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

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.

IN DEPTH


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.

© 2019 McDermott Will & Emery

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About this Author

Eric Orsic, corporate, securities, attorney, McDermott Will, law firm
Partner

Eric Orsic is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. Eric focuses his practice in the areas of mergers and acquisitions, and securities transactions and compliance.   Eric works with both public and privately-held companies to structure and negotiate business acquisitions/dispositions.  His public company transactional experience includes public equity and debt offerings, tender offers and going-private transactions.  Eric also serves as outside securities counsel to several public companies and advises on SEC compliance...

312-984-7617
Thomas P. Conaghan, Mcdermott Will Emery law Firm,  (M&A), joint ventures, strategic investments, spin-offs,
Partner

Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the Sarbanes-Oxley Act of 2002.

He advises US- and foreign-based public companies on issues relating to mergers and acquisitions (M&A), joint ventures, strategic investments, spin-offs, public and private offerings of securities (including initial public offerings (IPOs)), disclosure, Securities and Exchange Commission (SEC) reporting, corporate governance, executive compensation, and the stock exchange-listed company rules. Tom is co-head of the Firm's Capital Markets and Public Companies Group, and partner-in-charge of the Corporate Group in the Firm's Washington, DC office.

Tom is rated in Chambers USA and The Legal 500 for his M&A work, and is cited for being a "strong M&A lawyer who anticipates clients’ needs, exhibits strong management over deals, and translates his breadth of knowledge in a way that clients can easily understand and use." Tom has led several M&A transactions for alcohol beverage clients in conjunction with the Firm's Chambers USA top-rated beverage practice.

Tom represents real estate investment trusts (REITs) in connection with IPOs and M&A transactions. He also advises clients on large-scale global corporate reorganizations and spin-offs. His experience includes advising Tyco International (NYSE: TYC) in connection with is spin-offs of Covidien, TE Connectivity and The ADT Corporation.

202-756-8161
Daniel Woodard, McDermott Law Firm, Washington DC, Corporate Law Attorney
Associate

Daniel (Dan) Woodard advises clients on general corporate matters. He has represented private and public companies on issues involving mergers and acquisitions, corporate restructurings, public company regulatory compliance, commercial transactions and corporate governance.

Dan received his Juris Doctor, cum laude, from the Georgetown University Law Center. While in law school, he was an executive editor of the Georgetown Journal of International Law and participated in the Harrison Institute of Housing and Community...

202-756-8298
Hank Goldberg Corporate Attorney
Associate

Hank Goldberg focuses his practice on corporate matters, capital markets and transactions.

During law school, Hank served as a judicial intern for the Hon. Luis Felipe Restrepo of the United States Court of Appeals for the Third Circuit. He also worked as a legal and compliance extern at an investment bank focusing on fixed income securities and structured notes and was an Executive Articles Editor for the Washington University Journal of Law and Policy.

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