The SEC has released proposed rules that would allow all issuers to communicate with certain institutional investors in a proposed offering before filing a registration statement via the “test-the-waters” accommodation. The latest round of rules would expand the test-the-waters accommodation to all issuers. The SEC has gradually expanded test-the-waters processes in recent years. The accommodation was made available under the 2015 JOBS Act to emerging growth companies, or issuers with annual gross revenue of less than $1 billion, and is also available to well-known seasoned issuers and issuers conducting Regulation A offerings.
Upon release of the proposed rules, SEC Chairman Jay Clayton commented that he has “seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors,” and that “the proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering."
Under the proposed rules, an issuer may communicate with institutional investors to determine whether the investors have an interest in a contemplated registered securities offering. The rules would allow communications with both qualified institutional buyers (QIBs) as defined in Rule 144A, and institutional accredited investors (IAIs) as defined in Regulation D. QIBs generally include institutions that invest in at least $100 million of securities, or broker-dealers that own or invest in at least $10 million of securities. IAIs generally include high-net-worth individuals, banks, financial institutions, and certain corporations.
Covered communications include communications made with eligible investors both before and after a registration statement is filed, and need not bear any legend or be filed with the SEC. However, the communications will continue to be considered offerings, could be subject to Section 12(a)(2) liability, and may not conflict with any material information in any registration statement filed for the offering.
The SEC is accepting comments on the proposed rules until April 29, 2019. Contact the experts at Michael Best’s Securities and Capital Markets team for more information on submitting comments or on conducting an offering with a test-the-waters component.