New issues

New issues, as FINRA Rule 5130 FINRA Rule 5130 FINRA Rule 5130 (New Issue Rule) prevents brokerage firms from giving initial public offerings (IPOs) to accounts owned by industry insiders. This rule stops people who work in finance from getting special access to new stock offerings that might be underpriced and profitable. defines them, are initial public offerings (IPOs) of equity securities. These offerings must be made under a registration statementA comprehensive disclosure document filed with the SEC that provides detailed information about a securities offering, including financial statements, risk factors, and business descriptions required before public offerings can proceed. or offering circularA disclosure document used in certain securities offerings that provides material information about the offering to prospective investors, similar to but less detailed than a full registration statement. filed with regulators. However, the definition has important limitations. It excludes many types of securities offerings, including private placementsA securities offering that is exempt from public registration requirements and typically limited to accredited or sophisticated investors. that are exempt from registration, convertible bonds and preferred stock, special purpose acquisition companiesA shell company that raises capital through an IPO with the purpose of acquiring or merging with an existing private company, providing an alternative path to public markets. (SPACs), rights offeringsA securities offering that gives existing shareholders the right to purchase additional shares at a specified price before the shares are offered to the general public, typically at a discount to market price. to existing shareholders, exchange offersA securities transaction where shareholders are offered the opportunity to exchange their existing securities for different securities, typically used in restructurings or recapitalizations., investment-grade asset-backed securitiesFinancial securities backed by a pool of underlying assets such as loans, mortgages, or receivables that generate cash flows to pay investors., and mutual funds or other investment companies registered under federal law.

This means that when financial professionals talk about new issues under these regulations, they are referring to a specific subset of IPOs—primarily common stock offerings by operating companies going public for the first time.

The current Rule 5130 represents a significant change from earlier regulations. Previously, FINRA operated under what was called the "Free-Riding and Withholding InterpretationFINRA's predecessor regulation that restricted only 'hot issues' (IPOs trading at premiums in secondary markets) from being allocated to restricted persons, later replaced by the broader Rule 5130.." That older rule only applied to "hot issues"—IPOs that traded at a premium price in the secondary market immediately after going public.

The current Rule 5130 is broader in scope because it applies to all IPO securities, not just the ones that perform well after their debut. This change means that broker-dealersA person or firm engaged in the business of buying and selling securities for the account of others or for its own account. must follow the allocation restrictions for every new issue, regardless of how the stock performs once it starts trading.

However, Rule 5130 also provides some practical relief compared to the old system. It includes a de minimis exemptionA regulatory exception that allows limited participation in restricted activities when the involvement falls below specified minimal thresholds. that allows small amounts of restricted person participation, and it defines "restricted persons Restricted persons Restricted persons are individuals or entities prohibited or limited from participating in certain hedge fund investments due to regulatory restrictions, particularly FINRA Rules 5130 and 5131 regarding new issues, including financial industry personnel and their family members. " more narrowly than the previous interpretation did. At the same time, the new rule provides fewer total exceptions, making the overall framework more restrictive in some ways. The rule also creates standardized recordkeeping requirements, so firms must maintain detailed documentation to prove they are following the allocation restrictions.

FINRA created two main rules, known together as the New Issues Rules, to prevent unfair practices in IPO allocations. These rules work as a team to address different but related problems in the market.

Rule 5130 tackles the core fairness issue in IPOs. It prevents broker-dealers from using their privileged position to keep profitable new stock offerings for themselves or their most valuable clients. Without this rule, brokers could essentially guarantee themselves profits by allocating shares in successful IPOs only to accounts that generate significant business for the firm.

Rule 5131 FINRA Rule 5131 FINRA Rule 5131 (Anti-Spinning Rule) prohibits broker-dealers from allocating new issues to executive officers and directors of public companies and certain covered non-public companies as a reward for investment banking business, a practice known as "spinning." addresses a separate but related practice called "spinning." In spinning arrangements, broker-dealers allocate IPO shares to corporate executives and decision-makers at companies. In return, these executives steer their company's investment banking business—such as future IPOs, debt offerings, or merger advisory work—to the broker-dealer. This creates a quid pro quo relationship that can compromise the fairness of both IPO allocation and investment banking competition.

FINRA recognizes that strict application of these rules could create impractical compliance burdens, particularly for investment funds with diverse investor bases. To address this concern, the regulator has established de minimis exemptions that provide meaningful operational relief.

Under Rule 5130, accounts where restricted persons own 10% or less of the beneficial interestEconomic ownership or stake in an investment, including any right to share in gains, losses, or distributions, regardless of legal title. can still receive new issue allocations. Rule 5131 provides a more generous threshold, allowing allocations to accounts where restricted persons own 25% or less of the beneficial interest. These exemptions enable funds with mixed investor bases to participate in IPO allocations without requiring complete segregation of restricted and non-restricted investors.

Additionally, FINRA permits a practice called "journalingThe practice of transferring securities between different accounts through internal book entries at current market prices rather than through actual purchase and sale transactions, commonly used for managing IPO allocations." for new issue shares. This allows firms to transfer shares between different accounts through journal entries on their books rather than through actual purchase and sale transactions. However, these journal transfers must occur at the current market price of the shares, not at the original IPO price. This flexibility helps firms manage their new issue allocations more efficiently while maintaining compliance with the underlying restrictions.

These rules create substantial compliance burdens for hedge funds that want to participate in IPO allocations. Funds must navigate several complex requirements to remain in compliance.

First, hedge funds must determine whether each of their investors qualifies as a "restricted person" under the rules. This classification affects whether the fund can receive IPO allocations on behalf of those investors. Second, funds must calculate what percentage of their total assets comes from restricted persons, since this percentage determines their eligibility for certain exemptions.

Third, when funds do receive new issue allocations, they must ensure that any profits from those investments flow only to eligible investors who are not restricted persons. Finally, funds must maintain comprehensive records that demonstrate their compliance with all aspects of the rules.

Most hedge funds address these challenges through one of several operational approaches. Some maintain segregated books and records, creating separate accounting systems that track new issue profits independently from other fund activities. Others include special allocation provisions in their fund documents that allow them to distribute new issue profits differently from other investment gains.

Many funds also require new issue restriction representations from their investors, asking each investor to certify their status as either restricted or non-restricted. Some funds create entirely separate investment vehicles dedicated to new issue investing, allowing them to accept only eligible investors in those funds.

Although the New Issues Rules technically apply only to FINRA members—primarily broker-dealers—they have significant indirect effects on private investment funds. This occurs because broker-dealers are required to obtain annual representations from their account holders regarding their restricted person status.

Many contractual arrangements between private funds and their executing brokers include indemnification provisionsContractual terms that allocate responsibility for losses and protect parties from certain liabilities.. These clauses require the private fund to compensate the broker for any losses that result from violations of the New Issues Rules. This creates a strong incentive for private funds to maintain compliance even though they are not directly subject to FINRA jurisdiction.

Furthermore, regulatory authorities retain the theoretical ability to pursue enforcement actions against private funds for market manipulation if their new issue activities violate broader securities laws. While such enforcement actions are rare, the possibility creates additional compliance incentives for private fund managers.

FINRA continues to refine the New Issues Rules as market conditions evolve. On July 23, 2025, the regulator expanded the exemptions to include business development companiesA type of closed-end investment company that invests in small and mid-sized businesses, subject to specific regulatory requirements under the Investment Company Act. (BDCs). Under this amendment, BDCs are now exempt from both Rules 5130 and 5131(b), provided that the BDC was not formed or maintained specifically to circumvent the new issues restrictions.

This exemption applies to all types of BDCs, including non-traded BDCs, private BDCs, and publicly traded BDCs. The change is designed to facilitate capital formationThe process by which businesses and other entities raise funds from investors to finance their operations and growth. while preserving the market integrity protections that the rules were designed to create. FINRA justified this exemption by noting that BDCs are already subject to extensive regulation under the Investment Company Act of 1940 Investment Company Act of 1940 The Investment Company Act of 1940 is a U.S. law that regulates companies whose main business involves investing in securities. Hedge funds typically use special exemptions under Sections 3(c)(1) or 3(c)(7) to avoid having to register under this law, which allows them to maintain the flexibility they need for their investment strategies and fee structures. , including investment limitations that naturally restrict their exposure to new issues.