The SEC has proposed a new rule which would allow all companies to solicit institutional investors, before or after the filing of a registration statement, to determine whether such investors might have an interest in purchasing securities in a contemplated registered offering. The SEC proposal would extend to all issuers an accommodation currently principally available only to emerging growth companies (companies with less than $1.07 billion of revenue). If adopted, the rule would give all companies the ability to gauge interest in a potential registered offering prior to incurring the time and expense of preparing and filing a registration statement with the SEC.
Key features of the proposed new rule would include the following:
- All Issuers. The exemption would apply to all issuers, including non-reporting issuers, emerging growth companies, non-EGCs, foreign private issuers, WKSIs, BDCs and investment companies.
- Underwriters. The exemption would also apply to any person authorized to act on behalf of an issuer, including underwriters.
- Timing. Testing the waters communications, whether oral or written, could be made at any time either prior to or following the filing of a registration statement.
- Investors. Testing the waters communications could be made to investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors. The SEC declined to specify the steps that an issuer could or must take to establish a reasonable belief that the investor is a QIB or IAI, but it is clearly less than would be needed to verify the status of the investor for purposes of Regulation D.
- All Registered Offerings. Testing the waters would be permitted in IPOs and all other registered securities offerings.
- No Filing. Testing the waters communications would not need to be filed with the SEC. However, the SEC staff could request such communications in connection with its review of an offering, as is the current practice with testing the water communications by emerging growth companies.
- No Legends. Special legends on the materials would not be required.
- Liability. As is currently the case for EGCs, testing the waters communications would be considered “offers” and thus would be subject to antifraud liability under Section 12(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. However, they would not be required to be filed as exhibits to the registration statement and would not be subject to Section 11 liability.
- Regulation FD. Regulation FD requires public disclosure of any material nonpublic information that is selectively disclosed to certain securities market professionals or shareholders if the issuer is already a public company. Testing the waters communications made under the proposed new rule could be subject to public disclosure under Regulation FD, unless the recipient has signed a confidentiality agreement or another exemption is applicable. If an issuer enters into confidentiality agreements but then chooses not to proceed with an offering, the issuer may need to cleanse the recipients of the information by making it public.
- Non-Exclusive. The proposed rule would be non-exclusive. Issuers could rely on other rules in lieu of or in addition to the new testing-the-waters proposed rule, including:
- Section 5(d), which allows EGC’s to test the waters with QIBs and IAIs,
- Rule163, which allows WKSIs to make oral and written offers to any investors before a registration statement is filed, subject to legending and filing requirements,
- Rule 164, which allows some issuers to send free writing prospectuses to all investors after filing a registration statement, subject to legending and filing requirements, and
- Rule 255, which allows issuers to engage in solicitations of interest to all investors in Regulation A offerings before and after filing a Form 1-A, subject to legending and filing requirements.
The SEC’s proposing release states that the SEC believes that the proposed rule can help issuers assess the demand for and valuation of their securities and, by reducing the potential costs and risks of conducting a registered offering, potentially make registered offerings more attractive to issuers. If an issuer tests the waters and then decides not to move forward with its offering, the issuer can save the cost of preparing the registration statement and the risk of public disclosure of sensitive or proprietary information to competitors. It also reduces the risk of miscalculating market interest and having to withdraw an offering, thus reducing potential reputational costs.
The SEC’s proposing release solicited comments on many aspects of the rule, such as the nature of the issuers that could benefit from the rule and the nature of the investors who could be solicited. Comments on the proposed rule are due within 60 days following publication of the rule in the Federal Register.