Who Is a Restricted Person Under FINRA Rule 5130?

A restricted person under FINRA Rule 5130 is anyone who falls into one of five insider categories: broker-dealers and their personnel, finders and fiduciaries connected to an underwriter, portfolio managers with authority over institutional accounts, owners of broker-dealers above set thresholds, and the immediate family members of anyone in those groups. If you are a restricted person, a FINRA member firm cannot sell you shares of a covered IPO, and you cannot buy those shares for any account in which you hold a beneficial interest.¹ The rule is designed to keep industry insiders from capturing the first-day gains that IPOs frequently produce.

Broker-Dealers and Their Personnel

The first and broadest category is the broker-dealer industry itself. Every FINRA member firm and any other broker-dealer is restricted, as is essentially anyone associated with one: officers, directors, general partners, employees, and agents engaged in the investment banking or securities business. Drawing a paycheck from a broker-dealer in almost any capacity is enough to trigger the rule.¹

The one carve-out is for personnel of a “limited business broker-dealer,” meaning a firm whose activities are confined to selling investment company shares, variable contracts, and direct participation programs. Because those firms do not participate in IPO underwriting or allocation, their employees are not restricted.¹

Finders and Fiduciaries Tied to an Underwriter

A finder is someone paid to identify potential investors in an offering. A fiduciary is someone acting in an advisory capacity to the managing underwriter, including attorneys, accountants, and financial consultants. Both are restricted only with respect to the specific offering they are connected to, not IPOs generally. What makes them restricted is their access to nonpublic information about the deal or their ability to influence how shares get allocated.¹

Portfolio Managers

Anyone with authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser, or collective investment account is a restricted person. The rule captures the power to steer institutional capital into an IPO, which creates an inherent conflict of interest. This restriction applies regardless of whether the portfolio manager has any relationship with the underwriter.¹

Owners of Broker-Dealers

People who hold a meaningful equity stake in a broker-dealer are restricted, and the rule uses several thresholds tied directly to the ownership disclosures firms file on Form BD.

Anyone listed (or required to be listed) on Schedule A of Form BD is restricted unless their ownership code is below 10%. Schedule A captures a firm’s direct owners.
Anyone on Schedule B is restricted unless their listing traces to an ownership interest in a Schedule A person with a code below 10%. Schedule B captures indirect owners.
If a public reporting company is listed on Schedule A, anyone owning 10% or more of that company is restricted; for a public company on Schedule B, the threshold is 25%. Neither ownership test applies if the public company is listed on a national securities exchange.

Sovereign entities are carved out of this category. A sovereign nation, and any investment fund owned or controlled by one and created to invest on its behalf, is not treated as restricted simply because it owns a stake in a broker-dealer.¹

Immediate Family Members

To stop restricted persons from routing IPO purchases through relatives, the rule extends to immediate family members in defined situations. “Immediate family member” means parents, in-laws (mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law), spouse, siblings, and children, plus anyone else the restricted person provides material support to.¹

“Material support” means providing, directly or indirectly, more than 25% of a person’s income during the prior calendar year. Family members living in the same household are automatically deemed to provide material support to each other, with no income calculation needed.¹

For family members of broker-dealer personnel, restriction kicks in under any of three conditions: the restricted person materially supports (or receives material support from) the family member; the family member buys the IPO through the restricted person’s employer or an affiliate; or the restricted person can control the allocation of the specific new issue. For family members of finders, fiduciaries, and portfolio managers, only the material support test applies.¹

A sibling who lives independently, earns their own income, and buys through an unrelated brokerage is generally free to purchase IPO shares even if their brother works on a trading desk. The restriction attaches when there is a financial or transactional link between the two.

When a Fund or Entity Is Treated as Restricted

Restricted persons cannot get around the rule by pooling money into a partnership, trust, or fund. Any account in which restricted persons collectively hold more than 10% of the beneficial interests is itself treated as a restricted account. If their combined ownership or profit-sharing interest stays at 10% or below, the account can participate in IPOs.¹

A “beneficial interest” means any direct or indirect economic stake in the account, including the right to share in profits or losses. For hedge funds and investment partnerships, that requires adding up the capital commitments or profit allocations attributable to restricted persons and comparing the total to the 10% threshold.

When restricted investors exceed 10%, a fund can still participate through a carve-out mechanism. A broker-dealer organized as an investment partnership may purchase IPO shares at the public offering price so long as the shares are credited only to the capital accounts of partners whose interests comply with the 10% rule. The fund administrator segregates restricted investors’ capital so it does not share in IPO allocations.¹ If a restricted person has a controlling interest in an entity, or is the grantor or primary beneficiary of a trust, the whole entity is likely restricted regardless of the 10% math, because the restricted person can direct its investment decisions.

Certain institutional accounts sit outside these calculations altogether. Registered investment companies, ERISA plans not sponsored solely by a broker-dealer, state and municipal government plans, church plans, 501(c)(3) charities, publicly traded companies, qualifying insurance company accounts, qualifying foreign investment companies, and, as of July 2025, business development companies not formed to give restricted persons IPO access, are all treated as eligible even when insiders are involved with the institution.¹²

Which Offerings the Rule Actually Applies To

Being a restricted person only matters if the offering itself is a “new issue” under the rule. Rule 5130 defines a new issue as an IPO of an equity security sold through a registration statement or offering circular, and the definition is narrower than most investors expect.¹ The following offerings are excluded, so restricted persons can buy them without violating the rule:

Private placements under Regulation D, Regulation S, or Rule 144A.
Government bonds and municipal securities.
Preferred stock and convertible securities.
Rights offerings and exchange offers, including those tied to a merger or acquisition.
Investment grade asset-backed securities.
Foreign securities and ADRs that already trade on a foreign exchange.
Mutual fund and ETF shares under the Investment Company Act.
SPACs, BDCs, REITs, and direct participation programs.

What Rule 5130 actually targets is the common-stock IPO offered to U.S. investors for the first time. Everything else is fair game regardless of the buyer’s status.

The Anti-Dilution Carve-Out

A restricted person who already owns pre-IPO stock in a company going public does not have to accept forced dilution. Rule 5130 lets restricted persons buy IPO shares when four conditions are all met:¹

The account has held an equity stake in the issuer, or in a company the issuer acquired within the past year, for at least one year before the offering’s effective date.
The purchase does not push the account’s percentage ownership above the level it held three months before the registration statement was filed.
The shares are bought on the same terms available to any other investor.
The IPO shares acquired this way cannot be sold, transferred, pledged, or otherwise disposed of for three months after the effective date.

This matters most for venture capital investors, angel investors, and early employees who happen to also work for a broker-dealer or manage institutional portfolios. Without the carve-out, their industry status would cost them ownership every time one of their portfolio companies went public.

How a Broker-Dealer Confirms Your Status

Before selling any IPO shares to an account, a broker-dealer must obtain a written representation that the account is eligible under the rule, and that representation must have been collected within the previous 12 months. For accounts held by beneficial owners, the representation comes from the account holder. For accounts held through intermediaries such as banks, foreign banks, or investment advisers, the intermediary confirms that all purchases comply.¹

A broker-dealer cannot rely on a representation it believes, or has reason to believe, is inaccurate. If the firm knows an account holder just started working at another broker-dealer, a six-month-old questionnaire is not a shield. Records supporting eligibility must be kept for at least three years after the last IPO sale to that account.¹ In practice, most firms handle this with a new-account questionnaire and annual recertification, and some require an updated response whenever ownership or control of the account changes.

Consequences of a Violation

FINRA’s Sanction Guidelines set the standard penalty for an individual involved in an improper IPO sale or purchase at a fine of $2,500 to $20,000 and a suspension of 10 business days to two months. When aggravating factors are present, such as false statements about eligibility or a deliberate scheme to route shares to restricted accounts, the suspension can extend up to two years or become a permanent bar.³ Disgorgement of IPO profits is a routine outcome: if a restricted person received shares they should not have received, FINRA typically requires the gains to be surrendered.

How Rule 5131 Differs

Rule 5130 is often confused with FINRA Rule 5131, because both restrict who can receive IPO allocations. The distinction matters. Rule 5130 keeps securities industry insiders out of IPOs. Rule 5131 stops broker-dealers from using IPO shares as bribes to win corporate business, a practice known as “spinning.”

Under Rule 5131, a broker-dealer cannot allocate new issues to accounts in which an executive officer or director of a public company (or a “covered non-public company” meeting certain size thresholds) has a beneficial interest, when the company is a current investment banking client, was a client within the past 12 months, or is expected to hire the firm within the next three months.⁴ A CEO of a public manufacturing company is not a restricted person under Rule 5130 if she has no broker-dealer ties, but she could easily be a covered person under Rule 5131 if her company is shopping for an underwriter. The two rules work together: 5130 turns on who you are in the industry, 5131 on what business relationship creates the conflict.

1
FINRA. FINRA Rule 5130 – Restrictions on the Purchase and Sale of Initial Equity Public Offerings
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Financial Industry Regulatory Authority. Regulatory Notice 25-08 – FINRA Adopts Exemption From FINRA Rules 5130 and 5131 for Business Development Companies
3
FINRA. FINRA Sanction Guidelines
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FINRA. FINRA Rule 5131 – New Issue Allocations and Distributions