On Sept. 25, 2019, the U.S. Securities and Exchange Commission (SEC) adopted previously proposed Rule 163B under the Securities Act of 1933, as amended, to expand the use of "test-the-waters" (TTW) communications – which, other than in Regulation A offerings, were previously available only to emerging growth companies (EGCs) and persons authorized to act on their behalf – to all issuers, regardless of size or reporting status, and persons authorized to act on their behalf. Rule 163B permits all issuers to engage in TTW communications with potential investors who are qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) regarding proposed securities offerings prior to, or following, the filing of a registration statement. This expansion will permit all issuers to assess market interest in, and to determine whether to proceed with, a registered offering before incurring substantial costs relating to any such offering.
Section 5 of the Securities Act restricts communications by issuers during different phases of a registered securities offering. Section 5(c) generally prohibits any written or oral offers prior to the filing of a registration statement, and Section 5(b)(1) limits any written offer following the filing of a registration to a "statutory prospectus" that conforms to the information requirements of Section 10 of the Securities Act. Violations of these provisions of Section 5, known as "gun jumping," could have adverse consequences for the issuer and the proposed offering.
In 2012, Congress passed the Jumpstart Our Business Startups Act, which among other things permitted EGCs and persons authorized to act on their behalf to engage in TTW communications with potential investors who are QIBs and IAIs, either before or after the filing of a registration statement, in order to assess such investors' interest in a proposed offering. As we previously reported, on Feb. 19, 2019, the SEC proposed new Rule 163B to expand the use of TTW communications to all issuers, regardless of size or reporting status, in order to enhance their ability to access the capital markets without incurring substantial related costs.
The SEC adopted Rule 163B and related amendments substantially as initially proposed. As adopted, Rule 163B permits all issuers and any persons authorized to act on their behalf, including underwriters and dealers, to engage in oral or written communications with potential investors who are, or are reasonably believed by the issuer or authorized person to be, QIBs or IAIs, either prior to or following the filing of a registration statement, in order to determine whether such potential investors may have an interest in a contemplated securities offering. Rule 163B exempts TTW communications from Section 5(b)(1) and Section 5(c) of the Securities Act, each as described above.
In addition, the SEC adopted amendments to Rule 405 to make clear that any written communication that complies with either Rule 163B or Section 5(d) of the Securities Act would not be considered a "free writing prospectus." TTW communications that comply with Rule 163B need not be filed with the SEC or include any specified legends. However the SEC noted that the "staff in the Division of Corporation Finance anticipates requesting, in connection with its review of a registration statement, that any test-the-waters communications used in connection with the offering be furnished to the staff for review, as is currently its practice when reviewing offerings conducted by EGCs." TTW communications will be deemed "offers" and thus subject to liability for any material misstatements or omissions in such communications at the time that they are made, as well as to liability under the antifraud provisions of federal securities laws. Rule 163B is non-exclusive, meaning that a company may rely on other Securities Act rules or exemptions. Finally, the SEC advised issuers that they must consider whether any information contained in a TTW communication would trigger any obligations under Regulation FD, which requires public disclosure of any material non-public information that has been selectively disclosed to certain persons or entities, or whether an exception to Regulation FD would apply.
Rule 163B and related amendments will be effective 60 days from their publication in the Federal Register.
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