On September 26, the Securities and Exchange Commission adopted a new rule to allow all issuers, not just emerging growth companies, to utilize “test-the-waters” communications in connection with an initial public offering or other securities offering.
The rule implements the proposal put forth by the SEC in February 2019, discussed in the March 1, 2019 edition of Corporate & Financial Weekly Digest.
Since 2012, the JOBS Act has allowed emerging growth companies to engage in “test-the-waters” meetings with institutional investors prior to or following the filing of a registration statement. These meetings have proved popular with issuers looking to gauge investor interest in a potential offering prior to a formal roadshow and, in some cases, prior to devoting significant financial and other resources to the registration process. The SEC’s new rule expands this accommodation, which is intended to encourage more issuers to consider entering the US public markets, to all issuers.
As a general matter, Section 5 of the Securities Act of 1933 (Securities Act) prohibits issuers from making any written or oral offers prior to filing a registration statement. Once a registration statement is filed, offers must be made pursuant to a “statutory prospectus” that conforms to the requirements of the Securities Act. “Test-the-waters” communications are exempt from these limitations, allowing these communications to occur before a registration statement is filed or before a statutory prospectus is furnished to investors.
Under this new rule any issuer, or any person authorized to act on behalf of an issuer (including an underwriter), can engage in oral or written communications about a potential offering with investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors.
Importantly, though, “test-the-waters” communications are “offers” within the meaning of the securities laws and are subject to the general anti-fraud provisions of the federal securities laws, as well as to potential liability under Securities Act Section 12(a)(2) (Civil Liabilities in Connection with Prospectuses and Communications). Accordingly, issuers should take care in preparing or authorizing any “test-the-waters” materials and review the contents with legal counsel prior to holding any meetings.
Under the new rule, no special legending will be required in connection with “test-the-waters” communications, and issuers will not be required to publicly file “test-the-waters” materials. The SEC noted, however, that, as is currently the practice of the SEC staff when reviewing registration statements, the staff could request an issuer to furnish any “test-the-waters” materials to the staff in connection with their registration statement review.
The SEC also reminded public companies to consider the application of Regulation FD in connection with furnishing investors any materials. To the extent “test-the-waters” communications contain any material nonpublic information, an issuer would need to determine whether Regulation FD requires public disclosure of the information at the same or whether an exemption from Regulation FD disclosure applies.
The new rule will be codified as Rule 163B under the Securities Act, with conforming amendments to existing Rule 405, and will take effect 60 days after publication in the Federal Register.
The SEC’s full adopting release is available here.