trust for the benefit of the lock-up signatory or immediate family members, (ii) transfers by operation of law, such as pursuant to a qualified domestic relations order, (iii) transfers to charitable organizations in an amount not exceeding a specified threshold, (iv) establishment of Rule 10b5-1 trading plans (provided no sales occur during the Lock-Up Period), and (v) transfers to affiliates or equity holders of the lock-up signatory, in each case subject to the requirement that the transferee execute a lock-up agreement on substantially similar terms.
• Early Release Authority: Early release from the Lock-Up Agreement is at the sole discretion of Pinnacle Securities LLC. Pinnacle may, in its sole and absolute discretion, waive or modify the lock-up restrictions for any signatory, at any time, without prior notice to or consent of any other Syndicate member, the Company, or any other person.
The AAU's grant of sole authority to Pinnacle over lock-up waiver decisions is consistent with market practice for underwritten IPOs and reflects the Representative's role as the gatekeeper for aftermarket supply management. However, we note that this arrangement has the practical consequence that Pinnacle may release lock-up signatories — including, potentially, the Selling Stockholders and members of the Company's management team — without the Company having any consent right or advance notice. While the Company is not typically granted a consent right over lock-up releases under the AAU (as the lock-up runs in favor of the Underwriters, not the Company), the Underwriting Agreement may be negotiated to include a provision requiring the Representative to provide advance notice to the Company before granting any lock-up waiver or early release. This is one of our key issuer-protective recommendations, as discussed in Section XI.C below.
B. Underwriter Lock-Up
In addition to the lock-up obligations imposed on Company insiders, the AAU itself may contain restrictions on Syndicate members' ability to sell Shares from their own accounts or proprietary trading accounts for a specified period following the IPO. We have reviewed the AAU and confirm that Section 11.3 includes a restriction on each Underwriter from selling Shares from its own account (other than in connection with stabilization activities or the exercise of the Overallotment Option) for a period of 25 calendar days following the date of the final prospectus.
Additionally, we have reviewed whether the AAU includes restrictions on the timing of research publication by the Syndicate members' research analysts. Under FINRA Rules and the Global Research Analyst Settlement, there are established restrictions on the publication of research reports in connection with IPOs, including blackout periods around the offering. Section 11.4 of the AAU includes an acknowledgment by each Syndicate member that it will comply with applicable research blackout rules, including the FINRA rules governing the initiation of research coverage following an IPO. Under current FINRA rules (as amended in 2015), the mandatory 25-day research quiet period for managing underwriters has been eliminated, though individual firms may maintain internal policies regarding research initiation timing. We recommend confirming with the Company that it is aware of the potential timing of research initiation by the Syndicate members' research analysts following the IPO, as this may have implications for post-IPO trading dynamics and the Company's investor relations strategy.
IX. Termination and Withdrawal Provisions
A. Termination of the AAU
Article 12 of the AAU addresses the circumstances under which the AAU may be terminated. The AAU provides for the following termination triggers:
Automatic Termination. The AAU terminates automatically, without further action by any party, upon the termination of the Underwriting Agreement for any reason, including termination by the Company, termination by the Representative, or mutual termination.
Termination by the Representative. Pinnacle, as Representative, may terminate the AAU upon the occurrence of any of the following events: (a) a material adverse change in general economic, political, or financial conditions, including without limitation a material disruption in the U.S. equity capital markets; (b) a material adverse change in the business, financial condition, or prospects of the Company; (c) the occurrence of any event of force majeure (including war, terrorism, pandemic, natural disaster, or other similar event) that, in the reasonable judgment of the Representative, makes it impracticable or inadvisable to proceed with the Offering; (d) a material breach by any Syndicate member of its obligations under the AAU; or (e) a downgrade or withdrawal of the credit rating of any Syndicate member that, in the reasonable judgment of the Representative, materially impairs such member's ability to perform its underwriting obligations.
We note that the force majeure and market disruption termination provisions are particularly relevant in the current market environment. As of the date of this memorandum, the Nasdaq Composite Index has experienced a significant decline from its highs in late 2021, with heightened volatility in the technology sector driven by concerns about rising interest rates, inflation, and geopolitical developments (including the ongoing conflict in Ukraine). If these market conditions persist or worsen, there is a meaningful risk that the Offering could be delayed or withdrawn, in which case the AAU would terminate and any open syndicate positions would need to be unwound. The Company and its management should be aware of these provisions and the implications of a potential termination scenario, including the allocation of expenses incurred prior to termination and the treatment of any syndicate positions or stabilization activities that may have been initiated.
B. Survival
Section 12.3 of the AAU provides that certain provisions survive the termination or expiration of the AAU, including:
• Indemnification and contribution obligations (Article 6);
• Confidentiality obligations (Article 14);
• Expense-sharing and payment obligations (Sections 4.3 and 4.4);
• Governing law and dispute resolution provisions (Article 15); and
• Any other provisions that by their nature are intended to survive termination.
The survival of these provisions ensures that the Syndicate members' post-termination rights and obligations are preserved, including the right to seek indemnification or contribution for losses arising from pre-termination activities and the obligation to share in expenses incurred prior to termination.
X. FINRA Compliance Matters
A. FINRA Rule 5110 (Underwriting Compensation)
The AAU must comply with FINRA Rule 5110, which regulates the terms and arrangements of underwriting compensation in connection with public offerings of securities. Rule 5110 establishes a maximum cap on total underwriting compensation, including all items of value received by the Underwriters in connection with the Offering. Items of value subject to the Rule 5110 cap include the underwriting discount, management fees, expense reimbursements (to the extent deemed compensation), non-cash compensation (such as gifts, meals, and entertainment), and any other fees or payments made to the Underwriters or their associated persons in connection with the Offering.
The total underwriting discount of 6.5%, which at the midpoint pricing yields aggregate compensation of approximately $18.2 million on the base Offering (or approximately $20.9 million if the Overallotment Option is exercised in full), must be evaluated under Rule 5110 in conjunction with all other items of value to determine whether the total compensation falls within the permissible limits. Hargrove & Liddell LLP, as underwriters' counsel, is typically responsible for preparing the FINRA filing (Form BR) and conducting the comprehensive Rule 5110 compliance review. However, as issuer's counsel, we have an independent obligation to confirm that no issuer-borne expenses or other items of value are being improperly characterized or omitted from the Rule 5110 compensation calculation.
In particular, we recommend reviewing the following items for potential inclusion in the Rule 5110 compensation calculation: (i) any reimbursement of Underwriter expenses by the Company under the Underwriting Agreement; (ii) any non-cash compensation provided to the Underwriters or their associated persons by the Company (including meals, entertainment, or gifts during the road show); (iii) any warrants, options, or other equity-linked compensation granted to the Underwriters; and (iv) any right of first refusal or similar arrangement in favor of any Underwriter for future offerings by the Company. We note that the Engagement Letter between the Company and Pinnacle does not include a right of first refusal for future offerings, which eliminates one common source of additional compensation under Rule 5110.
B. FINRA Rule 5131 (New Issue Allocations and Distributions)
The AAU incorporates the requirements of FINRA Rule 5131, which governs the allocation and distribution of shares in new issue offerings (including IPOs). Rule 5131 prohibits several allocation practices that are deemed abusive or contrary to the interests of public investors, including:
• Spinning. The allocation of IPO shares to executive officers and directors of public companies (or persons materially supported by such individuals) as an inducement for the award of investment banking business to the Underwriter.
• Quid Pro Quo Allocations. The conditioning of IPO allocations on the receipt of excessive compensation from the investor, such as above-market commissions on unrelated transactions.
• Allocations to Executive Officers and Directors of the Issuer. Rule 5131 restricts the allocation of new issue shares to executive officers and directors of the issuer (other than through a bona fide directed share program). The AAU includes representations from each Underwriter that it will not allocate Shares to any executive officer or director of the Company in violation of Rule 5131.
The AAU's incorporation of these restrictions is standard and does not raise any concerns from the perspective of issuer's counsel. However, we note that if the Company implements a DSP, the allocation of Shares to Company officers, directors, and employees through the DSP must be structured to comply with the Rule 5131 exceptions for directed share programs, including the requirement that the DSP be disclosed in the prospectus and that the allocation decisions be made by the Company (not the Underwriters).
XI. Key Observations and Recommendations for Issuer's Counsel
A. Consistency with Underwriting Agreement
The most critical task for issuer's counsel in reviewing the AAU is to ensure that its provisions are consistent with, and do not conflict with or undermine, the corresponding provisions of the Underwriting Agreement. We recommend cross-referencing the following provisions between the two agreements:
1. Underwriting commitment percentages and share allocations. Confirm that the allocation schedule in Schedule I to the AAU is consistent with the corresponding schedule in the Underwriting Agreement, including the total number of base Shares (16,441,176), the primary/secondary split (12,941,176 primary / 3,500,000 secondary), and each Underwriter's individual commitment.
2. Overallotment Option mechanics. Confirm that the AAU's provisions regarding the Overallotment Option — including the total number of option Shares (2,466,176), the 30-day exercise period, the pro rata allocation among Underwriters, and the exercise notice provisions — are consistent with the corresponding provisions in the Underwriting Agreement and the Company's obligations to issue additional Shares upon exercise.
3. Default provisions and termination rights. Confirm that the default threshold (currently set at approximately 10% of the base Offering), the cure period (if any), and the termination triggers in the AAU are aligned with the corresponding provisions in the Underwriting Agreement, particularly the Company's and Selling Stockholders' right to terminate the Underwriting Agreement in the event of an Underwriter default.
4. Indemnification and contribution. Confirm that the inter-Underwriter indemnification and contribution provisions in the AAU do not create inconsistencies with, or dilute, the Company's indemnification and contribution rights under the Underwriting Agreement. In particular, verify that no provision of the AAU purports to subordinate the Underwriting Agreement's indemnification obligations to the AAU's inter-Underwriter obligations.
5. Stabilization disclosure obligations. Confirm that the stabilization and short-covering activities authorized by the AAU are accurately and completely described in the "Underwriting" section of the S-1, including the potential for stabilizing bids, syndicate covering transactions, penalty bids, and the use of the Overallotment Option as a covering mechanism.
6. Lock-up administration and waiver authority. Confirm that the AAU's provisions granting Pinnacle sole authority over lock-up waivers are consistent with any lock-up-related provisions in the Underwriting Agreement, including any notice or consultation requirements negotiated for the Company's benefit.
7. Expense allocation. Confirm that the expense allocation provisions of the AAU and the Underwriting Agreement are consistent, with no overlap, double-counting, or unexpected charges to the Company. In particular, verify that the fees and expenses of Hargrove & Liddell LLP are borne solely by the Underwriters and that no portion of such fees is charged to the Company.
B. S-1 Disclosure Consistency
We recommend confirming that the "Underwriting" section of the Registration Statement on Form S-1/A (Amendment No. 1) (SEC File Number 333-264518; CIK 0001923847), as publicly filed on April 14, 2022, accurately describes the following items, each of which is addressed in the AAU:
• Syndicate composition, including the identification of Pinnacle as lead left book-running managing underwriter, Whitfield as joint book-running managing underwriter, and Graystone as co-manager;
• Underwriting discount of 6.5% of the public offering price per Share, including the aggregate dollar amount of the discount on the base Offering and the overallotment;
• Overallotment Option of up to 2,466,176 additional Shares, exercisable within 30 days of the date of the final prospectus;
• Stabilization and penalty bid mechanics, including a description of the types of stabilization transactions that may be conducted, the potential effect on the market price of the Shares, and the disclaimer that stabilization activities, if commenced, may be discontinued at any time;
• Lock-up provisions, including the 180-day Lock-Up Period, the scope of restrictions, the customary carve-outs, and the disclosure that the Representative may waive or modify the lock-up restrictions at any time in its sole discretion; and
• Selling restrictions, both domestic and international, including jurisdiction-specific legends for the United Kingdom, the European Economic Area, Canada, Hong Kong, Japan, and Australia.
Any discrepancies between the AAU and the S-1 disclosure should be identified and resolved prior to the pricing of the Offering and the filing of the final prospectus pursuant to Rule 424(b) of the Securities Act.
C. Issuer-Protective Comments
Based on our review of the AAU, we recommend that the Company, through issuer's counsel, raise the following comments or requests with Pinnacle Securities LLC:
1. Notice of Lock-Up Waiver or Early Release. Request that the Underwriting Agreement include a provision requiring the Representative to provide the Company with at least three (3) business days' advance written notice before granting any waiver or early release of the lock-up restrictions applicable to any director, executive officer, or stockholder holding more than 1% of the Company's outstanding shares. This notice requirement would enable the Company to make any necessary public disclosures (including a Form 8-K filing, if appropriate) and to manage investor communications in advance of any lock-up release. We note that this request is consistent with the recommendations of the SEC's Division of Corporation Finance regarding lock-up disclosure practices.
2. Confirmation of Expense Allocation. Request written confirmation from Pinnacle (or from Hargrove & Liddell LLP on behalf of the Underwriters) that the expense reimbursement provisions of the AAU do not include, and will not result in the inclusion of, any items of expense that are separately chargeable to the Company under the Underwriting Agreement. This confirmation will mitigate the risk of double-counting or unexpected issuer charges.
3. Notice of Material Amendments to the AAU. Request that Pinnacle agree to communic

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