Who Is a Restricted Person Under FINRA Rule 5130?

A restricted person under FINRA Rule 5130 is anyone who falls into one of five insider categories: broker-dealers and the people who work for them, finders and fiduciaries connected to an underwriter, portfolio managers with authority over institutional accounts, owners of broker-dealers, and the immediate family members of anyone in those groups. If you fit any of those descriptions, a broker-dealer cannot sell you shares of a common-stock initial public offering, and you cannot buy IPO shares for any account you control. The rule exists to keep securities industry insiders from capturing the first-day gains that IPOs frequently produce, so those shares reach ordinary investors instead.¹

Broker-Dealers and Their Personnel

The clearest category is the industry itself. Every FINRA member firm, and every other broker-dealer, is a restricted person. So is nearly anyone who works for one: officers, directors, general partners, employees, and agents engaged in the investment banking or securities business. If you draw a paycheck from a broker-dealer in any capacity tied to the securities business, the rule almost certainly reaches you. And the restriction applies to every IPO, not just offerings your firm is involved in.¹

One narrow exception. Personnel of a “limited business broker-dealer” — a firm whose business is confined to selling investment company shares, variable contracts, and direct participation programs — are not restricted, because those firms do not participate in IPO underwriting or allocation.¹

Finders and Fiduciaries Tied to an Offering

A finder is someone paid to identify potential investors in an offering. A fiduciary, for these purposes, is someone acting in an advisory capacity to the managing underwriter: attorneys, accountants, and financial consultants, among others. Both are restricted, but only with respect to the specific offering they are connected to. Their access to nonpublic information or their ability to influence how shares get allocated is what triggers the restriction.¹

An accountant who audits a company going public is restricted from buying that IPO, but nothing in Rule 5130 stops her from buying an unrelated IPO the following month.

Portfolio Managers

Portfolio managers are restricted more broadly. Anyone with authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser, or collective investment account is a restricted person. The rule focuses on their power to direct institutional capital toward an IPO, which creates its own conflict of interest. This restriction applies even when the portfolio manager has no relationship to the underwriter.¹

Owners of Broker-Dealers

People who own a meaningful stake in a broker-dealer are restricted, with different thresholds depending on how they show up in the firm’s regulatory filings. The category tracks the ownership disclosures broker-dealers file on Form BD.

Anyone listed (or required to be listed) on Schedule A of Form BD is restricted, unless their ownership code is below 10%. Schedule A captures direct owners.
Anyone listed on Schedule B is restricted, unless the listing relates to an ownership interest in a Schedule A person whose code is below 10%. Schedule B captures indirect owners.
If a public reporting company appears on Schedule A, anyone owning 10% or more of that company is restricted. For public companies on Schedule B, the threshold is 25%. These ownership restrictions do not apply, however, if the public company is listed on a national securities exchange.

Sovereign entities are carved out of this whole category. A sovereign nation, or an investment fund owned or controlled by a sovereign nation and created to invest on its behalf, is not treated as a restricted person just because it owns a stake in a broker-dealer.¹

Immediate Family Members

To keep a restricted person from routing IPO shares through a relative, the rule reaches immediate family members under specific conditions. “Immediate family member” means parents, in-laws (mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law), spouse, siblings, and children, plus anyone else the restricted person provides material support to.¹

“Material support” means directly or indirectly providing more than 25% of a person’s income during the prior calendar year. Family members living in the same household are automatically treated as providing material support to each other, so a spouse or adult child living at home qualifies without any income calculation.¹

An immediate family member of broker-dealer personnel becomes restricted under any of three conditions:

The restricted person materially supports, or receives material support from, the family member.
The family member buys the IPO through the restricted person’s employer or an affiliate of that firm.
The restricted person has the ability to control the allocation of the new issue being purchased.

Family members of finders, fiduciaries, and portfolio managers are restricted only through the material support test.¹

The practical effect: a sibling who lives independently, earns their own income, and buys IPO shares through an unrelated brokerage is generally free to do so, even if their brother works on a trading desk. The restriction kicks in when there is a financial or transactional connection between the two.

Accounts and Entities Holding Restricted-Person Interests

Restricted persons cannot sidestep the rule by pooling money into a partnership, trust, or fund. Any account in which restricted persons collectively hold more than 10% of the beneficial interests is itself treated as restricted. If restricted persons’ combined ownership or profit-sharing interest stays at 10% or below, the account can participate.¹

“Beneficial interest” here means any direct or indirect economic stake, including the right to share in profits or losses. For hedge funds and investment partnerships, that requires measuring the capital commitment or profit allocation attributable to restricted investors against the 10% threshold.

When restricted interests exceed 10%, a fund can still participate through a carve-out. The rule lets a broker-dealer organized as an investment partnership buy IPO shares at the public offering price, provided the shares are credited only to the capital accounts of partners whose interests comply with the 10% rule. Administrators segregate restricted investors’ capital so it does not benefit from IPO allocations.¹

If a restricted person has a controlling interest in an entity, or is the grantor or primary beneficiary of a trust, the entire entity is likely treated as restricted regardless of the 10% figure, because the restricted person can direct its investment decisions.

When a Restricted Person Can Still Buy Into an IPO

A restricted person who already owns shares in a company going public is not forced to accept dilution. Rule 5130’s anti-dilution provisions allow a restricted person to buy IPO shares if all four of these conditions are met:¹

The account has held an equity stake 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 the level it held three months before the registration statement was filed.
The shares are purchased on the same terms available to any other investor.
The IPO shares acquired under this provision are not sold, transferred, pledged, or otherwise disposed of for three months after the effective date.

This matters most for venture capital investors, angel investors, and employees with pre-IPO equity who also happen to work for broker-dealers or manage institutional portfolios.

Offerings the Rule Doesn’t Reach

Restricted-person status only matters if the offering itself is a “new issue” as Rule 5130 defines it. That term is narrower than most people assume: it covers IPOs of common stock sold through a registration statement or offering circular, and nothing else. A long list of offering types are carved out entirely, including private placements under Regulation D, Regulation S, or Rule 144A; government and municipal securities; IPOs of preferred stock and convertible securities; rights offerings and exchange offers; investment-grade asset-backed securities; foreign securities with an existing trading market; mutual fund and ETF shares; and offerings by SPACs, BDCs, REITs, and direct participation programs.¹

A restricted person can buy any of those without running afoul of Rule 5130.

How Firms Verify Status

Before selling any IPO shares to an account, a broker-dealer must obtain a written representation confirming the account is eligible under Rule 5130. That representation has to have been collected within the 12 months before the sale. For accounts held by beneficial owners, the representation comes from the account holder or an authorized signatory. For accounts held through intermediaries such as banks, foreign banks, or investment advisers, the intermediary must confirm that all purchases comply with the rule.¹

A firm cannot rely on a representation it believes, or has reason to believe, is inaccurate. If it knows an account holder recently joined another broker-dealer, a stale questionnaire from six months earlier won’t cover the sale. All records and information about an account’s eligibility must be kept for at least three years after the firm’s last IPO sale to that account.¹

In practice, most broker-dealers handle this through new-account questionnaires asking whether the applicant, or anyone with a beneficial interest in the account, is associated with a broker-dealer, manages institutional portfolios, or otherwise falls into a restricted category. Firms usually re-certify annually, and some require an updated response any time the account’s ownership or control structure changes.

What a Violation Costs

Under FINRA’s Sanction Guidelines, an individual involved in an improper IPO sale or purchase faces a fine of $2,500 to $20,000 and a suspension in any or all capacities for 10 business days to two months. When aggravating factors are present, such as false statements about an account’s eligibility or a deliberate scheme to funnel shares to restricted accounts, FINRA can impose a suspension of up to two years or a permanent bar from the industry.²

FINRA weighs several factors in setting penalties: whether the respondent had a personal interest in the restricted account, whether the violation involved false statements or omissions, and whether the allocation was part of a deliberate scheme to benefit someone financially. Disgorgement of any IPO profits is common; if a restricted person received shares they should not have, the gains typically have to be surrendered. For firms, a pattern of Rule 5130 failures can trigger broader supervisory inquiries and additional remedial measures.