8.6.1. For Initial Public Offerings
IPO securities must be offered to all public investors fairly. FINRA’s New Issue Rule is meant to protect the distribution of IPO securities from manipulation by securities industry insiders. In most cases, the New Issue Rule prohibits IPO securities from being distributed to any account in which any restricted person has a beneficial interest. Restricted persons include:
• Broker-dealers (whether involved in the IPO or not) and their employees
• Persons with a significant ownership interest in a broker-dealer
• Attorneys, accountants, financial consultants, finders, or anyone else acting in a fiduciary capacity to the lead underwriter
• Portfolio managers (persons with authority to buy or sell securities for a bank, insurance company, investment company, investment adviser, or collective investment account)
• Immediate family members of any of the above
The definition of family varies from one FINRA rule to another, but in this case an “immediate family member” is a parent, child, spouse, sibling, mother/father-in-law, brother/sister-in-law, son/daughter-in-law, any individual who is part of the same household, or any individual who received material support (more than 25% of income) from the person in the previous calendar year.
Example: Jenny is an employee of a broker-dealer. She is a receptionist at the firm and is not a registered representative. She would like to purchase shares in an IPO that she has recently heard about at her office. Unfortunately, the New Issue Rule would define Jenny as a “restricted person,” making her unable to take part in this transaction.
Of course, part of the normal underwriting process involves distribution participants briefly holding the securities, so that they can resell them to investors. The New Issue Ru