On July 26, 2019, FINRA announced proposed changes to FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and FINRA Rule 5131 (New Issue Allocations and Distributions) to exempt additional persons from the scope of these rules, modify current exemptions to enhance regulatory consistency, address unintended operational impediments and exempt certain types of offerings from the scope of these rules.[1] Notice was published in the Federal Register on August 8, 2019.[2]

On October 30, 2019, FINRA announced amendments to the proposal, which were subsequently approved by the SEC and published in the Federal Register on November 12, 2019.[3] On December 19, 2019, FINRA published Regulatory Notice 19-37 discussing the amendments.[4] The amendments take effect on January 1, 2020.

In general, the amendments provide welcome updating to Rule 5130 (New Issues) and Rule 5131 (IPO Allocations), including with respect to a number of longstanding operational issues. These amendments include:

  • An important exemption from the definition of “new issue” for certain non-U.S. offerings;
  • An exemption from restricted status for sovereign actors who own broker-dealers;
  • Employee plans meeting certain size criteria are exempt from allocation restrictions;
  • The exemption permitting allocation to non-U.S. investment companies has been broadened;
  • An exemption from the definition of “new issue” for SPAC offerings; and,
  • Broadening the definition of a “family investment vehicle” in the exemption from restricted status for family offices.

The full set of amendments are described more fully below.

Rule 5130

Amendments to the General Exemptions under Rule 5130(c)

Employee Retirement Benefits Plans

The amendments add a new exemption to the prohibitions of Rule 5130(a) and Rule 5131(b)(2) for employee retirement benefits plans organized under and governed by the laws of the United States or of a foreign jurisdiction, provided that such a plan or family of plans: (i) has, in aggregate, at least 10,000 plan participants and beneficiaries and $10 billion in assets; (ii) is operated in a non-discriminatory manner insofar as a wide range of employees, regardless of income or position, are eligible to participate without further amendment or action by the plan sponsor; (iii) is administered by trustees or managers that have a fiduciary obligation to administer the funds in the best interests of the participants and beneficiaries; and (iv) is not sponsored solely by a broker-dealer.

The amendments provide two alternative methods to establish that a foreign investment company is widely held for purposes of the foreign investment company exemption set forth in Rule 5130(c)(6): (i) the investment company has 100 or more direct investors; or (ii) the investment company has 1,000 or more indirect investors. The amendments also add a third prong to this exemption, requiring that the investment company not have been formed for the specific purpose of permitting restricted persons to invest in new issues. These amendments also affect the corresponding exemption to Rule 5131(b)(2).

Amendments to Certain Defined Terms

Exclusions from the Definition of “New Issue”

Foreign Offerings and Independent Allocations by Foreign Non-Member Broker-Dealers

The amendments add an exclusion from the definition of “new issue” for offerings made under Regulation S or otherwise made outside of the United States or its territories. This exclusion is limited, however, to offerings that do not include securities that are concurrently registered for sale in the United States. The amendments also add Rules 5130.01 and 5131.05 to clarify that Rule 5130 and Rule 5131 are not intended to restrict new issue allocations 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 or an associated person of a member.


The amendments add a new exclusion from the definition of “new issue” for initial public offerings of special purpose acquisition companies (SPACs).

These amendments affect the definition of “new issue” under Rule 5131 as well, given that the definition of “new issue” in Rule 5131 cross-references the definition under Rule 5130.

The categories of restricted persons under Rule 5130 include portfolio managers, defined as any person (or certain of their immediate family members) who has authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment advisor or collective investment account. Family investment vehicles (as defined in Rule 5130), however, are excluded from the definition of “collective investment account.” Because of this, a person who has the authority to buy or sell securities for a family investment vehicle is not a restricted person based solely upon that investment authority.

The amendments seek to better align the definition of family investment vehicle with the family office concept from the Investment Advisers Act of 1940 (the “Advisers Act”). In doing so, the amendments expand the definition of family investment vehicle from a legal entity that is beneficially owned solely by immediate family members to a legal entity that is beneficially owned solely by one or more immediate family members, family members, as defined under Rule 202(a)(11)(G)-1 of the Advisers Act, or family clients, as defined under Rule 202(a)(11)(G)-1 of the Advisers Act.

Sovereign Entities as Owners of Broker-Dealers

The definition of “restricted person” under Rule 5130 includes, among others, certain direct and indirect owners of broker-dealers. The amendments exclude “sovereign entities” (defined as a sovereign nation (or its political subdivisions, agencies or instrumentalities) or a pool of capital or an investment fund or other vehicle owned or controlled by a sovereign nation and created for the purpose of making investments on behalf or for the benefit of the sovereign nation) from the scope of owners of broker-dealers considered restricted persons. This exclusion does not, however, extend to affiliates of sovereign entities that are otherwise restricted persons. Therefore, for example, a sovereign wealth fund investing on behalf of a sovereign entity would generally qualify for the exemption, notwithstanding that the sovereign wealth fund has a broker-dealer portfolio company. A sovereign-owned broker-dealer, on the other hand, would not.

Issuer Directed Securities

To harmonize the language of Rule 5130(d) and Rule 5131.01, the amendments modify the language of Rule 5130(d)(1) and (2) to include not only issuer directions, but also those of affiliates and selling shareholders. The amendments also make changes to clarify that securities must be directed in writing for purposes of Rule 5130(d)(1), (2) and (4), and modify current Rule 5130(d)(1)(B) to expressly permit issuer-directed allocations of securities to employees and directors of franchisees.

Rule 5131

Definition of “Covered Non-Public Company”

Rule 5131(b) prohibits the allocation by a FINRA member of new issue securities to certain accounts in which an executive officer or director of a “public company” or “covered non-public company” has a beneficial economic interest. The amendments provide an exemption from the definition of “covered non-public company” for unaffiliated charitable organizations.


The amendments add an anti-dilution provision to Rule 5131 similar to that currently found in Rule 5130(e), to allow an executive officer or director of a public company or a covered non-public company (or a person materially supported by such a person) to retain the percentage equity ownership in the issuer at a level up to the ownership interest as of three months prior to the filing of the registration statement, provided that the other conditions of Rule 5131.04 are met.

Lock-Up Agreements

The amendments modify Rule 5131(d)(2)(B) to extend the exception from the public announcement requirement to transfers to immediate family members as defined in Rule 5130(i)(5), provided that the transferee has agreed in writing to be bound by the same lock-up agreement terms in place for the transferor. The amendments also make changes to Rule 5131.03 to provide that the disclosure of a release or waiver in a publicly filed registration statement in connection with a secondary offering satisfies the requirement for an announcement through a major news service, which is a codification of the guidance published in FINRA Regulatory Notice 10-60.


In adopting the amendments to Rule 5130 and Rule 5131, FINRA noted that the amendments are intended to promote capital formation, aid member firm compliance efforts and maintain the integrity of the public offering process. While not likely to require large-scale changes, the amendments to Rule 5130 and Rule 5131, and corresponding January 1, 2020 effective date, may require some end-of-year attention to ensure that systems, processes, forms and policies and procedures are updated to reflect these changes.