Amendments to FINRA Rules 5130 and 5131 allow non-traded and Private BDCs to participate in IPOs

On July 23, 2025, the Financial Industry Regulatory Authority, Inc. (FINRA) adopted amendments exempting business development companies (BDCs) from FINRA Rule 5130 (Rule 5130) (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and paragraph (b) (Spinning) of FINRA Rule 5131 (Rule 5131) (New Issue Allocations and Distributions).¹

Rules 5130 and 5131 aim to protect the integrity of IPOs by preventing certain industry insiders and related parties from receiving improper benefits in new issue allocations. Specifically, Rule 5130 prohibits FINRA members or associated persons from, among other things, (1) selling new issues to accounts in which a “restricted person” has a beneficial interest; (2) purchasing new issues in accounts where the broker-dealer or its associated persons have a beneficial interest; and (3) continuing to hold new issues acquired as an underwriter, selling group member, or otherwise. Rule 5131 addresses conflicts and abusive allocation practices, with paragraph (b) specifically prohibiting the allocation of IPO shares to accounts tied to the broker-dealer’s current, former, or prospective investment banking clients, a practice known as spinning. 

Rule 5130(c) and Rule 5131(b)(2) provide certain general exemptions for investment companies registered under the Investment Company Act of 1940 (Investment Company Act) and general exemptions for publicly traded entities listed on a national securities exchange. Prior to the amendments, publicly traded BDCs qualified under the publicly traded entity exemption, but non-traded and private BDCs could only participate in IPOs if none of their investors were restricted persons or covered persons. 

While serving important market protection functions, the eligibility demonstration requirements under Rules 5130 and 5131 created insurmountable hurdles for non-traded and private BDCs, effectively excluding them from IPO participation. However, effective July 23, 2025, with the adoption of the amendments to Rules 5130 and 5131, both non-traded and private BDCs are now categorically exempt from these restrictions; provided the BDC was not formed or maintained for the specific purpose of allowing restricted persons to invest in new issues. As a result, non-traded and private BDCs, along with publicly traded BDCs are now permitted to participate in IPOs without having to demonstrate that their investors are not restricted persons or covered persons.

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_{1 See Regulatory Notice 25-08 FINRA Adopts Exemption From FINRA Rules 5130 and 5131 for Business Development Companies, available at: https://www.finra.org/rules-guidance/notices/25-08.}