On March 20, 2025, the Financial Industry Regulatory Authority (FINRA) proposed amendments to its rules imposing restrictions on the purchase and sale of equity securities offered in initial public offerings (IPOs) (Rule 5130) and new issue allocations and distributions (Rule 5131) to exempt business development companies (BDCs) from the rules’ prohibitions.
Currently, non-traded (and private) BDCs fall under the definition of “restricted persons” under Rule 5130 so they cannot purchase shares in IPOs due to their affiliations with broker-dealers and investment managers. The proposed changes to Rule 5130 would expand the pool of investors that can participate in IPOs by exempting non-traded BDCs from the rule’s application, treating such entities similarly to publicly-traded BDCs and registered investment companies. Publicly-traded BDCs are already exempt from the prohibition under the existing text of Rule 5130. The proposed amendments would not apply to private BDCs. The proposed modifications to Rule 5131 would permit IPO allocations in some circumstances to non-traded BDCs even if such BDCs have relationships with the investment bank involved in the IPO (known as “spinning” restrictions).
The proposed changes seek to align FINRA rules with the Securities and Exchange Commission’s treatment of BDCs and recognition of their role as capital providers to small to medium-sized businesses. Comments on the proposal must be submitted on or before 21 days from publication in the Federal Register, and, if approved, the amendments could go into effect by year-end. A link to the text of the proposed rule is available here.
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