Key Takeaways
- Prior to recent rule amendments, non-traded and private BDCs were, as a practical matter, largely unable to participate in IPOs.
- The recently adopted amendments create a categorical exemption for all BDCs to purchase new shares so long as they were not "formed or maintained for the specific purpose of permitting restricted persons to invest in new issues."
FINRA adopted amendments to exempt business development companies ("BDCs") from FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and from paragraph (b) (Spinning) of FINRA Rule 5131 (New Issue Allocations and Distributions) on July 23, 2025.1
FINRA Rules 5130 and 5131 operate to mitigate certain conflicts of interest and maintain market integrity when broker-dealers or their associated persons (together, "members") allocate and distribute new issues through an initial public offering ("IPO"). Among other things, FINRA Rule 5130 prohibits members from (1) selling new issues to accounts in which restricted persons2 have a beneficial interest; (2) purchasing new issues for their own accounts; or (3) continuing to hold new issues acquired by the member as underwriter. Similarly, FINRA Rule 5131 prohibits a member from allocating new issues to officers or directors of investment banking companies that are a current or prospective client of the member ("covered persons").
Both rules contain exemptions for a variety of entities, including allocations made to investment companies and publicly traded entities listed on a national securities exchange. Publicly traded BDCs qualified under the publicly traded entity exemption, but non-traded and private BDCs could only participate in IPOs if none of their investors were restricted persons or covered persons. Overcoming the financial and operational constraints of demonstrating eligibility was impractical for most non-traded and private BDCs.
With the recent adoption of amendments to Rules 5130 and 5131, which also became effective on July 23, 2025, BDCs are now included in the list of exempted entities, so long as the BDC "is not formed or maintained for the specific purpose of permitting restricted persons to invest in new issues."3 As a result, non-traded and private BDCs, in addition to publicly traded BDCs, are now permitted to participate in IPOs without having to demonstrate that their investors are not restricted persons or covered persons.
Footnotes
1 See FINRA Regulatory Notice 25-08.
2 Restricted persons include "members or other broker-dealers," "broker-dealer personnel," "finders and fiduciaries," "portfolio managers," and "persons owning a broker-dealer." See FINRA Rule 5130(i)(10)(A)-(E).
3 See FINRA Rule 5130(c)(12) and FINRA Rule 5131(b)(2).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
