New issues

New issues, as defines them, are initial public offerings (IPOs) of equity securities. These offerings must be made under a or filed with regulators. However, the definition has important limitations. It excludes many types of securities offerings, including that are exempt from registration, convertible bonds and preferred stock, (SPACs), to existing shareholders, , investment-grade , 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 "." 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 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 that allows small amounts of restricted person participation, and it defines "" 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.

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 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 "" 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 . 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 (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 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 , including investment limitations that naturally restrict their exposure to new issues.