United States: SEC Adopts New Rule 163B To Permit "Test-The-Waters" Communications For All Issuers

On September 25, 2019, the Securities and Exchange Commission (SEC) adopted new Rule 163B under the Securities Act of 1933 (Securities Act) to allow all issuers to engage in “test-the-waters” communications in connection with a contemplated registered offering. Specifically, Rule 163B permits any issuer or person authorized to act on behalf of an issuer, including an underwriter, to engage in oral or written communications with certain potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs), either prior to or following the filing of a registration statement, to gauge interest in a contemplated registered securities offering. Rule 163B extends the accommodations currently available to emerging growth companies (EGCs) under Section 5(d) of the Securities Act to all issuers, including non-reporting issuers, non-EGC, well-known seasoned issuers and investment company issuers.

Investor Status

In general, a QIB is an institution that, acting for its own account or the accounts of other QIBs, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers. An IAI is any institutional investor that is also an accredited investor (as defined in Rule 501(a) of Regulation D). Rule 163B permits communications with potential investors that are, or that the issuer reasonably believes to be, QIBs or IAIs. As noted in the adopting release, Rule 163B does not specify the steps that an issuer could or must take to establish a reasonable belief regarding investor status or require the issuer to verify investor status. Instead, the SEC believes that issuers should continue to rely on the methods that they currently use to establish a reasonable belief with respect to an investor’s status as a QIB or IAI pursuant to Rules 144A and 501(a) of the Securities Act.

Section 12(a)(2) Liability and Anti-Fraud Provisions Still Applicable

Section 5(c) of the Securities Act prohibits any written or oral offers prior to the filing of a registration statement. Once an issuer has filed a registration statement, Section 5(b)(1) of the Securities Act limits written offers to a “statutory prospectus” that conforms to the information requirements of Section 10 of the Securities Act. To provide issuers with flexibility to gauge market interest, Rule 163B exempts communications from Section 5(b)(1) and Section 5(c). However, because Rule 163B communications will still be considered “offers” as defined in Section 2(a)(3) of the Securities Act, such communications will be subject to liability under Section 12(a)(2) in addition to the anti-fraud provisions of the federal securities laws. Application of the anti-fraud provisions and exposure to Section 12(a)(2) liability, along with limiting such communications to QIBs and IAIs, will mitigate investor protection concerns according to the SEC. Also, while not a condition to the availability of Rule 163B, the SEC did emphasize that information in a Rule 163B communication must not conflict with material information in the related registration statement. Based the SEC staff’s experience in reviewing test-the-waters material used by EGCs, the SEC notes that even if an issuer changes its capital raising strategy, modifies offering terms based on investor input or changes its messaging, material information about the issuer usually remains consistent, other than updates to reflect continuing operations and material changes that may develop during the time between the communication and filing. While recognizing that disclosure may change in order to reflect a change in circumstances or offering terms, the SEC highlights that information in the Rule 163B communication should not contain material misstatements or omission at the time the communication is made.

No Filing or Legend Requirements

In the adopting release, the SEC clarified that Rule 163B communications need not be filed with the SEC, which, if required, could “have a chilling effect on the usefulness of the rule” according to the SEC. Nor must Rule 163B communications include any specified legends. Additionally, the SEC clarified that a written communication used in reliance on Rule 163B would not constitute a free writing prospectus. The SEC did note, however, that, as is currently the practice of the SEC staff when reviewing offerings conducted by EGCs, the SEC or its staff could request that an issuer furnish any test-the-waters communication used in connection with an offering.

Rule 163B and Regulation FD

In its adopting release, the SEC cautioned that issuers subject to Regulation FD would need to consider whether any information in the test-the-waters communication would trigger any obligations under Regulation FD or whether an exception to Regulation FD would apply. In general, Regulation FD requires public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders if the issuer has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or is required to file reports under Section 15(d) of the Exchange Act. Therefore, communications made under Rule 163B that also include material nonpublic information could be subject to Regulation FD unless an exception applies.

Test-the-Waters Communications and General Solicitation

According to the SEC, whether a test-the-waters communication would constitute a general solicitation depends on the facts and circumstances regarding the manner in which the communication is conducted. The SEC notes that an issuer can engage in test-the-waters communications under Rule 163B concurrently with communications related to a private offering if it conducts such communications in a manner that preserves the availability of both Rule 163B and any other exemption upon which it may otherwise rely. If an issuer wishes to pursue a private placement in lieu of a registered offering immediately after engaging in test-the-waters communications, the issuer should consider whether the test-the-waters communication was conducted in such a way as to constitute a general solicitation. If it was a general solicitation, then the issuer should consider whether the private offering exemption upon which the issuer is relying allows for general solicitation and, if not, whether the investors in the private placement were solicited by the test-the-waters communication or through some other means that does not foreclose the exemption.


Finally, because Rule 163B is a non-exclusive exemption, an issuer would be able to rely concurrently on other Securities Act communications rules or exemptions when determining how, when and what to communicate related to a contemplated securities offering. As noted above, however, any issuer should be mindful of complying with the conditions of any other exemption or rule if it decides to claim the availability of such other exemption or rule with respect to any communications that may be considered offers.

Effective Date

Rule 163B will become effective 60 days after publication in the Federal Register.

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.

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