In apparent recognition of the popularity of “testing the waters” by Emerging Growth Companies (EGCs) before proceeding with an IPO, the Securities and Exchange Commission recently voted to propose an expansion of this accommodation to all companies.[1] Currently, EGCs and any person authorized to act on behalf of an EGC may engage in oral or written communications with potential investors that are qualified institutional buyers or institutional accredited investors to determine whether these investors might have an interest in a contemplated securities offering without violating the SEC’s prohibition on gun-jumping.
This outreach by EGCs may occur both prior to and after the registration statement is filed for the offered securities. The ability to test investor appetite, especially when coupled with an EGCs ability to confidentially submit draft registration statements, allows EGCs to determine the viability of a proposed offering without the potential for negative publicity if an offering is abandoned or otherwise cannot be completed. In July 2017, the SEC’s Division of Corporation Finance expanded the confidential submission process in the IPO context to all companies in addition to EGCs but declined to expand the testing the waters accommodation at that time.[2]
The SEC indicated that its intent in proposing Securities Act Rule 163B, which would permit all companies to test the waters, is to encourage more companies to consider entry into the public equity markets. The proposal will be subject to a 60-day comment period.
[1] The proposal also includes investment companies.
[2]Confidential submissions are permitted for registration statements related to IPOs, initial Exchange Act registrations (including spin-offs) and offerings made in the first year after an IPO or Exchange Act listing.