SEC Adopts Rule Expanding “Test-the-Waters” Modernization Reform

K&L Gates LLP

K&L Gates LLP

Executive Summary

On September 26, 2019, the Securities and Exchange Commission (the “SEC”) adopted Rule 163B (the “Rule”) under the Securities Act of 1933, as amended (the “1933 Act”), which enables all issuers to engage in “test-the-waters” communications with certain institutional investors to gauge interest in a registered securities offering either prior to or following the filing of a registration statement. With respect to registered investment companies, this includes exchange-traded funds (“ETFs”), mutual funds, closed-end funds, and business development companies (“BDCs”). Such investment companies are often excluded from similar exemptions. [1] Under the Rule, such written or oral “test-the-waters” communications are exempt from the restrictions imposed by Sections 5(c) and 5(b)(1) of the 1933 Act.

However, the Rule as adopted, just like the proposed rule, [2] is expected to have limited use for registered funds. This alert summarizes the application of the Rule to registered funds and describes certain challenges that will limit its practical usefulness for such funds. The Rule will become effective on December 3, 2019.


The 1933 Act imposes strict limitations on an issuer’s communications with the public, which includes investors, brokers, and the press, regarding a securities offering prior to the effective date of the registration statement. Section 5(c) prohibits any written or oral offers prior to the filing of a registration statement (the “Restricted Period”). [3] Section 5(b)(1) limits written offers to a “statutory prospectus” that complies with the information requirements of Section 10 of the 1933 Act. Any violation of these prohibitions is commonly referred to as “gun-jumping.”

Section 5(d) of the 1933 Act, adopted in 2012 as part of the Jumpstart Our Business Startups Act, permits an emerging growth company (“EGC”), and any person acting on behalf of the EGC, to engage in written or oral communications with qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs,” and together with QIBs, “Permitted Investors”) before or after filing a registration statement to determine whether such investors would be interested in a contemplated securities offering.

On February 19, 2019, the SEC proposed the Rule to expand such “test-the-waters” communications by allowing all issuers, and those authorized to act on behalf of the issuer, to engage in “test-the-waters” communications with potential investors who are, or are reasonably believed by the issuer to be, Permitted Investors prior to or following the filing of a registration statement. Such “test-the-waters” communications, which include oral and written offers to purchase securities, are “offers” of securities under the 1933 Act and thus remain subject to liability under federal securities laws.

The SEC received approximately 20 comments, which were largely supportive of the proposed rule. Accordingly, the Rule was adopted almost entirely as proposed, with the exception of two changes. Specifically, the Rule does not include any anti-evasion language, which would have made the Rule unavailable for any communication that, while in technical compliance with the Rule, is part of a plan or scheme to evade the requirements of Section 5 of the 1933 Act. Additionally, while the proposal sought to amend Rule 405 to exclude Rule communications from the definition of “free writing prospectuses,” both Rule 405 and Rule 424(b) are amended to clarify that neither Rule communications nor Section 5(d) communications constitute free writing prospectuses requiring filing, thus confirming both types of “test-the-waters” communications will be treated equally. These changes from the proposal were designed to remove certain regulatory uncertainty that would have limited the utility of the Rule.

Investment Companies

A) Limited Use for Registered Funds

No Exemption From Registration Under the 1940 Act. The SEC received three comments about the application of the proposed rule on registered funds. Commenters noted that registered funds will be less likely to use “test-the-waters” communications than other issuers because, although “test-the-waters” communications are exempt from registration under the 1933 Act, there is no analogous exemption from the requirement to file a registration statement under the Investment Company Act of 1940, as amended (the “1940 Act”).

In the adopting release, the SEC recognized that funds that registered as investment companies would not specifically benefit from the Rule, since the Rule only relates to communications about contemplated registered securities offerings that Sections 5(c) or 5(b)(1) of the 1933 Act would otherwise restrict. [4] Filing a single registration statement under both the 1933 Act and the 1940 Act offers certain efficiencies. Absent an exemption under the 1940 Act, funds must register as investment companies before offering shares. [5]

In the adopting release, the SEC expressly declined to provide a new exemption under the 1940 Act to allow a fund to avoid the registration requirement under Section 8 of the 1940 Act while it engages in communications under the Rule. The SEC acknowledged the comments received, but expressed concerns that an exemption from registration (and thus from the substantive requirements of the 1940 Act) could allow funds to engage in certain self-dealing transactions and other activities that are prohibited by the 1940 Act.

B) Considerations for Closed-End Funds, BDCs, and ETFs

The SEC noted that BDCs may be more likely to engage in “test-the-waters” communications under the Rule when contemplating a registered offering close in time to the BDC’s inception. Additionally, funds that initially conduct private offerings, including certain registered closed-end funds, may use the Rule to communicate with Permitted Investors before filing a 1933 Act registration statement if they are contemplating a subsequent registered offering. [6] Additionally, the Rule may provide a greater safe harbor around the closed-end fund syndicate building stage of an initial public offering and may assist ETFs in gauging seeding interest.

Closed-end funds, however, should consider whether information in any “test-the-waters” communications triggers disclosure obligations under Regulation FD or, alternatively, avoids the application of Regulation FD through a confidentiality agreement. Regulation FD requires public disclosure of any nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders if the issuer has a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “1934 Act”), or is required to file reports under Section 15(d) of the 1934 Act. Closed-end funds subject to Regulation FD must ensure any “test-the-waters” communications containing material nonpublic information comply with Regulation FD, unless the closed-end fund obtains a confidentiality agreement from the potential investor to avoid the application of Regulation FD.

Scope and Terms of the Adopted Rule

A) Scope of the Rule

The Rule allows all issuers, including investment companies, and persons authorized to act on behalf of the issuer, to engage in “test-the-waters” communications before or after filing a registration statement by communicating with prospective investors that the issuer reasonably believes are Permitted Investors.

Communications with investment advisers, broker-dealers, and banks, among other types of Permitted Investors, are allowed under the Rule. The Rule defines QIBs in the same manner as Rule 144A under the 1933 Act, which generally include (1) certain institutions that own or invest, either for their own accounts or the accounts of other QIBs, in the aggregate, at least $100 million in securities of unaffiliated issuers (or $10 million with respect to broker-dealers); and (2) banks that have a net worth of at least $25 million. The Rule defines IAIs as any institutional investor that is also an accredited investor pursuant to Rule 501(a) of Regulation D promulgated under the 1933 Act.

The Rule is nonexclusive, and an issuer can continue to rely on other 1933 Act communications rules or exemptions when determining how, when, and what to communicate with respect to a contemplated securities offering.

B) Requirements of the Rule

No Content Restrictions. The Rule does not limit or impose additional restrictions on the content that may be used in “test-the-waters” communications, including performance presentations, so long as such communications do not conflict with material information in the related registration statement. [7] “Test-the-waters” communications must not contain any material misstatements or omissions at the time such communications are made, even though a registration statement may not be available at that time and offering terms and disclosures may evolve in accordance with feedback from potential investors.

Additionally, as proposed, the Rule will not impose any filing or legending requirements as those otherwise required by rules governing similar communications. Under the current framework and without the benefit of the Rule, “test-the-waters” communications would generally be considered “sales literature” and would be subject to rules governing “sales literature” under the 1933 Act and the 1940 Act.

Investor Status Does Not Require Verification. As proposed, the Rule includes a reasonable belief standard and does not require verification of or otherwise specify the steps an issuer could or must take to establish a reasonable belief of an investor’s status. Unlike the burdensome verification requirements of Rule 506(c) under the 1933 Act, the reasonable belief standard is intended to provide flexibility to use methods that are cost-effective but appropriate in light of the facts and circumstances of each contemplated offering and each potential investor. Issuers may continue to rely on the methods they currently use to establish a reasonable belief of investor status as a QIB or IAI pursuant to Rule 144A and Rule 501(a) under the 1933 Act, respectively.


[1] Similar exemptions that allow issuers to engage in “test-the-waters” communications with potential investors, without restriction as to the type of investors, subject to certain requirements, include: (i) Rule 163, which exempts well-known seasoned issuers but is not available to registered investment companies or BDCs; and (ii) Regulation A, which exempts small offerings but is also not available to registered investment companies or BDCs.

[2] Our alert discussing the proposed rule can be found at  

[3] Under the current framework applicable to investment companies, the Restricted Period has three distinct stages governing the types of communications an issuer may have with the public while in the process of making a registered offering: (1) the pre-filing period, (2) the waiting period, and (3) the post-effective period. During the pre-filing period—from deciding to make a securities offering to filing a registration statement—an issuer may not make any offers to sell or buy securities (see Section 5(c)). The SEC interprets an “offer” broadly; it includes a solicitation to purchase securities or a statement designed to condition the market with respect to the registered offering. During the waiting period—from filing a registration statement to the registration effective date—written offers must be a statutory prospectus that conforms to the requirements of Section 10 (see Section 5(b)(1)). A written offer, other than a statutory prospectus, may be made only if a final prospectus meeting the requirements of Section 10(a) is sent or given prior to or at the same time as the written offer (see Section 2(a)(1)). During the post-effective period—from the registration effective date to the date the offering’s securities begin trading—an issuer can offer and sell securities, but any communications generally must be accompanied or preceded by a prospectus (see Section 5(b)(2)).

[4] Funds sometimes register as investment companies during a seeding period in which the fund’s sponsor tests the fund’s investment strategy and establishes a performance track record for marketing purposes. Funds could engage in “test-the-waters” communications with Permitted Investors during the seeding period without filing a 1933 Act registration statement.

[5] In theory, a fund could rely on Sections 3(c)(1) and 3(c)(7) of the 1940 Act during the seeding period; however. funds typically do not rely on such exclusions. Furthermore, these exclusions are not available to funds that make, or propose to make, a registered offering. Under the Rule, an issuer choosing to engage in “test-the-waters” communications under the Rule concurrently with communications related to a private offering must conduct such communications in a manner that preserves the availability of both the Rule and the private offering exemption.

[6] Open-end funds are less likely to use the Rule in this manner because they typically offer shares to retail investors. However, mutual funds may find the Rule helpful in conducting “test-the-waters” discussions regarding potential fund distribution with various intermediary platform providers that are Permitted Investors.

[7] Additionally, “test-the-waters” communications are also subject to the anti-fraud provisions of federal securities laws.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.