Want to Test the Waters? All Issuers May Soon Get Their Chance

On February 19, 2019, the Securities and Exchange Commission (SEC) proposed a rule that would permit all issuers to take advantage of the “test-the-waters” accommodation that has been available to emerging growth companies under the Jumpstart Our Business Startups Act (JOBS Act) since 2012.

Currently, pursuant to the JOBS Act, an emerging growth company and any person authorized to act on its behalf (which includes the company’s underwriters) may communicate with certain potential investors, either prior to or following the filing of a registration statement with the SEC, in order to gauge their interest in investing in the company pursuant to a proposed registered public offering. Such communications with potential investors may be both oral and written. However, to rely on the JOBS Act provision, prospective issuers that are emerging growth companies (and their underwriters) may only approach qualified institutional buyers (QIBs) and institutional accredited investors (which are entities that qualify as accredited investors under Rule 501(a) of Regulation D) to test the waters. This “test-the-waters” accommodation has proven to be valuable to emerging growth companies, allowing them the opportunity to measure investor interest early on in the process and pick the right time to launch their public offerings.

The SEC’s proposed rule would permit all issuers (including investment company issuers) to rely on substantially the same “test-the-waters” accommodation as emerging growth companies, which, according to the SEC, would “thereby encourage more issuers to consider entering our public equity markets.”

The proposed rule and related amendments would not require issuers to include any legends on test-the-waters communications, and issuers would not be required to file those communications with the SEC. However, under the proposal, any test-the-waters communications would not be allowed to conflict with material information in the related registration statement.

In addition, under the proposed rule and related amendments, issuers subject to Regulation FD would still 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. In the proposed rule release, the SEC acknowledges that companies subject to the restrictions of Regulation FD are less likely to benefit from the proposed rule. Such companies could rely on the limited Regulation FD exception for communications made in connection with a registered offering after a registration statement in connection with the proposed offering has been filed. However, communications made prior to the filing would need to rely on another FD exception, which would most likely be the confidentiality agreement exception, although the reluctance of institutional investors to enter into such arrangements could limit the usefulness of this exception.

In its press release announcing the proposed rule, available here, the SEC noted that 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.”

The proposed rule and related amendments, which are available here, are subject to a 60 day comment period.

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