[author: Ned Welch]

An issuer that is considering or that has commenced an initial public offering (“IPO”) should take special care to familiarize itself with the communications rules applicable to offerings.

First, an issuer should keep in mind that communications may be viewed as impermissible “gun jumping” activities designed to condition the market for the issuer’s securities.  Second, the issuer should bear in mind that it remains liable for oral communications, and the Commission may require that certain information included in interviews, for example, be incorporated into an issuer’s prospectus.  Communications should therefore be closely controlled and vetted by counsel.

Title I of the JOBS Act expands permissible communications during a securities offering by amending the Securities Act to permit an Emerging Growth Company (“EGC”), or any person authorized to act on behalf of an EGC to “test-the-waters” by engaging in oral or written communications with potential investors that are QIBs or institutions that are accredited investors to determine whether such investors might have an interest in a contemplated securities offering.


Test the waters communications may take place before an EGC makes a confidential submission of its IPO registration statement, while the confidential submission is being reviewed, once an issuer has publicly filed, or at any other point in the offering cycle.


The objective of this provision was to enable EGCs to gauge investor interest earlier in the process, and, thereby, determine whether to move forward with their offerings.  As a result, test the waters communications are not considered “offers” and would not be viewed as “gun jumping.”


An issuer and its underwriters have considerable latitude in structuring their discussions.  For companies in certain sectors, like biotech, where there are complex technologies, a regulatory pathway, etc., a bank may want to set up meetings early in the process so investors can become familiar with the company’s “story.”  In other sectors, it may be preferable to wait until the issuer has gone through at least one or two rounds of comments from the Commission before meetings with investors are scheduled.

What materials are used?

Depending on the stage at which discussions are held, written materials may or may not be used.  If written materials are used, the issuer and its counsel and the underwriter and its counsel must review the materials and approve their use.  The materials must be consistent with the registration statement disclosure and may consist of a slide deck or the draft registration statement.  Written materials should not be left behind.  Materials should not contain information beyond what is provided in the registration statement (i.e., no projections).

The Commission will ask whether test the waters materials were used and will request copies of the materials.  The issuer is liable for statements made in such materials.

If no written materials are used, the working group should agree on a script.

Can orders be obtained?

The underwriter cannot solicit orders during such meetings.  It can only gauge interest and obtain nonbinding indications of interest.

Private versus public

It is important to remember that during such meetings, an investor may manifest interest in investing in the company.  If the issuer intends to complete a private offering prior to completion of the IPO or concurrently with the IPO, the issuer and financial intermediary should be clear with investors as to the type of offering in which they are being asked to participate.  A number of considerations will need to be taken into account—for example, pricing of the securities sold in the private placement; class of securities; “cheap” stock type issues; etc.

Implications for dual-track transactions

In the past, when an issuer was contemplating a dual track IPO/M&A process, the applicable restrictions on communications (pre-filing, and while in registration), made it difficult for the issuer to pursue actively M&A opportunities, because the issuer had to wait until fairly late in the offering process to pursue such conversations.  The additional flexibility for communications during the pre-filing and registration phase will facilitate dual-track discussions.