On November 5, 2019, the SEC approved amendments to FINRA Rules 5130 and 5131, which govern the offer and sale of "New Issue" securities (the "Rules"). (Under the Rules, "New Issue" means any initial public offering (IPO) of an equity security as defined in Section 3(a)(11) of the Securities Exchange Act of 1934 made pursuant to a registration statement or offering circular, subject to certain exceptions.) These amendments went into effect on January 1, 2020. In general, the amendments to the Rules broaden the categories of investors that are exempt from the Rules' restrictions. Therefore, additional types of investors may now be able to invest in New Issues directly and through their investments in private investment funds.
Private fund managers and broker-dealers should update their relevant forms, certifications, and policies and procedures to reflect these changes, some of which are summarized below.
FINRA Rule 5130 prohibits a broker-dealer from selling New Issues to accounts in which "Restricted Persons" have a beneficial interest. The term "Restricted Person" includes broker-dealers and their personnel, finders and fiduciaries in securities offerings, portfolio managers, persons owning a broker-dealer, and, in some cases, persons materially supported by, or the immediate family members of these persons. FINRA Rule 5131 restricts broker-dealers from selling New Issues to accounts that are beneficially owned by persons that are executive officers or directors of public companies and certain covered non-public companies having specified relationships with the broker-dealer, and persons materially supported by these persons.
Summary of Significant Changes
The amendments include the following changes:
What Should Private Funds, Managers and Broker-Dealers Do Now?
Firms should revise their new issues questionnaires and related documentation, as necessary, to reflect the changes to the Rules that became effective January 1.