United States: SEC Proposes To Expand "Testing-The-Waters" Accommodation To All Issuers

On February 19, 2019, the U.S. Securities and Exchange Commission (SEC) voted to propose Rule 163B under the Securities Act of 1933, as amended (Securities Act), that would expand the "testing-the-waters" accommodation — currently available only to emerging growth companies (EGCs) — to all issuers. The proposal would enable all issuers, or any person authorized to act on their behalf, including underwriters, to make oral and written offers to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) prior to or after the filing of a registration statement to gauge market interest in a possible initial public offering or other proposed registered securities offerings.

The rule was proposed in response to recent calls for the SEC to expand the "testing-the-waters" accommodation beyond EGCs to all issuers. Rule 163B is intended to benefit more issuers seeking capital in the public markets and to level the playing field with respect to permissible investor solicitations for EGCs and other issuers contemplating a registered securities offering.

Background

In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which created Section 5(d) of the Securities Act, otherwise known as the "testing-the-waters" rule. The rule permits EGCs — companies with less than $1.07 billion in annual revenues and that do not qualify as a "large accelerated filer" — or persons authorized to act on the EGC's behalf, to engage in "testing-the-waters" communications. Permitting EGCs to "test-the-waters" was intended to ease long-standing restrictions on "gun-jumping" under Section 5 of the Securities Act in order to provide increased flexibility to EGCs with respect to such communications, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.

Proposed Rule

Proposed Rule 163B would allow any issuer, not just an EGC, or any person authorized to act on its behalf, to engage in "testing-the-waters" communications with potential investors that are, or that the issuer reasonably believes to be, QIBs or IAIs, either prior to or following the date of filing of a registration statement related to such offering. All issuers — including nonreporting issuers, EGCs, non-EGCs, well-known seasoned issuers and investment companies — would be eligible to rely on the proposed rule.

The "testing-the-waters" rule and the related proposal are intended to help issuers assess the demand for and valuation of their securities, which in turn could improve the ability of issuers to conduct successful offerings and lower their cost of capital, thereby encouraging additional participation in the public markets. In summarizing the rationale for the proposed rule, the SEC proposing release stated that increasing the number of registered offerings could prove to be beneficial, resulting in improved issuer disclosure, increased transparency and resiliency in the marketplace and better-informed investors.

Takeaways

Some takeaways of the proposed rule:

  • The proposal is non-exclusive, and an issuer could rely on other Securities Act communication rules or exemptions related to a contemplated securities offering.
  • There are no SEC filing requirements (the communications would be excluded from the definition of a free writing prospectus) or legend requirements.
  • Issuers would not be required to verify investor status as long as they reasonably believe the potential investor meets the requirements of the rule.
  • These communications, while exempt from restrictions imposed by Section 5 of the Securities Act, would still be considered "offers" as defined in Section 2(a)(3) of the Securities Act and therefore subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.
  • "Testing-the-waters" communications may not conflict with material information in the related registration statement and, consistent with the current review practice, the SEC staff could request that an issuer furnish the communications to the SEC staff.
  • Issuers subject to Regulation FD (Reg FD) would need to consider whether information in such a communication would trigger disclosure obligations under Reg FD or whether an exemption under Reg FD would apply. The proposing release notes that to avoid application of Reg FD, an issuer could consider obtaining a confidential agreement from a potential investor engaged using Rule 163B since Reg FD is generally inapplicable if the selective disclosure is made to an individual owing a duty of trust or confidence to the issuer or who expressly agrees to maintain the disclosed information in confidence.

Request for Comment

The proposal will be subject to a 60-day public comment period following publication in the Federal Register.

For more information, please see the SEC's proposed rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
24 Mar 2019, Briefing, California, United States

Fenwick's Robert Brownstone will be presenting on: The e-Workplace: Privacy Issues and Cyber Security

26 Mar 2019, Symposium, California, United States

Learn to respond effectively to new governance challenges at venture capital firms and at portfolio companies, and explore best practices in fund management and limited partner relationships. Speakers include leading venture capitalists, limited partners, CEOs, regulators, attorneys, and scholars.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions