On February 19, 2019, the Securities and Exchange Commission voted to propose a new rule that would expand the availability of the “testing-the-waters” provisions that enable eligible companies to engage in certain communications to gauge institutional investor interest in a proposed IPO. Currently, only companies that qualify as “emerging growth companies” or “EGCs” are eligible to test the water. The new rule and related amendments would expand the availability of the provisions to all types of issuers, including investment companies.
The purpose of the testing-the-waters provisions is to allow potential issuers to gauge market interest in a possible initial public offering or other registered securities offering by discussing the offering with certain investors, including qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”), prior to filing a registration statement. SEC Chairman Jay Clayton said that “[t]he 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.” The proposed rules and related amendments are intended to give more issuers a cost-effective and flexible means of communicating with institutional investors regarding contemplated offerings and evaluating market interest.
Testing-the-waters communications that comply with the proposed rule would not need to be filed with the SEC, and there would be no requirement that they include any specified language. Also, issuers would be allowed to make these communications with investors without verifying their investor status as long as they reasonably believe the potential investor is a QIB or IAI. However, issuers would need to be careful that their communications under the testing-the-waters provision do not contradict material information in the prospective registration statement. Further, issuers subject to Regulation FD would need to consider whether any information in the testing-the-waters communication would trigger any obligations under Regulation FD, or whether an exception to Regulation FD would apply.
Certain JOBs Act provisions, such as the testing-the-waters provision, initially only benefited EGCs – generally, companies with annual revenues up to $1 billion. Companies not qualifying as EGCs have therefore been unable to take advantage of these provisions. However, because the goal of these provisions is to foster capital formation in the public markets, we are now seeing a trend towards expanding their availability to a broader range of issuers in order to better accomplish this goal. Clayton further stated “[e]xtending 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.”
The proposal will have a 60-day public comment period following its publication in the Federal Register.