The Securities and Exchange Commission (“SEC”) announced on September 26, 2019 that it voted to adopt the application of “testing-the-waters” rules to all issuers who engage in raising capital in the public markets. This represents a significant expansion of that accommodation, as those rules were previously only available to certain issuers classified as emerging growth companies or “EGCs.” The new Rule 163B will become effective 60 days after publication in the Federal Register.
Importantly, only investors who are, or are reasonably believed to be, qualified institutional buyers (“QIBs”) and institutional accredited investors (as such term is defined in Rule 501 of Regulation D) (“IAIs”) are permitted to receive “testing-the-waters” communications under the new rule. QIBs are generally defined as accredited investors who act for their own account or the accounts of others and, in the aggregate, own and/or invest, on a discretionary basis, at least $100 million in securities of non-affiliate issuers.
“Testing-the-waters” accommodations are a product of the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted by Congress in 2012. The JOBS Act directed the SEC to permit EGCs to engage in oral or written communication with potential investors before or after the filing of a registration statement with the SEC in order gauge interest from certain investors in an offering of an issuer’s securities. Considered by many to be Congress’ attempt at crafting securities regulation for the new millennium, the JOBS Act reforms upended decades-old rules prohibiting issuers from discussing a potential securities offering with investors before a registration statement covering that offering was filed and declared effective by the SEC pursuant to the Securities Act of 1933.
Absent the “testing-the-waters” accommodation, Section 5 of the Securities Act of 1933 generally prohibits written or oral communications to investors relating to a potential securities offering until a registration statement has been filed with the SEC. The new Rule 163B now extends the “test-the-waters” accommodation to EGCs and non-EGCs alike, thereby encouraging more issuers to consider entering the public markets.
As both new and well-seasoned issuers alike continue to attempt to access capital in the public markets, we expect many issuers will avail themselves of these new rules upon effectiveness.