FINRA Moves to Improve BDCs’ Access to IPOs, Broadening Investor Pool

In response to comments, the Financial Industry Regulatory Authority announced an amendment to a recent proposal, signaling a shift in how business development companies and their investors interact with initial public offerings, or IPOs.

The revised proposal aims to exempt all BDCs from FINRA Rules 5130 and 5131(b), provided the BDC was not specifically established to enable “restricted persons” to invest in new issues.

Restricted persons may include FINRA member firms, their associated persons, and certain other individuals or entities with affiliations to the financial industry.

This proposal, originally filed with the U.S. Securities and Exchange Commission in March 2025, reflects FINRA’s responsiveness to industry feedback and a broader effort to align regulations.

FINRA Rules 5130 and 5131(b) are designed to safeguard the public offering process:

• FINRA Rule 5130/Restrictions on the Purchase and Sale of Initial Equity Public Offerings: This rule generally prohibits broker-dealers from selling new issue equity securities to, or purchasing them for, restricted persons or accounts in which restricted persons have a beneficial interest. The aim is to prevent industry insiders from gaining an unfair advantage in highly anticipated IPOs and ensure a legitimate public offering at the stated price.
• FINRA Rule 5131(b)/New Issue Allocations and Distributions – Spinning): Spinning is when a member firm allocates new issue shares to an account in which an executive officer or director of a public or covered non-public company (especially one that is a current, former, or prospective investment banking client of the firm) has a beneficial interest. The rule seeks to prevent quid pro quo arrangements where IPO allocations are used to reward or curry favor with potential clients.

Why the Exemption for BDCs?

BDCs typically provide debt and equity financing to small and mid-sized businesses, many of which may struggle to secure traditional bank loans or other forms of capital.

Prior to the proposed exemption, many BDCs, particularly non-traded and private BDCs, fell under the restricted person definition in Rule 5130 due to their affiliations with broker-dealers and investment managers. This status effectively barred them from participating in IPOs, limiting their investment opportunities and potentially hindering their ability to diversify their portfolios.

Publicly traded BDCs already enjoy an exemption under the existing framework of Rule 5130. The initial FINRA proposal aimed to extend this similar treatment to non-traded BDCs. However, in response to comments, notably from the Investment Company Institute, FINRA has now broadened the proposed exemption to encompass all BDCs, including private BDCs.

The ICI advocated for the broader exemption, citing similarities between non-traded and private BDCs. They argued that it is often “difficult, if not impossible” for these entities to satisfy the representation requirements of Rules 5130 and 5131.

FINRA generally agreed with the ICI’s stance, recognizing that extending the exemption to private BDCs would not undermine the integrity of the public offering process. This is largely because BDCs, regardless of their public or private nature, are subject to extensive regulation under the Investment Company Act of 1940, including stringent investment limitations.

By exempting all BDCs, FINRA aims to: expand the investor base for IPOs; promote portfolio diversification for BDCs; align with SEC treatment; and enhance investor access. Ultimately, the move will benefit investors in both non-traded and private BDCs by providing their funds with more investment avenues.

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