On March 20, 2025, the Financial Industry Regulatory Authority, Inc. (FINRA) filed a proposed rule change with the US Securities and Exchange Commission (SEC) to exempt certain 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 The proposal, which is directed at FINRA’s current prohibitions on allocating initial public offerings (IPOs) to certain “restricted” persons, aims to expand the access to IPOs for non-traded BDCs and promote capital formation.
1. Rule 5130
Currently, Rule 5130 ensures the integrity of IPOs and prevents industry insiders from benefiting at the expense of public investors through a registered broker-dealer that has been engaged to distribute the IPO. Specifically, Rule 5130 generally 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.
2. Rule 5131
Currently, Rule 5131 addresses conflicts and abuses in the allocation and distribution of new issues. Specifically, paragraph (b) of Rule 5131 prohibits the practice of “spinning,” which is generally the allocation of new issues by a broker-dealer to an account in which the broker-dealer’s current, former, or prospective investment banking client has a beneficial interest.
3. Proposed Changes to Rules 5130 and 5131
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. Unless a general exemption applies to BDCs, the broker-dealers distributing a new issue may request that the BDC represent that they are eligible to purchase the new issue and confirm that the shares will not be allocated to any account in which a “restricted person” (as defined in FINRA Rule 5130(i)(10)) has a beneficial interest. This representation may not always be feasible based on the size, operational structure, and investor make-up of the BDC.
Since traded BDCs are generally captured by the existing exemption for publicly traded entities, the proposed rule change filed by FINRA would exempt non-traded BDCs from the restrictions described above and therefore allow investors in non-traded BDCs to more easily access new issues. FINRA’s rationale for this proposal is to recognize the unique characteristics of BDCs, which are designed to provide capital to small and mid-sized businesses, and also acknowledge that BDCs are already subject to specific regulatory requirements under the Investment Company Act.
Once approved by the SEC, the exemption would allow non-traded BDCs to diversify their portfolio more easily and promote capital formation without compromising the integrity of the IPO process.
Eversheds Sutherland’s Thoughts
While this proposal would exempt non-traded BDCs from the restrictions in Rules 5130 and 5131, private BDCs are not covered and would still be subject to the same “restricted person” representations and/or attestations requested by broker-dealers distributing new issues. In addition, certain other types of alternative investment funds, such as interval funds and other closed-end funds, would not be covered by the proposed rule and may not qualify for one of the existing exemptions, which means they would likely be subject to the full scope of FINRA Rules 5130 and 5131.
FINRA’s proposal was open for comment until April 21, 2025, and they received two comment letters from industry trade groups, both of which were generally supportive of the proposal. SEC action on the rule proposal is anticipated no later than May 15, 2025.
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1 See SR-FINRA-2025-001 Proposed Rule Change to Exempt Certain Business Development Companies from FINRA Rules 5130 and 5131, available at: https://www.finra.org/rules-guidance/rule-filings/sr-finra-2025-001
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