SIE Ready🚀 Securities Offerings · Lesson 6 of 6 · 6 min
Hot IPOs, Spinning and Muni Deals
🔥 Hot IPOs can jump 50% on day one. That is exactly why FINRA limits who in the industry gets a piece.
💡 Key idea
5130: no hot IPO shares for restricted persons (10% de minimis). 5131: no spinning. Munis use an official statement and competitive or negotiated underwriting.
🧠 Why it matters
FINRA RULE 5130 bars firms from selling new equity IPOs to accounts of RESTRICTED PERSONS: broker-dealer employees and their immediate family (if they share a household or support each other, or the employee works for the selling firm or controls the allocation), portfolio managers, finders and fiduciaries of the managing underwriter, and broker-dealer owners. An account is still eligible if restricted persons hold no more than 10% of it, and firms must get an eligibility representation within 12 months before the sale. RULE 5131 bans SPINNING: allocating IPO shares to executives or directors of a company to win or reward its investment banking business. MUNIS are exempt from SEC registration, so the issuer prepares an OFFICIAL STATEMENT, posted on EMMA. Muni underwriters are chosen either COMPETITIVELY (sealed bids answering a notice of sale; lowest interest cost wins) or by NEGOTIATION (the issuer picks the underwriter directly).
📈 In the real world
Rep Sam's brother, who lives with him and whom he supports, asks for shares in a hot IPO. Sam's firm says no: as an immediate family member he materially supports, his brother is a restricted person under Rule 5130. Sam's neighbor, unrelated to the industry, may buy.
📌 Takeaways
- 5130 restricted persons include broker-dealer staff, their supported or household family, and portfolio managers
- 5131 prohibits spinning and quid pro quo IPO allocations
- Munis: official statement on EMMA; competitive (sealed bid) or negotiated underwriting
📖 Terms in this lesson
Spinning: Allocating hot IPO shares to executives in return for investment banking business, prohibited by FINRA Rule 5131.
Restricted person (IPOs): Under FINRA Rule 5130, a person such as a broker-dealer employee who generally may not buy new equity issues.
Official statement: The disclosure document for a new municipal issue, the municipal counterpart of a prospectus.
✅ Test yourself
Under FINRA Rule 5130, which of these may generally buy shares of a new equity IPO?
- A rep's dependent spouse
- A registered representative
- A bank portfolio manager
- A teacher with no industry ties
Answer: D · A teacher with no industry ties
A person with no industry connection is not restricted. Reps, portfolio managers and immediate family materially supported by a broker-dealer employee are restricted persons.
Allocating hot IPO shares to a company executive to win that company's investment banking business is called:
- Spinning
- Free-riding
- Front running
- Stabilizing
Answer: A · Spinning
Rule 5131 prohibits spinning. Free-riding involves trading without paying, front running is trading ahead of customer orders, and stabilizing is supporting a new issue's price.
In a competitive municipal underwriting, the underwriter is selected by:
- Sealed bids from syndicates
- A lottery among FINRA members
- The issuer choosing a favored dealer
- The MSRB assigning a dealer
Answer: A · Sealed bids from syndicates
Competitive deals award the bonds to the best bid, generally the lowest interest cost to the issuer. When the issuer picks a firm directly, it is a negotiated sale; the MSRB and FINRA do not assign underwriters.
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