New SEC Rule Permits All Issuers to “Test-the-Waters”
The SEC issued new rules in a release captioned “Solicitations of Interest Prior to a Registered Public Offering.” New Rule 163B enables all issuers to engage in test-the-waters communications with qualified institutional buyers, referred to as QIBs, and institutional accredited investors, referred to as IAIs, regarding a contemplated registered securities offering.
The communications permitted by the new rules will be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement. The expanded test-the-waters provision will provide all issuers with flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protections.
New Rule 163B permits 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, 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 such investors might have an interest in the contemplated offering.
Under current securities law:
- Section 5(c) of the Securities Act prohibits any written or oral offers prior to the filing of a 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 of the Securities Act.
As a result of the SEC’s action, Rule 163B communications are exempt from Section 5(b)(1) and Section 5(c). However, Rule 163B communications are subject to liability under Section 12(a)(2) of the Securities Act in addition to liability under other anti-fraud provisions of the federal securities laws.
Rule 163B communications do not need to be filed with the SEC. In addition, such communications are not required to include any specific legends.
In the adopting release, the SEC expressed its view 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. The SEC noted 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.
The SEC also cautioned that when an issuer wishes to pursue a private placement in lieu of a registered offering immediately after engaging in test-the-waters communications, the issuer should consider whether the test-the-waters communication was conducted in such a way as to constitute a general solicitation. If the communication constitutes 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.
The new rule does not modify the Commission’s existing framework for analyzing how an issuer can conduct simultaneous registered and private offerings. This 2007 guidance continues to be applicable to address circumstances that may arise with respect to pre-filing test-the-waters communications and concurrent or immediately subsequent private offerings.
All issuers—including non-reporting issuers, EGCs, non-EGCs, well-known seasoned issuers, or WKSIs, and investment companies (including registered investment companies and business development companies)—are eligible to rely on the rule.