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Securities Regulation

SEC Proposes to Expand “Test the Waters” Accommodation

By Anna Pinedo, Mayer Brown

On February 19, 2019, the Securities Exchange Commission (SEC or Commission) proposed a new rule under the Securities Act that would extend the ability to “test-the-waters” to all issuers. Currently, this ability is available only to emerging growth companies (EGCs).  This has been highly anticipated. In prior sessions of Congress, legislation had been proposed to do exactly this. Although most of the issuers that have undertaken IPOs in recent years are EGCs and already benefit from the ability to communicate with institutional investors, the notion of extending this communications safe harbor to other issuers has been viewed as providing greater flexibility without raising any investor protection concerns. 

The new accommodation is reflected in proposed Rule 163B.  The rule would allow all issuers to engage in test the waters communications with potential investors that are reasonably believed to be institutional accredited investors or qualified institutional buyers either prior to or following the date of filing of a registration statement relating to the offering.  The proposed rule would provide an exemption from the registration requirements of Section 5 of the Securities Act.  The communications could be oral or written, would not be required to be filed with the Commission, and would not be required to bear any legends.  Since written communications will be permitted, the Commission also proposes to amend Rule 405 to exclude written test the waters communications from the definition of “free writing prospectus.”  Of course, information shared in any test the waters communication must not conflict with material information included in the registration statement for the offering.  The Commission notes that issuers subject to Regulation FD would need to consider whether such communications trigger any Regulation FD obligations.  

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