FINRA Rule 5130: Restricted Persons, New Issues, and Exemptions

FINRA Rule 5130 prohibits broker-dealers from selling shares in an equity IPO to “restricted persons,” a category that covers most securities industry insiders and certain of their close family members. The rule is meant to keep IPO allocations flowing to ordinary public investors rather than to people with inside connections to the underwriting process. If a restricted person holds a beneficial interest in an account, that account generally cannot receive new issue shares either, though several exemptions soften the rule for institutional accounts, pooled funds, and pre-IPO shareholders.¹

Who Is a Restricted Person

The rule sorts restricted persons into five categories. If you fall into any of them, standard IPO allocations are off-limits, and so are allocations to accounts where you hold a beneficial interest.

Broker-Dealers and Their Personnel

Every FINRA member firm is restricted, along with its associated persons: employees, officers, registered representatives, partners, and directors. The restriction applies regardless of any involvement with the specific offering. Working at a brokerage firm in any capacity makes you a restricted person.¹

Owners of Broker-Dealers

Owning a broker-dealer triggers restricted status even without a day-to-day role at the firm. Anyone listed on Schedule A or Schedule B of the firm’s Form BD is restricted unless their stake is below 10%. Different thresholds apply when a publicly traded parent company owns the broker-dealer, and owners of firms listed on a national securities exchange are not swept in.¹

Finders and Fiduciaries

Attorneys, accountants, consultants, and other professionals acting as finders or fiduciaries for the managing underwriter are restricted with respect to that specific offering. Their associated persons are covered too. Unlike the blanket restriction on broker-dealer personnel, this one is deal-by-deal.

Portfolio Managers

Anyone with authority to buy or sell securities for an institutional account such as an investment company, bank, insurance company, or collective investment vehicle is a restricted person. The concern is that a portfolio manager who steers business to an underwriter should not be personally rewarded with IPO shares.¹

Immediate Family Members

The rule extends to immediate family of anyone in the categories above, but only under specific conditions. A family member is restricted if they share a household with the restricted person, or if either one provided more than 25% of the other’s income in the prior calendar year. That income test, called “material support,” is where most gray-area compliance questions arise. A parent covering a child’s living expenses, or an adult child supporting a retired parent, can trigger the restriction even without shared housing.¹

What Actually Counts as a “New Issue”

Rule 5130’s prohibitions only reach “new issues,” defined as the first public offering of a common equity security through a registration statement or offering circular. That scope is narrower than many investors assume. A restricted person can generally buy the following without running into Rule 5130:

Follow-on offerings by companies already trading publicly
Secondary sales by existing shareholders
Private placements, including offerings under Regulation D, Regulation S (when not paired with a concurrent U.S. IPO), and Rule 144A
Preferred stock and convertible securities, regardless of issuer
Investment-grade asset-backed securities and other debt or fixed-income offerings
Rights offerings, exchange offers, and merger-related distributions
Registered investment company shares, such as mutual funds
SPACs, BDCs, REITs, and direct participation programs
Ordinary shares or ADRs with an existing foreign trading market

The practical target of Rule 5130 is a single thing: allocation of common stock in a traditional U.S. equity IPO. Securities outside that description are outside the rule.¹

Exemptions That Let Certain Accounts Still Buy

Not every account touched by a restricted person is locked out. The rule carves out several exemptions, mostly for institutional accounts where restricted persons hold only a small or indirect interest.

The De Minimis Exemption

This is the exemption that matters most to hedge funds, venture funds, and other pooled vehicles. An account can purchase IPO shares as long as restricted persons’ beneficial interests do not exceed 10% of the account in the aggregate. Fund managers routinely track this threshold and either exclude restricted person capital from IPO allocations or restructure fund interests to stay within the limit.¹

Registered Investment Companies

Mutual funds and other companies registered under the Investment Company Act of 1940 are fully exempt. Independent boards and SEC oversight provide enough separation to address the conflicts the rule targets.¹

Publicly Traded Entities

A company listed on a national securities exchange can purchase IPO shares without restriction, provided it is not itself a broker-dealer or an affiliate of a broker-dealer that participates in public offerings as an underwriter or selling group member. Foreign issuers meeting the quantitative listing criteria for a national exchange qualify on the same basis.¹

Insurance Company Accounts

General, separate, and investment accounts of insurance companies are exempt if the account is funded by premiums from at least 1,000 policyholders (or, for general accounts, the insurer has at least 1,000 policyholders) and the insurer does not limit its policyholder base primarily to restricted persons.¹

Large Employee Retirement Plans

Domestic and foreign retirement plans qualify if the plan or its family of plans has at least 10,000 aggregate participants and beneficiaries and $10 billion in assets. The plan must also be open to a wide range of employees regardless of income or position, be administered by fiduciaries acting in participants’ best interests, and not be sponsored solely by a broker-dealer. Those numbers make this exemption realistic only for very large employer plans.¹

Foreign Investment Companies

Investment companies organized under foreign law are exempt if they are listed on a foreign exchange or authorized for public sale by a foreign regulator, and no holder of more than 5% of the fund’s shares is a restricted person.²

The Anti-Dilution Provision

A restricted person who already owned equity in the issuer can buy IPO shares to avoid dilution. Four conditions must all be met:

The account has held equity in the issuer, or in a company the issuer acquired within the past year, for at least one year before the offering’s effective date.
The purchase does not push the account’s percentage ownership above where it stood three months before the registration statement was filed.
The IPO shares come on the same terms as those offered to every other investor.
The shares bought under this exemption are not sold, transferred, or pledged for three months after the offering’s effective date.

This exemption typically matters for early-stage investors or employees holding pre-IPO equity who want to keep their ownership percentage through the public offering.¹

Issuer-Directed Allocations

When the issuer, its affiliates, or selling shareholders specifically direct shares in writing to identified people, the rule’s restrictions ease. Issuer-directed shares still cannot go to a broker-dealer, and they can go to accounts benefiting finders, fiduciaries, or portfolio managers only if that person or a family member is an employee or director of the issuer.¹

How This Shows Up in Your Brokerage Account

The IPO eligibility question that most brokerages ask when you open an account exists because of Rule 5130. Before selling any new issue to an account, the firm must obtain a good-faith representation, made within the prior 12 months, confirming the account is eligible. The certification typically asks you to confirm that no restricted person holds a beneficial interest and to notify the firm if your status changes.¹

After the initial certification, firms usually re-verify status once a year, often through a negative consent notice: if you do not respond, your existing certification stays in effect. If something changes mid-year, such as a spouse taking a job at a brokerage firm or a parent becoming a portfolio manager, you are expected to tell your broker rather than wait for the next review. A missed update can mean forced sale of improperly allocated IPO shares and disgorgement of any profits.¹

For clearly restricted people such as registered representatives or compliance staff at broker-dealers, the rule is a bright line: no IPO allocations. Harder cases involve family members outside the industry connected to someone inside it. Whether a parent’s financial support, a shared apartment, or a spouse’s job triggers restricted status turns on the specific facts, and getting it wrong creates problems for both the investor and the selling firm.

How Rule 5130 Differs from Rule 5131

Rule 5130 asks who can buy IPO shares. Its companion, Rule 5131, asks why non-restricted accounts received them. Rule 5131 prohibits “spinning,” where a firm allocates new issue shares to executive officers or directors of a company that is a current investment banking client, was a client within the past 12 months, or is expected to become one within the next three months. It also bans “quid pro quo” allocations offered in exchange for excessive compensation. Rule 5131 borrows Rule 5130’s definitions of “beneficial interest” and “new issue” and incorporates most of its exemptions, so the two are designed to be read together.³