On September 26, 2019, the U.S. Securities and Exchange Commission adopted a final rule that extends the "testing-the-waters" accommodation, currently available only to emerging growth companies1 to all issuers. The final rule will allow all issuers to gauge market interest in a possible initial public offering or other registered securities offering through discussions with certain institutional investors before or after the filing of a registration statement. As SEC Chairman Jay Clayton indicated in an accompanying public statement, the SEC believes that the added flexibility provided by the new rule will "encourage more issuers to consider entering [U.S.] public equity markets."
In 2012, the Jumpstart Our Business Startups Act enacted Section 5(d) of the Securities Act. Section 5(d) permits emerging growth companies to engage in oral or written communications with qualified institutional buyers or institutional accredited investors to determine their interest in a contemplated securities offering before or after the filing of a registration statement, commonly referred to as "testing-the-waters" communications.
Since the JOBS Act became law, testing-the-waters has been popular with issuers and investors alike by providing an avenue for issuers to evaluate market interest and obtain valuable feedback on the information that is important to investors for the offering to succeed. However, companies that did not qualify as emerging growth companies were not permitted to engage in testing-the-waters communications.
The SEC has adopted Rule 163B under the Securities Act to permit all issuers, or persons authorized to act on their behalf, to engage in testing-the-waters communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors. Under the rule:
- there are no filing or legending requirements;
- the communications are deemed "offers"; and
- issuers subject to Regulation FD will need to consider whether any information in a testing-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.
The expanded provision is intended to provide all issuers with flexibility in determining whether to proceed with a registered securities offering and could reduce the potential costs and risks associated with the offering, making the offering more attractive to issuers. The new rule will also result in greater harmonization of offering process requirements between emerging growth companies and non-emerging growth companies.
The new rule will become effective 60 days after it is published in the Federal Register.
1An emerging growth company is an issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. Such an issuer continues to be an emerging growth company for the first five fiscal years after the date of the first sale of its common equity securities pursuant to an effective registration statement, unless one of the following occurs: its total annual gross revenues are $1.07 billion or more; it has issued more than $1 billion in non-convertible debt in the past three years; or it becomes a "large accelerated filer" under the Exchange Act.
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