FINRA Adopts Exemption From FINRA Rules 5130 and 5131 for Business Development Companies — FINRA — US

Notice Type
X Rule Amendment
Suggested Routing
X Corporate Finance
X Legal
X Operations
X Registered Representatives
X Senior Management
Key Topics
X Business Development
Companies
X New Issue Allocations and
Distributions
X Restrictions on the Purchase and Sale of Initial Equity Public Offerings Referenced Rules & Notices X FINRA Rule 5130 X FINRA Rule 5131 Business Development Companies FINRA Adopts Exemption From FINRA Rules 5130 and 5131 for Business Development Companies Effective Date: July 23, 2025 Summary FINRA has 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). The amendments maintain the integrity of the public offering process while facilitating vibrant capital markets by expanding access to initial public offerings (IPOs) through a highly regulated entity. The amendments will become effective on July 23, 2025. The text of the rule change is set forth in Attachment A. Questions concerning this Notice should be directed to:
X Afshin Atabaki, Vice President and Associate General Counsel, Office of General Counsel (OGC), by email or (202) 728-8902; X Ilana Herscovitz Reid, Associate General Counsel, OGC, by email or (202) 728-8268; or X Britny Auletti, Assistant General Counsel, OGC, by email or (212) 858-4039. Background & Discussion Rule 5130 protects the integrity of the public offering process. Except as otherwise permitted under the rule, a member or a person associated with a member, may not sell a new issue to an account in which a restricted person has a beneficial interest; a member or an associated person may not purchase a new issue in any account in which such member or associated person has a beneficial interest; and a member may not continue to hold new issues acquired as an underwriter, selling group member or otherwise.1 Further, before selling a new issue to 1 Regulatory Notice 25-08 July 23, 2025

any account, a member must in good faith have obtained within the 12 months before the sale, a representation from 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 Rule 5130. Rule 5131 addresses conflicts and abuses in the allocation and distribution of new issues, including prohibiting the practice of “spinning,” which is the allocation of new issues by a member firm to an account in which a covered person that is the member firm’s current, former or prospective investment banking client has a beneficial interest.2 There are several general exemptions under Rule 5130(c), and, by reference, Rule 5131(b)(2). These include, for example, general exemptions for an investment company registered under the Investment Company Act of 1940 (Investment Company Act), and for a publicly traded entity listed on a national securities exchange. Traded BDCs are subject to the general exemption for publicly traded entities, but there is not currently a general exemption for non-traded or private BDCs.3 Unless a general exemption applies,4 non-traded and private BDCs would be required to represent that they are eligible to purchase new issues, which may not be feasible due to their size and operational structure. FINRA has amended Rules 5130 and 5131 to create a general exemption for nontraded and private BDCs. The categorical exemption would apply to a BDC, as that term is defined in Section 2(a)(48) of the Investment Company Act, provided that for purposes of this exemption, the BDC is not formed or maintained for the specific purpose of permitting restricted persons to invest in new issues.5 The categorical exemption for publicly traded entities would continue to apply to traded BDCs. This new exemption will treat non-traded and private BDCs more similarly to investment companies registered under the Investment Company Act and to traded BDCs, for which there are general exemptions.6 It will enable BDCs to more easily diversify their portfolios with new issues to the extent that such investments are consistent with all other applicable regulations.7 By expanding access to IPOs through a highly regulated entity, the exemption maintains the integrity of the public offering process while facilitating vibrant capital markets.8 Effective Date The amendments will become effective on July 23, 2025.9 2 Regulatory Notice 25-08 July 23, 2025

1 The term “new issue” is defined as “any initial public offering 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 a number of exceptions. See Rule 5130(i)(9). This term has the same meaning for purposes of Rule 5131. The term “restricted person” includes “members or other broker-dealers,” “broker-dealer personnel,” “finders and fiduciaries,” “portfolio managers,” and “persons owning a broker-dealer,” as those terms are defined in Rule 5130(i)(10)(A)-(E). The term “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. See Rule 5130(i)(1). This term has the same meaning for purposes of Rule 5131. 2 The term “covered person” refers to an executive officer or director of a public company or a covered non-public company, or a person materially supported by such executive officer or director. See Rule 5131(b)(1). 3 As used herein, “traded BDC” refers to a BDC with registered shares under the Securities Act of 1933 (Securities Act) that is publicly traded on a national securities exchange, “non-traded BDC” refers to a BDC with registered shares under the Securities Act that is not publicly traded, and “private BDC” refers to a BDC that is offered in a private placement. For purposes of this Notice, the term “BDC” refers generally to all types of BDCs. The exemption under Rule 5130(c)(5) for publicly traded entities would apply to traded BDCs. Endnotes 4 A non-traded or private BDC may rely on the 10 percent de minimis exemption under Rule 5130(c)(4) or the 25 percent de minimis exemption under Rule 5131(b)(2) if they have collected restricted person and covered person information for their investors. However, due to their size and operational structure, FINRA believes that they may have difficulties determining whether restricted persons and covered persons meet the rules’ thresholds. 5 FINRA has also made a conforming change to Rule 5130(c)(6)(C) to add “or maintained” to make clear that under the exemption for investment companies organized under the laws of a foreign jurisdiction, the investment company cannot be formed or maintained for the specific purpose of permitting restricted persons to invest in new issues. 6 See Rule 5130(c)(1) and (c)(5). 7 Section 55(a) of the Investment Company Act requires at least 70 percent of the assets held by BDCs (other than non-investment assets used to conduct the BDC’s operations) to be in specified assets. Thus, only 30 percent of BDC assets can potentially be invested in new issues. 8 As part of the FINRA Forward initiative, FINRA published Regulatory Notice 25-06 (March 2025) requesting comment on modernizing its rules, guidance and processes to further facilitate capital formation. FINRA will continue to review the comments received in connection with that Notice, including any comments
related to Rules 5130 and 5131. 9 See Securities Exchange Act Release No. 103334 (June 26, 2025), 90 FR 28835 (July 1, 2025) (Order Approving File No. SR-FINRA-2025-001). Regulatory Notice 3 July 23, 2025 25-08 ©2025. FINRA. All rights reserved. Regulatory Notices attempt to present information to readers in a format that is easily understandable. However, please be aware that, in case of any misunderstanding, the rule language prevails.

Attachment A
New language is underlined; deletions are in brackets.

5000. SECURITIES OFFERING AND TRADING STANDARDS AND
PRACTICES
5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

5130. Restrictions on the Purchase and Sale of Initial Equity Public Offerings
(a) through (b) No Change.
(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) through (5) No Change.
(6) An investment company organized under the laws of a foreign jurisdiction, provided that:
(A) through (B) No Change.
(C) the investment company was not formed or maintained for the specific purpose of permitting restricted persons to invest in new issues; (7) through (9) No Change. (10) A tax exempt charitable organization under Section 501(c)(3) of the Internal Revenue Code; [or] (11) A church plan under Section 414(e) of the Internal Revenue Code[.]; or

(12) A business development company as that term is defined in Section 2(a)(48) of the Investment Company Act provided that the business development company was not formed or maintained for the specific purpose of permitting restricted persons to invest in new issues. (d) through (j) No Change.
5131. New Issue Allocations and Distributions
(a) No Change.
(b) Spinning
(1) No Change.
(2) The prohibitions in this paragraph shall not apply to allocations of shares of a new issue to any account described in Rule 5130(c)(1) through (3) and (5) through ([11]12), or to any other account in which the beneficial interests of executive officers and directors of the company and persons materially supported by such executive officers and directors in the aggregate do not exceed 25% of such account. (c) through (f) No Change.