Last week, the Securities and Exchange Commission (“SEC”) issued a set of FAQs clarifying a number of questions and ambiguities regarding the activities of underwriters and research analysts in connection with offerings by Emerging Growth Companies (“EGCs”) under the Jumpstart Our Business Startups Act (the “JOBS Act”). We summarize and analyze the key points below.
Testing the Waters -
The FAQs address a technical concern that “testing the waters” under the JOBS Act might violate the requirements of Rule 15c2-8(e) under the Securities Exchange Act of 1934, as amended. Testing the waters is the process whereby an EGC, or a person authorized to act on its behalf, engages in oral or written communications with Qualified Institutional Buyers2 or institutions that are Accredited Investors to determine their interest in a contemplated securities offering. Rule 15c2-8(e) makes it a deceptive act or practice for a broker or dealer to participate in a distribution of securities once a registration statement has been filed, unless (among other things) the broker or dealer takes reasonable steps to provide a preliminary prospectus to each of the broker’s or dealer’s associated persons who are expected to “solicit customers’ orders” for securities. The FAQs clarify that customary testing the waters activities under the JOBS Act would be unlikely to constitute soliciting activities under Rule 15c2-8(e). The FAQs also note that Rule 15c2-8(e) would only apply in any event once a registration statement has been filed publicly with the SEC and not when it has only been submitted confidentially.
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