- Neil R. E. Carr
SEC Adopts Rule Permitting “Test-the-Waters” Communications by All Issuers
September 27, 2019
On September 25, 2019, the SEC adopted a new rule to permit all issuers to engage in oral and written communications with investors that are, or are reasonably believed to be, qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAI”) either prior to or following the filing of a registration statement under the Securities Act of 1933, as amended (“Securities Act”) to determine whether these potential investors might have an interest in a contemplated registered securities offering.
The new rule, Rule 163B, will become effective 60 days after publication in the Federal Register.
The new rule extends the accommodation currently available to emerging growth companies (“EGCs”) to all issuers, including non-reporting issuers, EGCs, non-EGCs, well-known seasoned issuers, and investment companies (including registered investment companies and business development companies).
Summary of New Rule
New Rule 163B will permit any issuer or person authorized to act on behalf of an issuer, including an underwriter, either prior to or following the filing of a registration statement with the SEC under the Securities Act, to engage in oral or written communications with potential investors that are, or that the issuer reasonably believes are, QIBs or IAIs, to determine whether they might have an interest in the contemplated registered offering.
A QIB is generally defined as 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.
Currently, Section 5(c) of the Securities Act prohibits any written or oral offers prior to the filing of a Securities Act registration statement. Once an issuer has filed a registration statement, Section 5(b)(1) limits written offers to a “statutory prospectus” that conforms to the information requirements of Securities Act Section 10. Rule 163B communications will be exempt from Section 5(b)(1) and Section 5(c). However, these oral or written communications will be deemed “offers” as defined in Section 2(a)(3) of the Securities Act and will be subject to liability under Section 12(a)(2) of the Securities Act as well as the anti-fraud provisions of federal securities laws.
The SEC stated in its adopting release that information provided in a test-the-waters communication under the new rule must not conflict with material information in the related registration statement. Also, issuers subject to Regulation FD will need to consider whether any information in the test-the-waters communication would give rise to any obligations under Regulation FD, or whether an exception to Regulation FD would apply.
Communications under the rule will not need to be filed with the SEC. However, the SEC’s adopting release stated that the staff of the SEC’s Division of Corporation Finance anticipates requesting, in connection with its review of a registration statement, that any test-the-waters communication used in connection with the offering be furnished to the staff for review as is currently its practice when reviewing offerings conducted by EGCs.
In the adopting release, the SEC stated that whether a test-the-waters communication constitutes a general solicitation depends on the facts and circumstances regarding the manner in which the communication is conducted. If an issuer chooses to engage in test-the-waters communications under Rule 163B concurrently with communications related to a private offering, it can conduct such communications in a manner that preserves the availability of both Rule 163B and any offering exemption upon which it might otherwise rely.
Also, the SEC stated that where an issuer wishes to pursue a private placement in lieu of a registered offering immediately after engaging in test-the-waters communications, it should consider whether the test-the-waters communication constitutes a general solicitation. If it does constitute a general solicitation, the issuer should consider whether the private offering exemption upon which the issuer is relying allows for general solicitation and, if it does not, whether the investors in the private placement were solicited by means of such a test-the-waters communication, or through some other means that would otherwise not foreclose the availability of the exemption.
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