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The Financial Industry Regulatory Authority (FINRA) has amended Rules 5130 and 5131, which act in combination to govern the offer and sale of new issue1 securities to certain restricted persons,2 to clarify the rules and expand exemptions from them. These amendments should benefit a broad range of market participants, including fund managers, benefit plans, family offices and sovereign entities.


FINRA Rule 5130 generally restricts, among other things, broker-dealers (or persons associated with them) from selling shares of a new issue, to an account in which a restricted person has a beneficial interest. Rule 5131 restricts (so called “spinning”) brokers from selling new issues to accounts that are beneficially owned by persons that are executive officers or directors of public companies having specified relationships with the broker-dealer (and persons materially supported by such persons) (“Covered Persons”). Since FINRA Rules 5130 and 5131 look to the beneficial owners of an account, persons responsible for making investments in new issues for accounts with multiple beneficial owners, such as managers of private investment funds, need to determine whether the beneficial owners of such accounts are Restricted Persons or Covered Persons. For purposes of these rules beneficial interest can take the form of almost any economic interest such as a right to share in the profits or losses.


FINRA’s update to these rules clarifies many historically obscure points and provides greater flexibility for investors:

Non-U.S. Investment Companies

Rule 5130(c)(6) previously provided a general exemption for an investment company organized under the laws of a non-U.S. jurisdiction. To qualify for this exemption the non-U.S. investment company had to: (1) be is listed on a non-U.S. exchange for sale to the public or authorized for sale to the public by a non-U.S. regulatory authority; and (2) ensure that no person owning more than five percent of the shares of the investment company was a restricted person. Historically this has been operationally difficult for broker’s to implement where a portion of the shares would be held in an omnibus account or in nominee form. To resolve this, the amendments add alternative tests to the five percent condition mentioned above. These new tests now allow non-U.S. investment companies that have either, (1) 100 or more direct investors, or (2) 1,000 or more indirect investors. However, in connection with this change, FINRA has also added the requirement that those non-U.S. investment companies not be formed for the specific purpose of permitting restricted persons to invest in new issues.

Non-U.S. Offerings and Independent Allocations by Non-U.S. Non-Member Broker-Dealers

The amendment excludes from the definition of “new issue” offers made under Regulation S or otherwise made outside of the U.S. or its territories, provided that such securities are not currently registered for sale in the United States. Further, FINRA has adopted Rule 5130.01 and Rule 5131.05 to clarify the rules do not prohibit allocation of new issues to non-U.S. persons by non-U.S. non-member broker-dealers participating in the underwriting syndicate, provided that such allocation decisions are not made at the direction or request of a member firm or its associated persons.

Sovereign Entities

Sovereign entities are now excluded from the category of restricted persons covering owners of brokerdealers. FINRA has newly defined a “sovereign entity” to be a sovereign nation or a pool of capital or an investment fund owned or controlled by a sovereign nation and created for the purpose of making investments on behalf of the sovereign nation. Additionally, a “sovereign nation” is defined as a sovereign nation or its political subdivisions agencies or instrumentalities. The exclusion does not extend; however, to affiliates of sovereign entities that are otherwise restricted. By way of example, the broker owned by the sovereign entity would continue to be restricted while the sovereign entity would not.

Non-U.S. Employee Retirement Benefit Plans

Rule 5130(c)(8) now provides an exemption for an employee retirement benefit plan organized under, and governed by, either U.S. or non-U.S. laws, provided that such plan or family of plans: (1) has, in aggregate, at least 10,000 plan participants and beneficiaries and $10 billion in assets, (2) is operated in a nondiscriminatory manner, insofar as a wide range of employees regardless of income or position, may participate (3) is administered by trustees or managers that have a fiduciary obligation to the participants and beneficiaries, and (4) is not sponsored solely by a broker-dealer.

Issuer-Directed Securities

Rules 5130(d) and 5131.01 provide exemptions for issuer-directed allocations of securities, subject to specified conditions. For consistency with Rule 5131.01, FINRA has amended paragraph (d) of Rule 5130 to apply the exemptions to securities directed by affiliates and selling shareholders of the issuer and to clarify that the exemptions apply to securities directed in writing. FINRA has clarified that certain exemptions also apply to securities that are directed by a single affiliate or selling shareholder of the issuer. In addition, FINRA has amended Rule 5130(d)(1)(B) to permit issuer-directed allocations of securities to employees and directors of franchisees.


FINRA has excluded special purpose acquisition companies (“SPACs”) from the definition of “new issue,” citing that like registered closed-end investment companies, business development companies and real estate investment trusts SPACs typically commence trading at the public offering price with little potential for trading at a premium given that their assets at the time the IPO trades consist of the capital they have raised through the offering process. Moreover, if there is a premium, it is generally small.

Family Investment Vehicles

Historically FINRA has defined a “family investment vehicle” as a legal entity that is beneficially owned solely by immediate family members (largely these are a person’s parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, and any other individual to whom the person provides material support3). A person with the authority to buy or sell securities for such a family investment vehicle has not been considered a portfolio manager based solely on this investment authority and, therefore was not considered a restricted person under Rule 5130. The amendments broaden what constitutes a family investment vehicle to more closely align with the definition of a family office under the Investment Advisers Act of 1940.

Lock-Up Agreements

Rule 5131(d)(2) requires lock-up agreements applicable to the officers and directors of an issuer entered into in connection with the new issue stipulate certain notification procedures be followed informing the issuer and general public of the impending release or waiver of such lock-up agreement’s transfer restrictions. The exemption for transfers not involving compensation that are to persons agreeing to be bound by the same lock-up terms, has been modified to include immediate family members as defined in Rule 5130(i)(5) provided that the transferee agree in writing to be bound by the same lock-up agreement terms in place for the transferor. Finally, the amendment modified Rule 5131.03 to include the disclosure of a release in a publicly filed registration statement in connection with a secondary offering within the definition of announcement through a major news service.

Unaffiliated Charitable Organizations

The amendment excludes unaffiliated charitable organizations from the definition of a “covered non-public company” for the purposes of the “spinning” prohibition under Rule 5131, effectively allowing allocation of new issues to executive officers and directors of these charitable organizations even if they have a current or potential investment banking relationship.

Addition of Anti-Dilution Provision

FINRA has adopted anti-dilution provisions user Rule 5131 matching those under Rule 5130. The provisions allow executive officers and directors of public companies and covered non-public companies subject to Rule 5131 to purchase shares of a new issue to maintain the same equity ownership level that they held three months prior to the filing of the registration statement.

Next Steps

Since these changes are now in effect, brokers and asset managers should update their FINRA Rule 5130 and 5131 questionnaires and/or subscription agreements to incorporate the changes resulting from the amendments. In addition, investors who are asked to execute questionnaires or subscription agreements may wish to seek legal review first to ensure that these documents match the rule’s updated requirements. Investors may wish to consider whether any of the other revisions will benefit them and update their responses to 5130/5131 queries accordingly.

1 As defined in FINRA rule 5130(i)(9).
2 For purposes of these rules a “restricted person” as the term is used this this alert, includes the following: (1) broker‑dealers; (2) broker-dealer personnel; (3) finders and fiduciaries; (4) portfolio managers; and (5) persons owning a broker‑dealer and (6) in certain cases persons materially supported by those in (1)-(5). See Rule 5130(i)(10). Note that for 5130, the term “broker‑dealer” includes foreign broker dealers that are operating based on an exemption under the Securities Exchange Act of 1934.
3 See FINRA rule 5130(i)(5)


Anthony Burrows is an associate in Baker McKenzie's Corporate & Securities Practice Group in Chicago. Prior to joining the firm Anthony gained transactional and litigation experience as a law clerk with two different firms and served as a member of Northwestern Law's Negotiation Team.


Kennan Castel-Fodor is a registered foreign lawyer in Baker McKenzie's Hong Kong office. He has significant experience in US regulatory issues related to fund structure/formation, marketing, and registration requirements for non-US clients. Kennan also has experience advising US registered funds and their boards, investment advisers, and related financial services firms. He is actively engaged in the Firm's global commodities and derivatives practice.