SEC Adopts New Rule Allowing All Issuers to Test the Waters in Registered Offerings

By Nimish Patel

On September 26, 2019, the SEC announced that all issuers —including non-reporting issuers and investment companies (including registered investment companies and business development companies) will soon be able to “test-the-waters” in initial public offerings and other registered securities offerings. Under the newly adopted Rule 163B, any issuer will be able to engage in “test-the-waters” communications with qualified institutional buyers and institutional accredited investors.

Previously, under the Jumpstart Our Business Startups Act, only emerging growth companies were permitted to engage in “test-the-waters” communications. Rule 163B provides relief from the from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to, or after filing, a registration statement for issuers who do not qualify as emerging growth companies. This will give all issuers “flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protections.”

Once in effect, communications made under Rule 163B will:

• Have no filing or legending requirements;
• Be deemed “offers”; and
• Issuers subject to Regulation FD will need to consider whether any information in a “test-the-waters” communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

While the rule as a whole provides more flexibility for issuers, issuers should still be cautious when communicating with qualified institutional buyers and institutional accredited investors before, or after, filing a registration statement. While such communications will soon be permitted under Rule 163B, they will still be deemed “offers” under the Securities Act and subject to the anti-fraud provisions of the federal securities laws.

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