SEC Proposes to Expand "Test the Waters" to All Issuers

Kramer Levin Naftalis & Frankel LLP


On Feb. 19, 2019, the Securities and Exchange Commission (the SEC) voted to propose a rule and related rule amendments under the Securities Act of 1933, as amended (the Securities Act), that would permit investor views about potential offerings to be taken into account at an earlier stage in the process than is the case today. The proposal would allow all prospective issuers, not just emerging growth companies (EGCs), to gauge market interest in a possible initial public offering or other proposed registered securities offering by permitting discussions with certain investors prior to the filing of a registration statement. The proposed rule builds on a provision of the 2012 Jumpstart Our Business Startups Act (the JOBS Act) that has heretofore been limited to EGCs. Generally, companies with more than $1 billion in annual revenues do not qualify as EGCs and, therefore, have not benefited from JOBS Act provisions intended to foster capital formation in the public markets. The proposed rule follows action taken by the Division of Corporation Finance of the SEC in 2017 to extend another EGC reform to all issuers: the ability to initially submit certain filings in draft, non-public form. As a result of that policy change, all issuers, not just EGCs, have been able to make non-public filings with the SEC as they begin the process of becoming a public company. The proposed rule would exempt “test the waters” communications from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement, and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs).

Proposed Securities Act Rule 163B

Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on an issuer’s behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive, and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.

Under the proposed rule:

  • there would be no filing or legending requirements;
  • test-the-waters communications may not conflict with material information in the related registration statement; and
  • issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposal will be subject to a 60-day public comment period.

The full text of the proposed rule can be found here.

[View source.]

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.

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