The SEC Wants to Extend Test the Waters for Issuers and That’s Good Thing

Yesterday, the Securities and Exchange Commission (SEC) proposed a reform that would permit potential issuers to gauge investor interest prior to pursuing an offering. According to the SEC, the new rule and related amendments would expand the “test-the-waters” process, currently available to emerging growth companies or “EGCs,” to all issuers, including investment company issuers.

Prior to an initial public offering (IPO) or other registered securities issuance, the company would be able to measure investor interest. The rule is frequently used for Reg A+ issuers.

The SEC notes that companies with more than $1 billion in annual revenues do not qualify as EGCs and, therefore, have not benefitted from JOBS Act provisions intended to foster capital formation in the public markets. This action follows a change by the SEC 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 SEC as they begin the process of becoming a public company.

Pursuing an offering can be an expensive undertaking. If an issuer “tests the water” and investor demand is lacking, the company can save substantial amounts of money.

SEC Chairman Jay Clayton commented on the proposal:

“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. 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.”

Clayton has repeatedly stated that access to capital for smaller firms is a priority during his tenure at the Commission.

The proposal now commences a 60 day comment period following publication in the Federal Register.



Solicitations of Interest Prior to a Registered Public Offering

Feb. 19, 2019


The Securities and Exchange Commission proposed a rule and related amendments under the Securities Act that would enable all issuers to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). 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.


In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which created Section 5(d) of the Securities Act. Section 5(d) permits an emerging growth company (EGC) and any person acting on its behalf to engage in oral or written communications with potential investors that are QIBs and IAIs before or after filing a registration statement to gauge such investors’ interest in a contemplated securities offering. The proposed rule will extend the “test-the-waters” provision to non-EGCs and thereby encourage more issuers to consider entering our public equity markets.

Highlights and the Proposal

Proposed Securities Act Rule 163B

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, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such 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 Regulation FD or whether an exemption under Regulation FD would apply.

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