This week the SEC proposed to expand the “test-the-waters” accommodation—currently available to emerging growth companies (EGCs)—to all issuers, including investment company issuers. The proposed rule and related amendments under the Securities Act of 1933 would enable all issuers (and its authorized representatives, including underwriters) to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would 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 and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs).

In the SEC’s press release announcing the action, SEC Chairman Jay Clayton said, “Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies.”  Chairman Clayton added, “I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. 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 proposed Securities Act Rule 163B:

  • there would be no filing or legending requirements
  • test-the-waters communications may not conflict with material information in the related registration statement issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposed rule would be non-exclusive, meaning that an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering. An issuer would not be precluded, for instance, from relying on the proposed rule and Securities Act Section 5(d), Securities Act Rules 163 or 164, or Rule 255 of Regulation A.

The SEC release included the following helpful table which summarizes some of the existing provisions that issuers may rely on in addition to, or in lieu of, the proposed rule:



Section 5(d)
  • Allows EGCs and those acting on their behalf to test the waters with QIBs and IAIs before and after filing a registration statement to gauge their interest in a contemplated registered offering.
Rule 163
  • Allows well-known seasoned issuers (WKSIs) to make oral and written offers before a registration statement is filed, subject to certain conditions.
  • Does not restrict communications to any particular group of potential investors.
  • The communications may be made by or on behalf of the
    WKSI, but may not be made on behalf of the WKSI by an offering participant who is an underwriter or dealer.
  • Not available for communications related to business combination transactions or communications by
    registered investment companies or business development companies (BDCs).
  • Written communications are subject to certain legending requirements and a requirement to file such communications promptly upon the filing of a registration statement.
Rule 164
  • Allows certain issuers to use free writing prospectuses (FWPs) after filing a registration statement, on the condition that such FWPs are accompanied by legends and are publicly filed.
  • Ineligible issuers, as defined in Rule 405 cannot rely on Rule 164 except where the FWPs of such ineligible issuers, other than penny stock, blank check, and shell companies (other than business combination-related shell companies), solely contain a description of the terms of the securities being offered and the offering.
  • Registered investment companies and BDCs also currently cannot rely on Rule 164 to use FWPs.
Rule 255
  • Permits issuers to engage in solicitations of interest in Regulation A offerings before and after filing a Form 1-A, so long as the solicitation materials meet certain conditions, such as including legends or disclaimers and filing requirements.

The proposal will have a 60-day public comment period following its publication in the Federal Register.

For additional background reading on this topic, see this prior blog post.

Do you have questions about test-the-waters communications or any of the existing provisions mentioned above? Don’t hesitate to contact a Bass, Berry & Sims corporate and securities attorney.