Family offices no longer have to spend the time trying to convince an investment bank that they are eligible to purchase an initial public offering of an equity security, thanks to an interpretive letter from FINRA.
The letter — which is in response to a letter from Elliott R. Curzon, a partner at Dechert LLP, on behalf of the Private Investor Coalition — determines that a “family office,” as defined in the Advisers Act, may be considered an “investment adviser” for purposes of meeting the limited exception of FINRA Rule 5131(b).
FINRA Rule 5131 (New Issue Allocations and Distributions) addresses potential misconduct in the allocation and distribution of new issues. “New issue” means any IPO of an equity security.
FINRA Rule 5131(b) prohibits the practice of “spinning,” which occurs when an underwriter allocates new issue shares to executive officers and directors of a company as an inducement to award the underwriter with investment banking business.
The rules are designed to prevent securities insiders from using their position to corner the market in an IPO or to get all the allocations. The rule does this by saying certain securities insiders are restricted persons; for example, investment banking clients can’t purchase IPOs either directly or through a vehicle.
There is a limited exception to the spinning provision.