The Securities and Exchange Commission announced last week that it voted to adopt a new rule that extends the “test-the-waters” accommodation (which was previously available only to Emerging Growth Companies) to all issuers.
Under the new rule, Rule 163B under the Securities Act of 1933, any issuer and any person authorized to act on its behalf (including the company’s underwriters) may engage in oral or written communications with qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”) 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.
These communications will 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. The expanded test-the-waters provision should provide all issuers with flexibility in determining whether to proceed with a registered public offering by gauging large investors’ interest in such an offering, while simultaneously maintaining appropriate investor protections.
The rule is non-exclusive and an issuer may rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate about a contemplated securities offering. Under Rule 163B:
- there are no filing or legending requirements;
- the communications are deemed “offers” (and are therefore subject to the usual anti-fraud provisions of the federal securities laws); and
- issuers subject to Regulation will 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.
The rule will become effective 60 days after publication in the Federal Register.
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