FINRA Rule 5130 Explained: Restrictions on the Purchase and Sale of Initial Equity Public Offerings

What Is FINRA Rule 5130?

FINRA Rule 5130 prohibits certain “restricted persons” from purchasing shares of initial equity public offerings. Regulators designed these restrictions to prevent industry insiders from unfairly benefiting from IPO allocations. However, the rule also provides specific exemptions under which some restricted persons or accounts may still participate in IPOs if they meet defined criteria. 

This rule applies to accounts where a “restricted person” has a beneficial interest, including a broad range of individuals and entities with ties to the securities industry. To enforce these limits, the rule requires firms to verify investor eligibility before selling IPO shares, document the basis for that eligibility, and follow specific procedures for issuer-directed allocations. 

Rule 5130 also identifies a set of exemptions for accounts that meet certain criteria. Together, these requirements promote fair and transparent distribution of IPOs. Here are the key components that define Rule 5130:

Who Qualifies as a Restricted Person

FINRA Rule 5130 defines “restricted persons” as members or other broker-dealers, broker-dealer personnel, finders and fiduciaries, portfolio managers, and certain persons owning a broker-dealer above the rules threshold. These are individuals and entities whose professional roles or industry connections give them access to IPO allocations. The restrictions apply both to their own purchases and to accounts in which they have a beneficial interest.

The rule also includes immediate family members of restricted persons when they either share a household or provide or receive material financial support. Additionally, professionals who work closely with underwriters, such as attorneys, accountants, and consultants, may be restricted if they are in a position to influence the offering or its allocation.

Firms must carefully assess investor status before allowing participation in IPOs. This may require reviewing ownership structures, confirming household relationships, and identifying indirect ties that create beneficial interests. 

Prohibited Sales and Purchases

FINRA Rule 5130 prohibits broker-dealers and their associated persons from selling IPO shares to accounts in which a restricted person has a beneficial interest. They are also barred from purchasing IPO shares for their own accounts unless a specific exemption applies. These restrictions prevent conflicts of interest during the distribution of initial equity offerings.

The rule applies broadly to all forms of IPO participation, including direct purchases, allocations through investment vehicles, and shares retained through underwriting. It is designed to promote fair access to new issues. While limited exceptions exist, such as internal transfers among syndicate members or accommodations for non-restricted customers, these are narrowly defined and subject to strict conditions.

Preconditions for Sale and Eligibility Representations

Before selling IPO shares to any account, broker-dealers should first obtain a written representation that the account is eligible under Rule 5130. This representation must be obtained in good faith within the 12 months prior to the sale and must come from either the account holder, an authorized representative, or a qualified conduit such as a bank or investment adviser.

This rule does not allow firms to rely on eligibility statements that are inaccurate or questionable. If a firm has reason to believe that an account includes a restricted person, it should treat the account as ineligible regardless of any written certification. Firms should also maintain clear documentation of these representations and keep them on file for at least three years after the last IPO sale to the account.

This process applies to both new accounts and existing clients who seek to participate in IPOs. FINRA expects regular updates and recertifications as part of a firm’s ongoing diligence.

Issuer-Directed Share Allocations

Rule 5130 permits IPO shares to be allocated at the direction of the issuer or a related party, even when recipients would otherwise be considered restricted persons. These issuer-directed allocations are allowed only under specific conditions and must follow defined compliance guidelines. For instance, such allocations must be made in writing by the issuer, an affiliate, or a selling shareholder, or be part of a program sponsored by the issuer or an affiliate of the issuer that meets specific criteria. 

However, an issuer cannot direct shares to broker-dealers or accounts in which restricted persons have a beneficial interest, unless the recipients are employees or directors of the issuer or its affiliates. In those cases, their employment status determines eligibility, not their industry relationships.

Rule 5130 also includes provisions for large-scale issuer-sponsored programs. They should offer participation to at least 10,000 participants, offer each participant an equal number of shares, or, using a predetermined formula applied uniformly, have each participant receive a specified number of shares,  and avoid disproportionately favoring restricted persons as compared to the investing public. The aim is to provide issuers with flexibility while maintaining fairness and preventing selective insider access to IPO shares.

Exempt Accounts and Carve-Outs

Although Rule 5130 restricts IPO participation for certain industry participants, it also identifies several types of accounts that are exempt from the rule’s general prohibitions. These exemptions allow firms to serve institutional clients and other investors whose structure or investment purpose reduces concerns about insider access.

Exempt accounts include registered investment companies, insurance companies’ general, separate, or investment accounts (with certain caveats), and publicly traded entities listed on a national securities exchange (excluding specific broker-dealers and their affiliates). Certain retirement plans and charitable organizations also qualify, as long as they are not formed solely to benefit restricted persons. In some cases, an account can still participate if restricted persons hold no more than 10% of the beneficial interest.

Firms relying on these exemptions must document the basis for eligibility and apply consistent criteria when evaluating account status. 

Anti-Dilution and Stand-By Agreements

Rule 5130 includes limited exceptions that allow restricted persons to purchase IPO shares in specific situations involving existing ownership or underwriter obligations. These provisions apply when the transaction does not increase the person’s influence over the offering or provide an unfair advantage.

The anti-dilution provision allows a restricted person to maintain their percentage ownership in a company if they held equity in the issuer for at least one year before the offering. The purchase cannot increase their ownership stake beyond what it was three months prior to the registration statement. Any shares acquired under this provision are subject to a three-month holding period.

The Rule also permits stand-by agreements when underwriters agree to purchase unsold shares in an offering. These arrangements need to be documented in a formal agreement, disclosed in the prospectus, and supported by a written statement from the managing underwriter confirming that no other buyers were available. These shares are also subject to a holding period following the offering’s effective date.

Recordkeeping and Filing Requirements

Firms participating in IPOs are expected to maintain clear documentation showing how they complied with Rule 5130. This includes records of eligibility representations, exemption determinations, and any correspondence related to issuer-directed allocations or restricted accounts.

To comply with FINRA requirements, the book-running lead manager must submit both the initial and final lists of distribution participants. The initial list, which includes underwriting commitments and retention amounts, is due on or before the offering date. The final list, on the other hand, should be filed within three business days after the offering date. 

These filings help regulators review how the offering was distributed and whether any restricted persons received shares inappropriately. You should also note that recordkeeping obligations apply for at least three years from the date of the last sale of new issue shares to a given account.  

Definitions and Special Terms

Rule 5130 includes several defined terms that clarify how the restrictions apply in different contexts. These definitions help firms evaluate account status, interpret relationships, and identify when participation in an IPO is prohibited.

A beneficial interest refers to any direct or indirect economic interest in an account, including the right to share in profits or losses. This does not include fees received for managing a collective investment account, unless those fees are based on performance. Collective investment accounts include hedge funds, investment partnerships, and similar pooled vehicles that trade securities. Family investment vehicles and informal investment clubs are excluded from this category.

Other important terms include immediate family member, which covers spouses, siblings, parents, children, and in-laws. Material support refers to providing more than 25 percent of someone's income in the prior year. The rule also defines a new issue as any IPO of equity securities, but excludes offerings such as private placements, preferred securities, mutual funds, and securities with a pre-existing foreign market.