Come On In, The Water’s Fine: SEC Proposes Expanding “Test-The-Waters” Communications to All Issuers
Monday, March 4, 2019

On February 19, 2019, the SEC proposed a new rule, Rule 163B, that would allow all issuers to engage in “test-the-waters” communications prior to the effectiveness of a registration statement for a public offering. The “test-the-waters” accommodation is currently available for emerging growth companies only. The proposed rule demonstrates the SEC’s sustained movement toward making JOBS Act accommodations available to all companies.


On February 19, 2019, the Securities and Exchange Commission (SEC) proposed a new rule, Rule 163B, as well as related amendments to existing rules, that would allow all issuers to engage in “test-the-waters” communications with certain qualified investors. Under the proposed rule, either prior to, or following, the filing of a registration statement related to a contemplated offering, issuers would be permitted to engage in oral or written communications with investors that are Qualified Institutional Buyers, as defined by Rule 144A, or Institutional Accredited Investors, defined as an institutional investor that is an “accredited investor” under Rule 501 of Regulation D.

Such communications, commonly known as “test-the-waters” communications, would be exempt from the gun-jumping restrictions imposed by Sections 5(b)(1) and 5(c) of the Securities Act of 1933 (the Securities Act), which prohibit written or oral offers prior to the filing of a registration statement and without a prospectus meeting the requirements of the Securities Act. The “test-the-waters” accommodation is currently available for emerging growth companies (EGCs), i.e., companies that have total annual gross revenues of less than $1.07 billion, that have not issued more than $1 billion in non-convertible debt in the past three years and that have not transitioned into a “large accelerated filer” under the Securities Exchange Act of 1934. Even if a company continues to meet the requirements of an EGC, the company will lose its EGC status five years after its first sale of its common equity securities pursuant to an effective registration statement.

The proposal is in line with other administrative and congressional initiatives to liberalize such communications and encourage additional participation in the public markets. Under statutory authority created by the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), EGCs were first permitted to engage in “test-the-waters” communications, allowing them to gauge the interest of sophisticated investors in a cost-effective, flexible manner before commencing an offering. The proposed expansion of the “test-the-waters” accommodation follows other expansions of JOBS Act accommodations, including the SEC’s decision to allow all issuers to submit draft registration statements prior to making a public filing.

“Test-the-waters” communications that comply with the proposed rule would not need to be filed with the SEC and would not need to include cautionary legends. However, issuers subject to Regulation FD who may wish to engage in “test-the-waters” communications prior to conducting follow-on and other registered offerings would need to evaluate if such communications would trigger disclosure obligations. In addition, communications made in reliance on the proposed rule would still be considered “offers” subject to Section 12(a)(2) of the Securities Act in addition to the anti-fraud provisions of the federal securities laws.

The new proposed Rule 163B would be an additional avenue for exemption and would not preclude the possibility of relying on other gun-jumping exceptions, such as Rule 163, which allows “well known seasoned issuers” to make pre-filing communications, or Rule 255, which allows eligible issuers to engage in solicitations of interest prior to conducting an offering under Regulation A.


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