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5130. Restrictions on the Purchase and Sale of Initial Equity Public Offerings


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(a) General Prohibitions
(1) A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.
(2) A member or a person associated with a member may not purchase a new issue in any account in which such member or person associated with a member has a beneficial interest, except as otherwise permitted herein.
(3) A member may not continue to hold new issues acquired by the member as an underwriter, selling group member or otherwise, except as otherwise permitted herein.
(4) Nothing in this paragraph (a) shall prohibit:
(A) sales or purchases from one member of the selling group to another member of the selling group that are incidental to the distribution of a new issue to a non-restricted person at the public offering price;
(B) sales or purchases by a broker-dealer of a new issue at the public offering price as part of an accommodation to a non-restricted person customer of the broker-dealer; or
(C) purchases by a broker-dealer (or owner of a broker-dealer), organized as an investment partnership, of a new issue at the public offering price, provided such purchases are credited to the capital accounts of its partners in accordance with paragraph (c)(4).
(b) Preconditions for Sale
Before selling a new issue to any account, a member must in good faith have obtained within the twelve months prior to such sale, a representation from:
(1) Beneficial Owners
the account holder(s), or a person authorized to represent the beneficial owners of the account, that the account is eligible to purchase new issues in compliance with this Rule; or
(2) Conduits
a bank, foreign bank, broker-dealer, or investment adviser or other conduit that all purchases of new issues are in compliance with this Rule.
A member may not rely upon any representation that it believes, or has reason to believe, is inaccurate. A member shall maintain a copy of all records and information relating to whether an account is eligible to purchase new issues in its files for at least three years following the member's last sale of a new issue to that account.
(c) General Exemptions
The general prohibitions in paragraph (a) of this Rule shall not apply to sales to and purchases by the following accounts or persons, whether directly or through accounts in which such persons have a beneficial interest:
(1) An investment company registered under the Investment Company Act;
(2) A common trust fund or similar fund as described in Section 3(a)(12)(A)(iii) of the Exchange Act, provided that:
(A) the fund has investments from 1,000 or more accounts; and
(B) the fund does not limit beneficial interests in the fund principally to trust accounts of restricted persons;
(3) An insurance company general, separate or investment account, provided that:
(A) the account is funded by premiums from 1,000 or more policyholders, or, if a general account, the insurance company has 1,000 or more policyholders; and
(B) the insurance company does not limit the policyholders whose premiums are used to fund the account principally to restricted persons, or, if a general account, the insurance company does not limit its policyholders principally to restricted persons;
(4) An account if the beneficial interests of restricted persons do not exceed in the aggregate 10% of such account;
(5) A publicly traded entity (other than a broker-dealer or an affiliate of a broker-dealer where such broker-dealer is authorized to engage in the public offering of new issues either as a selling group member or underwriter) that:
(A) is listed on a national securities exchange; or
(B) is a foreign issuer whose securities meet the quantitative designation criteria for listing on a national securities exchange;
(6) An investment company organized under the laws of a foreign jurisdiction, provided that:
(A) the investment company is listed on a foreign exchange for sale to the public or authorized for sale to the public by a foreign regulatory authority; and
(B) no person owning more than 5% of the shares of the investment company is a restricted person;
(7) An Employee Retirement Income Security Act benefits plan that is qualified under Section 401(a) of the Internal Revenue Code, provided that such plan is not sponsored solely by a broker-dealer;
(8) A state or municipal government benefits plan that is subject to state and/or municipal regulation;
(9) A tax exempt charitable organization under Section 501(c)(3) of the Internal Revenue Code; or
(10) A church plan under Section 414(e) of the Internal Revenue Code
(d) Issuer-Directed Securities
The prohibitions on the purchase and sale of new issues in this Rule shall not apply to securities that:
(1) are specifically directed by the issuer to persons that are restricted under the Rule; provided, however, that securities directed by an issuer may not be sold to or purchased by:
(A) a broker-dealer; or
(B) an account in which any restricted person specified in paragraphs (i)(10)(B) or (i)(10)(C) of this Rule has a beneficial interest, unless such person, or a member of his or her immediate family, is an employee or director of the issuer, the issuer's parent, or a subsidiary of the issuer or the issuer's parent. Also, for purposes of this paragraph (d)(1) only, a parent/subsidiary relationship is established if the parent has the right to vote 50% or more of a class of voting security of the subsidiary, or has the power to sell or direct 50% or more of a class of voting security of the subsidiary;
(2) are specifically directed by the issuer and are part of an offering in which no broker-dealer:
(A) underwrites any portion of the offering;
(B) solicits or sells any new issue securities in the offering; and
(C) has any involvement or influence, directly or indirectly, in the issuer's allocation decisions with respect to any of the new issue securities in the offering;
(3) are part of a program sponsored by the issuer or an affiliate of the issuer that meets the following criteria:
(A) the opportunity to purchase a new issue under the program is offered to at least 10,000 participants;
(B) every participant is offered an opportunity to purchase an equivalent number of shares, or will receive a specified number of shares under a predetermined formula applied uniformly across all participants;
(C) if not all participants receive shares under the program, the selection of the participants eligible to purchase shares is based upon a random or other non-discretionary allocation method; and
(D) the class of participants does not contain a disproportionate number of restricted persons as compared to the investing public generally; or
(4) are directed to eligible purchasers who are otherwise restricted under the Rule as part of a conversion offering in accordance with the standards of the governmental agency or instrumentality having authority to regulate such conversion offering.
(e) Anti-Dilution Provisions
The prohibitions on the purchase and sale of new issues in this Rule shall not apply to an account in which a restricted person has a beneficial interest that meets the following conditions:
(1) the account has held an equity ownership interest in the issuer, or a company that has been acquired by the issuer in the past year, for a period of one year prior to the effective date of the offering;
(2) the sale of the new issue to the account shall not increase the account's percentage equity ownership in the issuer above the ownership level as of three months prior to the filing of the registration statement in connection with the offering;
(3) the sale of the new issue to the account shall not include any special terms; and
(4) the new issue purchased pursuant to this paragraph (e) shall not be sold, transferred, assigned, pledged or hypothecated for a period of three months following the effective date of the offering.
(f) Stand-by Purchasers
The prohibitions on the purchase and sale of new issues in this Rule shall not apply to the purchase and sale of securities pursuant to a stand-by agreement that meets the following conditions:
(1) the stand-by agreement is disclosed in the prospectus;
(2) the stand-by agreement is the subject of a formal written agreement;
(3) the managing underwriter(s) represents in writing that it was unable to find any other purchasers for the securities; and
(4) the securities sold pursuant to the stand-by agreement shall not be sold, transferred, assigned, pledged or hypothecated for a period of three months following the effective date of the offering.
(g) Under-Subscribed Offerings
Nothing in this Rule shall prohibit an underwriter, pursuant to an underwriting agreement, from placing a portion of a public offering in its investment account when it is unable to sell that portion to the public.
(h) Exemptive Relief
Pursuant to the Rule 9600 Series, the staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally exempt any person, security or transaction (or any class or classes of persons, securities or transactions) from this Rule to the extent that such exemption is consistent with the purposes of the Rule, the protection of investors and the public interest.
(i) Definitions
(1) "Beneficial interest" means any economic interest, such as the right to share in gains or losses. The receipt of a management or performance based fee for operating a collective investment account, or other fees for acting in a fiduciary capacity, shall not be considered a beneficial interest in the account.
(2) "Collective investment account" means any hedge fund, investment partnership, investment corporation or any other collective investment vehicle that is engaged primarily in the purchase and/or sale of securities. A "collective investment account" does not include a "family investment vehicle" or an "investment club."
(3) "Conversion offering" means any offering of securities made as part of a plan by which a savings and loan association, insurance company or other organization converts from a mutual to a stock form of ownership.
(4) "Family investment vehicle" means a legal entity that is beneficially owned solely by immediate family members.
(5) "Immediate family member" means a person's parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, and any other individual to whom the person provides material support.
(6) "Investment club" means a group of friends, neighbors, business associates or others that pool their money to invest in stock or other securities and are collectively responsible for making investment decisions.
(7) "Limited business broker-dealer" means any broker-dealer whose authorization to engage in the securities business is limited solely to the purchase and sale of investment company/variable contracts securities and direct participation program securities.
(8) "Material support" means directly or indirectly providing more than 25% of a person's income in the prior calendar year. Members of the immediate family living in the same household are deemed to be providing each other with material support.
(9) "New issue" means any initial public offering of an equity security as defined in Section 3(a)(11) of the Exchange Act, made pursuant to a registration statement or offering circular. New issue shall not include:
(A) offerings made pursuant to an exemption under Section 4(1), 4(2) or 4(6) of the Securities Act, or Securities Act Rule 504 if the securities are "restricted securities" under Securities Act Rule 144(a)(3), or Rule 144A or Rule 505 or Rule 506 adopted thereunder;
(B) offerings of exempted securities as defined in Section 3(a)(12) of the Exchange Act, and rules promulgated thereunder;
(C) offerings of securities of a commodity pool operated by a commodity pool operator as defined under Section 1a(5) of the Commodity Exchange Act;
(D) rights offerings, exchange offers, or offerings made pursuant to a merger or acquisition;
(E) offerings of investment grade asset-backed securities;
(F) offerings of convertible securities;
(G) offerings of preferred securities;
(H) offerings of an investment company registered under the Investment Company Act;
(I) offerings of securities (in ordinary share form or ADRs registered on Form F-6) that have a pre-existing market outside of the United States; and
(J) offerings of a business development company as defined in Section 2(a)(48) of the Investment Company Act, a direct participation program as defined in Rule 2310(a) or a real estate investment trust as defined in Section 856 of the Internal Revenue Code.
(10) "Restricted person" means:
(A) Members or other broker-dealers
(B) Broker-Dealer Personnel
(i) Any officer, director, general partner, associated person or employee of a member or any other broker-dealer (other than a limited business broker-dealer);
(ii) Any agent of a member or any other broker-dealer (other than a limited business broker-dealer) that is engaged in the investment banking or securities business; or
(iii) An immediate family member of a person specified in subparagraph (B)(i) or (ii) if the person specified in subparagraph (B)(i) or (ii):
a. materially supports, or receives material support from, the immediate family member;
b. is employed by or associated with the member, or an affiliate of the member, selling the new issue to the immediate family member; or
c. has an ability to control the allocation of the new issue.
(C) Finders and Fiduciaries
(i) With respect to the security being offered, a finder or any person acting in a fiduciary capacity to the managing underwriter, including, but not limited to, attorneys, accountants and financial consultants; and
(ii) An immediate family member of a person specified in subparagraph (C)(i) if the person specified in subparagraph (C)(i) materially supports, or receives material support from, the immediate family member.
(D) Portfolio Managers
(i) Any person who has authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment advisor or collective investment account.
(ii) An immediate family member of a person specified in subparagraph (D)(i) that materially supports, or receives material support from, such person.
(E) Persons Owning a Broker-Dealer
(i) Any person listed, or required to be listed, in Schedule A of a Form BD (other than with respect to a limited business broker-dealer), except persons identified by an ownership code of less than 10%;
(ii) Any person listed, or required to be listed, in Schedule B of a Form BD (other than with respect to a limited business broker-dealer), except persons whose listing on Schedule B relates to an ownership interest in a person listed on Schedule A identified by an ownership code of less than 10%;
(iii) Any person listed, or required to be listed, in Schedule C of a Form BD that meets the criteria of subparagraphs (E)(i) and (E)(ii) above;
(iv) Any person that directly or indirectly owns 10% or more of a public reporting company listed, or required to be listed, in Schedule A of a Form BD (other than a reporting company that is listed on a national securities exchange or other than with respect to a limited business broker-dealer);
(v) Any person that directly or indirectly owns 25% or more of a public reporting company listed, or required to be listed, in Schedule B of a Form BD (other than a reporting company that is listed on a national securities exchange or other than with respect to a limited business broker-dealer);
(vi) An immediate family member of a person specified in subparagraphs (E)(i) through (v) unless the person owning the broker-dealer:
a. does not materially support, or receive material support from, the immediate family member;
b. is not an owner of the member, or an affiliate of the member, selling the new issue to the immediate family member; and
c. has no ability to control the allocation of the new issue.
(j) Information Required to be Filed
The book-running managing underwriter of a new issue shall be required to file the following information in the time and manner specified by FINRA with respect to new issues:
(1) the initial list of distribution participants and their underwriting commitment and retention amounts on or before the offering date; and
(2) the final list of distribution participants and their underwriting commitment and retention amounts no later than three business days after the offering date.
Amended by SR-FINRA-2009-046 eff. Aug. 17, 2009.
Amended by SR-FINRA-2009-005 eff. Feb. 17, 2009.
Amended by SR-FINRA-2008-025 eff. Dec. 15, 2008.
Amended by SR-NASD-2006-074 eff. Sept. 5, 2007.
Amended by SR-NASD-2006-068 eff. July 1, 2006.
Amended by SR-NASD-2004-165 eff. Nov. 2, 2005.
Amended by SR-NASD-99-60 eff. March 23, 2004.

Selected Notices: 03-79, 05-65, 07-34, 08-57.

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