In yet another step designed to invigorate the US public offering environment and liberalize the US federal securities laws, the US Securities and Exchange Commission (the “SEC”) has voted to adopt a new rule expanding an exemption from the strict communications rules governing US public offerings. The rule will permit all issuers, including foreign issuers and investment fund issuers, to communicate with certain institutional investors at an earlier stage of the offering process. It will become effective 60 days after it is published in the Federal Register.
US Securities Law Briefing 1
In yet another step designed to invigorate the US public offering environment
and liberalize the US federal securities laws, the US Securities and Exchange
Commission (the â€œSECâ€) has voted to adopt a new rule expanding an
exemption from the strict communications rules governing US public
offerings. The rule will permit all issuers, including foreign issuers and
investment fund issuers, to communicate with certain institutional investors at
an earlier stage of the offering process. It will become effective 60 days after
it is published in the Federal Register.
New Rule 163B under the US Securities Act of 1933 (the â€œSecurities Actâ€) will
permit any issuer, or any person authorized to act on its behalf, to engage in
oral or written communications with potential investors that are, or are
reasonably believed to be, qualified institutional buyers (â€œQIBsâ€) or
institutional accredited investors (â€œIAIsâ€). Communications may be made
before or after the filing of a registration statement, in order to determine
whether those investors might have an interest in a contemplated registered
securities offering. The new rule exempts the communications from both
Securities Act Section 5(b)(1), which limits written communications to a
Section 10 â€œstatutory prospectus,â€ and Section 5(c), which prohibits any
written or oral offers before a registration statement is filed.
Testing the waters, which allows issuers and underwriters to engage with
investors long before they formally launch their offerings, has become an
important part of the IPO offering process, and its expansion to all issuers is a
The Securities Act restricts communications by issuers contemplating a
registered securities offering during the initial phases of the offering process.
Written and oral communications with potential investors prior to filing a
registration statement are generally prohibited, with potentially severe
consequences for â€œgun-jumpingâ€ violations. The current restrictions have
historically prevented market participants from engaging in pilot fishing,
market testing and pre-marketing in many SEC-registered transactions, most
significantly in US IPOs. The Jumpstart Our Business Startups Act of 2012
(the â€œJOBS Actâ€) provided an exemption to these prohibitions by permitting
Contents Background.................... 1
Who may rely on Rule 163B? ........................... 2
Which investors may issuers communicate with under Rule 163B? ........... 2
What constitutes a reasonable belief that an investor is a QIB or IAI? ... 2
What is the standard of liability for Rule 163B communications? ............ 3
Does Rule 163B impose any legending or filing requirements? ................ 3
Can Rule 163B communications be deemed â€œgeneral solicitationâ€?....... 4
US Securities Law Briefing 2
emerging growth companies (â€œEGCsâ€)1 to communicate â€” or â€œtest the
watersâ€ â€” with QIBS or IAIs before or after a registration statement is filed
with the SEC.
Who may rely on Rule 163B?
All issuers are eligible to rely on Rule 163B, including non-reporting issuers ,
EGCs, non-EGCs, well-known seasoned issuers (â€œWKSIsâ€), foreign issuers
and investment companies. Significantly, any person authorized to act on
behalf of an issuer, such as an underwriter, may also rely on the new rule to
communicate with QIBs and IAIs. By contrast, the current accommodation for
WKSIs under Rule 163B does not extend to underwriters acting on their
Reliance on Rule 163B is non-exclusive, meaning an issuer would be able to
rely concurrently on other Securities Act rules or exemptions for such
In the final rule, the SEC also chose to remove language in the proposed rule
that would have made Rule 163B unavailable for any communication that is
part of a plan or scheme to evade the requirements of Section 5 of the
Securities Act, even if in technical compliance with the rule. The SEC agreed
with concerns expressed by commenters that such language could raise
uncertainty and risk limiting the utility of the rule.
Which investors may issuers communicate with under Rule 163B?
Rule 163B only contemplates communications with certain institutional (and
not natural person) investors â€” namely, QIBs and IAIs. The SEC declined to
extend the rule to cover other types of investors, such as non-US persons or
any SEC-registered investment adviser.
Rule 144A under the Securities Act defines QIBs to include institutions that,
acting for their own account or the accounts of other QIBs, in the aggregate,
own and invest on a discretionary basis at least $100 million in securit ies of
unaffiliated issuers. Banks and other specified financial institutions must also
have a net worth of at least $25 million. A registered broker-dealer qualifies
as a QIB if, in the aggregate, it owns and invests on a discretionary bas is at
least $10 million in securities of issuers that are not affiliated with the broker-
IAIs are institutions that are accredited investors, as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) of Regulation D, such as banks,
savings and loans, broker-dealers, registered investment companies and
What constitutes a reasonable belief that an investor is a QIB or IAI?
Rule 163B does not require an issuer to verify investor status, and does not
specify the steps that an issuer could or must take to establish a reasonable
belief regarding investor status, in order to provide an issuer with the flexibility
to use methods it deems appropriate in light of the facts and circumstances of
1 An EGC is an issuer that had total annual gross revenues of less than $1.07 billion during its
most recently completed fiscal year.
US Securities Law Briefing 3
each offering and each potential investor. However, an issuer could not form
a reasonable belief if it has actual knowledge that the investor is not a QIB or
The SEC expects that issuers and underwriters will draw on some of the
existing market practices developed for determining QIB status in Rule 144A
offerings and IAI status in Rule 506 offerings to form a reasonable belief
about the status of investors they solicit under the final rule.
What is the standard of liability for Rule 163B communications?
Rule 163 communications are not subject to the strict liability provisions of
Section 11 of the Securities Act. These communications still constitute an
offer of securities under Securities Act Section 2(a)(10), however, so they
remain subject to the general anti-fraud provisions of the Securities Act and
the US Securities Exchange Act of 1934 (the â€œExchange Actâ€) (such as
Section 10(b) and Rule 10b-5) and to liability under Section 12(a)(2) of the
The SEC stated in the proposing release that Rule 163B communication must
not conflict with material information in the relevant registration statement. In
the adopting release, the SEC clarifies that this statement was meant to be a
reminder to issuers to comply with the federal securities laws, and not a
condition to reliance on Rule 163B. Information in the Rule 163B
communication should not contain material misstatements or omissions at the
time the communication is made, although the SEC recognizes that between
the time of the Rule 163B communication and the time a registration
statement is filed, disclosures may be changed in order to reflect a change in
circumstances or offering terms.2
Issuers subject to Regulation FD3 will also need to consider whether any
information in a test-the-waters communication would trigger disclosure
obligations under Regulation FD, or whether an exemption under Regulat ion
FD would apply.4
Does Rule 163B impose any legending or filing requirements?
The SEC will not require issuers to file Rule 163B communications5 or place
any specific legends on such communications.
2 The SEC notes that even if an issuer changes its capital raising strategy or modifies offering
terms based on investor input during the pre-fi ling test-the-waters phase, or where an issuer changes its â€œmessaging due to investor demand,â€ material information about the issuer itself
usually remains consistent, other than updates to reflect continuing operations and material changes that may develop during the time between the communication and fi ling.
3 Regulation FD applies to all companies that have a class of securities registered under Section
12 of the Exchange Act or that are required to fi le reports under Section 15(d) of the Exchange
Act. It does not, however, apply to foreign private issuers. 4 For example, Regulation FD generally does not apply if the selective disclosure was made to
a person who owes a duty of trust or confidence to the issuer or to a person who expressly agrees to maintain the disclosed information in confidence. An issuer could consider obtaining
confidentiality agreements from any potential investors in order to avoid the application of Regulation FD.
5 This includes under Rule 424(a) (Fil ing of prospectuses) or Rule 497(a) (Fil ing of investment
company prospectuses) of Regulation C under the Securities Act, or pursuant to Section 24(b)
of the US Investment Company Act of 1940.
US Securities Law Briefing 4
The SEC is also amending Rule 405 to clarify that a written communication
used in reliance on Rule 163B or Section 5(d)6 does not constitute a free
Although there are no Rule 163B filing requirements, the adopting release
notes that the SEC staff anticipates requesting that test-the-waters
communications be furnished to it as part of its review of the registration
statement, as is currently its practice when reviewing offerings conducted by
Can Rule 163B communications be deemed â€œgeneral solicitationâ€?
â€œGeneral solicitation or general advertisingâ€7 is not permitted in connection
with certain private offerings, such as those made pursuant to Securities Act
Section 4(a)(2) or Rule 506(b) of Regulation D. There is some concern that i f
a Rule 163B communication could be deemed general solicitation or general
advertising, an issuer that begins a registered offering and engages in Rule
163B communications would not be able to end the registered offering
process (perhaps due to information gained from testing the waters) and
conduct a private offering instead.
Although communications with QIBs and IAIs would generally not const itute
general solicitation, the SEC declined to take the position that a test -the-
waters communication made in reliance on Rule 163B would never be
deemed general solicitation. Instead, the SEC said, whether a Rule 163B
communication would constitute a general solicitation depends on the â€œfac ts
and circumstancesâ€ regarding the manner in which the communication is
conducted. If an issuer chooses to engage in Rule 163B communications
concurrently with communications related to a private offering, it can conduct
the communications in a manner that preserves the availability of both Rule
163B and any offering exemption upon which it might otherwise rely. If an
issuer has taken reasonable steps to prevent test-the-waters communications
from being shared with non-QIBs and non-IAIs (such as through
confidentiality agreements) and such information is nonetheless shared, in
the SECâ€™s view, such circumstances in themselves would not give rise to
Section 5 liability for the issuer or the need for any cooling-off period.
* * *
6 Section 5(d) is the statutory exemption added to the Securities Act by the JOBS Act to permit
EGCs to communicate with QIBs and IAIs prior to or following the date of fi ling of a registration
statement. The proposed rule would have only amended Rule 405 state that Rule 163B communications do not constitute free writing prospectuses. Although the SEC has historically
has not treated Section 5(d) communications as free writing prospectuses, it is amending Rule 405 to make the point clear.
7 As defined in Rule 502 of Regulation D, general solicitation and general advertising includes
advertisements published in newspapers and magazines, public websites, communications
broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use of an unrestricted, and therefore
publicly available, website constitutes general solicitation. The solicitation must be an â€œofferâ€ of securities, but solicitations that condition the market for an offering of securities may be
considered to be offers.
US Securities Law Briefing 5
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The expansion of the testing-the-waters exemption is a highly favorable
development for US public capital markets. The new rule, combined with recent
changes allowing all IPO issuers to submit their registration s tatement to the
SEC on a confidential basis, puts the United States more in line with other
major jurisdictions, such as the United Kingdom, which have long permitted
communications with investors (provided certain procedures are followed) at
early stages of the public offering process and confidential review by
We will continue to monitor developments in this area and welcome any
queries you may have.