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Testing the waters


In February 2019 Securities and Exchange Commission voted to propose a new Securities Act Rule 163B that would permit any issuer to engage in oral or written communication with potential investors that are, or are reasonably believed to be, qualified institutional buyers and institutional accredited investors either prior or following the filing of registration statement. This means the expansion of the JOBS act, which created Section 5(d) of Securities Act that permits only emerging growth companies to engage in communication with investors prior or following the filing the registration statement of the offering.

Companies that have more than $1 billion in annual revenues cannot qualify as emerging growth companies and use the benefit of "test-the-waters" provision. The new rule will extend it beyond EGC to all issuers, including investment company issuers. The proposal from the SEC follows action taken by The Division of Corporate Finance in July 2017 to allow all issuers the ability to submit certain filings in draft, non-public forms. This can reduce uncertainty for these companies and allow them to raise capital with less exposure to market volatility which benefits companies and their investors.

The proposed rule 163B will not be exclusive and an issuer can rely on other Securities Act communication rules or exemptions when determining how, when and what to communicate related to a contemplated securities offering. Before, issuers planning an IPO have been prohibited from making written or oral offers of securities  before registration statement is filed. Expansion of "test-the waters" rule will allow to consult with investors more effectively and better recognize the information that is important to them before the public offering. This increased flexibility for the issuers provides effective way to evaluate market interest before incurring the cost related to the public offering. 
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