Section 4, FINRA Rule 5130

What does FINRA Rule 5130 cover?

Restrictions on the purchase and sale of IPOs by restricted persons and their immediate family members.

Who is considered a restricted person under Rule 5130?

Broker-dealers, their personnel (officers, directors, employees), finders and fiduciaries, portfolio managers, and their immediate family members.

Who qualifies as an immediate family member under Rule 5130?

Parents, spouse, siblings, children, in-laws, and anyone receiving material support.

Who is NOT considered an immediate family member under Rule 5130?

Aunts, uncles, and grandparents.

Can a member firm sell a new issue to an account with a restricted person?

No, not if the restricted person has a beneficial interest in the account.

Can a restricted person purchase a new issue for an account they have beneficial interest in?

No.

Can member firms hold IPO shares acquired as underwriters or syndicate members?

No.

When are sales between selling group members allowed?

If incidental to distribution and sold to a non-restricted person at public offering price.

Can broker-dealers not in the syndicate sell to non-restricted customers?

Yes, at the public offering price.

When can restricted persons own up to 10% of an account and still participate?

If their beneficial interest is 10% or less of the account's total value.

What must a member firm do before selling a new issue?

Obtain verification within 12 months that the account is eligible to purchase (i.e., not restricted).

What types of accounts are NOT considered restricted?

Registered investment companies, trust funds with 1,000+ accounts, insurance companies with 1,000+ policyholders, and accounts where restricted persons own ≤10%.

Can issuers direct sales of new issues to non-restricted persons?

Yes.

When can restricted persons purchase shares?

To maintain their proportionate ownership in a company they already partially own.

What is a standby purchaser?

A restricted person who agrees to buy unsold shares in a new issue under certain conditions.

What are the requirements for a standby purchaser to buy a new issue?

Written stand-by agreement disclosed in the prospectus, underwriter certifies no other buyers were found, and shares are subject to 3-month lock-up.

What is the lock-up period for standby purchasers under Rule 5130?

3 months.

What happens if a new issue is under-subscribed?

Underwriters may place unsold shares into their own investment accounts

Restricted Person

Includes broker-dealers, personnel of broker-dealers, finders, fiduciaries, portfolio managers, and their immediate families.

Immediate Family Member

Includes a person's parents, spouse, siblings, in-laws, children, or anyone they support financially.

Excluded Family Members

Aunts, uncles, and grandparents are not considered immediate family.

Beneficial Interest

When a restricted person stands to benefit financially from a new issue account.

Selling Group Transaction Exception

Allowed if shares are incidentally sold to non-restricted persons at the public offering price.

Outside Broker-Dealer Exception

Permits sale to non-restricted customers by firms not part of the syndicate.

10% Rule

Restricted persons may be in accounts owning a new issue if their ownership is 10% or less.

Preconditions for Sale

Firms must verify within the last 12 months that an account is eligible to buy IPOs.

Permitted Accounts

Includes registered investment companies, large trust funds, and insurance companies not primarily composed of restricted persons.

Issuer-Directed Sales

Issuers may direct sales of new issues to non-restricted persons.

Proportionate Ownership Exception

Restricted persons may buy shares to maintain the same ownership percentage.

Standby Purchaser

A restricted person who can buy leftover shares under strict rules.

Standby Agreement

Must be in writing, disclosed in the prospectus, and show no other buyers were available.

Lock-Up Period

Standby purchasers cannot sell shares for 3 months after purchase.

Under-Subscribed Offering

Underwriters can buy shares for their own account if public demand is insufficient.