The Securities and Exchange Commission has proposed expanding a popular reform to permit investor views about potential offerings to be taken into account at an earlier stage in the process. The new rule and related amendments would expand the “test-the-waters” accommodation—currently available to emerging growth companies (EGCs)—to all issuers, including investment company issuers.
The proposal, made public on Feb. 19, would allow all prospective issuers, not just EGCs, to gauge market interest in a possible initial public offering, or other proposed registered securities offerings, by permitting discussions with certain investors prior to the filing of a registration statement.
The proposal builds on a popular similar provision of the Jumpstart Our Business Startups Act (JOBS Act) that has, until now, been limited to EGCs. Generally, companies with more than $1 billion in annual revenues do not qualify as EGCs and have not benefitted from JOBS Act provisions intended to foster capital formation in the public markets.
The JOBS Act created Section 5(d) of the Securities Act. It permits an EGC, and any person acting on its behalf, to engage in oral or written communications with potential investors that are qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) before or after filing a registration statement to gauge those investors’ interest in a contemplated securities offering. The expanded test-the-waters provision, as proposed, would provide all issuers with appropriate flexibility in determining when to proceed with a registered public offering while maintaining investor protections.
The proposed rule follows action taken by the Division of Corporation Finance 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 Commission as they begin the process of becoming a public company.
“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,” SEC Chairman Jay Clayton said in a statement. “I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors.”
The proposed rules “would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering,” he added.
Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs), either prior to or following the filing of a registration statement, to determine whether those 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 that regulation, or whether an exemption would apply.
The proposal will have a 60-day public comment period following its publication in the Federal Register. In particular, the Commission is requesting comments regarding: the number of small entities that may be affected by the proposed rule; the existence or nature of the potential impact of the proposed rule on small-entity issuers discussed in the analysis; and how to quantify the impact of the proposed rule.