Securities Regulation Daily SEC proposes to allow all issuers to ‘test-the-waters’ prior to offerings
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Tuesday, February 19, 2019

SEC proposes to allow all issuers to ‘test-the-waters’ prior to offerings

By Amy Leisinger, J.D.

The proposal would provide all issuers and investments companies with a means by which to gauge market interest in a possible offering by permitting discussions with certain investors before filing a registration statement.

The SEC has voted to propose a new Securities Act rule that would permit issuers to engage in communications with potential institutional investors either before or after the filing of a registration statement to determine whether they have an interest in a contemplated securities offering. The proposed rule would extend the "test-the-waters" accommodation currently available to emerging growth companies pursuant to the JOBS Act to all issuers, including investment company issuers. The proposed rule and related amendments are intended to increase flexibility for issuers with respect to their communications with institutional investors and to provide a means by which to evaluate market interest before incurring the costs associated with an offering (Solicitations of Interest Prior to a Registered Public OfferingRelease No. 33-10607, February 19, 2019).

"Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies," said SEC Chairman Jay Clayton.

"Test-the-waters" expansion. Proposed Securities Act Rule 163B would permit any issuer or person authorized by the issuer to engage in oral or written communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors, either before or following the filing of a registration statement. These communications would be exempt from "gun-jumping" restrictions imposed by Securities Act Section 5 on offers before or after filing a registration statement, unless the communications are part of a plan or scheme to evade Section 5 requirements. The proposed rule would be non-exclusive, and an issuer could rely on other Securities Act communications rules or exemptions when determining how and when to communicate regarding a contemplated securities offering and what information to provide.

Under the proposal, test-the-waters communications that comply with the proposed rule would not need to be filed with the Commission or be required to include any specified legends; the type of institutional investors with which an issuer may communicate under the rule are generally considered to have the ability to assess investment opportunities, thereby reducing the need for the additional safeguards, the proposal states. As such, the proposal would amend Rule 405 to exclude a written communication used in reliance on the proposed rule from the definition of "free writing prospectus."

The proposal notes, however, that an issuer’s test-the-waters communications may not conflict with material information in the related registration statement and that each issuer should consider whether information in a test-the-waters communication would trigger disclosure obligations under Regulation FD.

Registered investment companies also would be eligible to engage in test-the-waters communications under the proposed rule, but the proposal acknowledges that funds’ uses of these communications under could be more limited than those of other issuers, particularly with respect to pre-filing communications and the common practice of funds contemplating registered offerings at the time organization simultaneously filing registration statements under both the Investment Company Act and the Securities Act.

Comments on the proposal are due within 60 days following publication in the Federal Register.

The release is No. 33-10607.

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