FINRA's rules relating to equity IPOs, on spinning and withholding and IPO allocations, which came into effect following the dot-com bust, were recently amended. The amendments to Rule 5130, relating to restrictions on the purchase and sale of initial equity public offerings, and Rule 5131, relating to IPO allocations and distributions, will become effective on January 1, 2020. FINRA issued Regulatory Notice 19-37 to provide guidance to member firms. The amendments, which are intended to modernize the rules and address practical and operational issues arising from the current rules, will require member firms to update their questionnaires and related policies and procedures. As detailed in the Regulatory Notice, the changes include, among other things, the following:

  • Alternative conditions to satisfy the foreign investment company exemption;
  • Exemptions for US and foreign employee retirement benefit planes meeting specified conditions;
  • Exclude foreign offerings (Reg S offerings), independent allocations to non-US persons by foreign non-member firms that participate in underwriting syndicates and in SPAC offerings;
  • Expand the "family investment vehicle" definition;
  • Exclude sovereign entities that own broker-dealers from the restricted persons under Rule 5130;
  • Clarified the provisions relating to issuer-directed securities;
  • Exclude specified transfers to family members from the Rule 5131 public announcement requirement relating to lock-up agreements; and
  • Codified guidance regarding the disclosure of a lock-up agreement release or waiver in a publicly filed registration statement.

A public announcement is required for a release of an IPO lock-up agreement for officers and directors at least two business days before the release or waiver except when the release or waiver is for a transfer that is not for consideration and where the transferee has agreed in writing to be bound by the same lock-up agreement terms. The exception has now been extended to transfers to "immediate family members" that agree in writing to the same lock-up terms. The rule amendments also codify the guidance that the public announcement requirement is satisfied to the extent that the release is disclosed in a publicly filed registration statement for a follow-on offering.

Originally published December 20, 2019

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