On February 19, 2019, the Securities and Exchange Commission published a rule proposal entitled “Solicitations of Interest Prior to a Registered Public Offering”[1] that would extend the “test-the-waters” provisions of Section 5(d) of the Securities Act of 1933 (the Act), currently available only to emerging growth companies (EGCs), to all issuers of registered securities.

Section 5(d) was added to the Act as part of the Jumpstart Our Business Startups Act (the JOBS ‎Act).[2] It permits an EGC to engage in oral or written communications with potential investors that are qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) before or after filing a registration statement to gauge such investors’ interest in a contemplated securities offering. These so called “test-the-waters” provisions are intended to provide increased flexibility to issuers with respect to their communications about contemplated registered securities offerings, as well as a cost-effective means for evaluating market interest before incurring costs associated with such an offering.  Without the accommodation of Section 5(d), written and oral offers prior to filing a registration statement are generally prohibited under Section 5(c) as “gun-jumping” activities in violation of the Act and communications during a pending registration are limited.

The newly proposed Rule 163B would allow all issuers,[3] including persons authorized to act on behalf of an issuer (e.g., underwriters), to engage in test-the-waters communications with potential investors that are QIBs or IAIs, either prior to or following the date of filing of a registration statement related to such offering, through an exemption from Section 5(b)(1)[4] and Section 5(c) of the Act. Test-the-waters communications that comply with the proposed rule would not need to be filed with the Commission, nor would they be required to include any specific legends. The rule, if finalized, coupled with the extension of the confidential submission process to all issuers in 2017, would allow all issuers to benefit from some of the most significant changes made by the JOBS Act. Rule 163B may be particularly valuable to companies that are too large to qualify as EGCs at the time of their initial public offering.[5]

In justification of the proposed rule, the Commission states in its release that it believes extending the test-the-waters accommodation to a broader range of issuers would still maintain investor protections, as it does not believe certain sophisticated institutional investors need the protections of the Act’s registration process, and that the proposed rule will level the playing field with respect to permissible investor solicitations for EGCs and other issuers contemplating a registered securities offering. The Commission also states that the ability to test-the-waters will benefit more issuers seeking capital and encourage additional participation in the public markets, which in turn would promote more investment opportunities for more investors, including retail investors, as well as transparency and resiliency in the U.S. marketplace.

[1] Release No. 33-10607 may be found here: https://www.sec.gov/rules/proposed/2019/33-10607.pdf

[2] The JOBS Act also added Section 6(e) to the Act which ‎provides that an EGC may ‎ submit to the Commission a draft registration ‎statement for confidential, non-‎public review by the Commission staff prior to its being filed publicly. The accommodation of ‎Section 6(e) was extended to all issuers in June 2017.‎ For further information see: https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded

[3] The rule proposal states that non-reporting issuers, EGCs, non-EGCs, WKSIs, and investment companies (including registered investment companies and business development companies) would be eligible to rely on the proposed rule.  However, the Commission notes that while it believes many benefits of the proposed rule would ‎apply to investment company issuers, the application of the proposed rule may have ‎more limited use than for other issuers in practice, particularly with respect to pre-filing communications.

[4] Section 5(b)(1) of the Act limits written offers to a “statutory prospectus” that conforms with Section 10 of the Act.‎

[5]It is worth noting that the rule may be of limited use for already public reporting companies because of the need under Regulation FD to avoid selective disclosure by requiring QIBs and IAIs ‎approached to agree not to trade in the company’s securities while in possession of ‎material non-public information about a contemplated offering and the difficulty of obtaining such agreement.