SEC Proposes to Expand “Testing-the-Waters” Accommodation to All Issuers

image of server roomOn February 19, 2019, the U.S. Securities and Exchange Commission (SEC) voted to propose Rule 163B under the Securities Act of 1933, as amended (Securities Act), that would expand the “testing-the-waters” accommodation — currently available only to emerging growth companies (EGCs) — to all issuers. The proposal would enable all issuers, or any person authorized to act on their behalf, including underwriters, to make oral and written offers to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) prior to or after the filing of a registration statement to gauge market interest in a possible initial public offering or other proposed registered securities offerings.

The rule was proposed in response to recent calls for the SEC to expand the “testing-the-waters” accommodation beyond EGCs to all issuers. Rule 163B is intended to benefit more issuers seeking capital in the public markets and to level the playing field with respect to permissible investor solicitations for EGCs and other issuers contemplating a registered securities offering.


In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which created Section 5(d) of the Securities Act, otherwise known as the “testing-the-waters” rule. The rule permits EGCs — companies with less than $1.07 billion in annual revenues and that do not qualify as a “large accelerated filer” — or persons authorized to act on the EGC’s behalf, to engage in “testing-the-waters” communications. Permitting EGCs to “test-the-waters” was intended to ease long-standing restrictions on “gun-jumping” under Section 5 of the Securities Act in order to provide increased flexibility to EGCs with respect to such communications, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.

Proposed Rule

Proposed Rule 163B would allow any issuer, not just an EGC, or any person authorized to act on its behalf, to engage in “testing-the-waters” communications with potential investors that are, or that the issuer reasonably believes to be, QIBs or IAIs, either prior to or following the date of filing of a registration statement related to such offering. All issuers — including nonreporting issuers, EGCs, non-EGCs, well-known seasoned issuers and investment companies — would be eligible to rely on the proposed rule.

The “testing-the-waters” rule and the related proposal are intended to help issuers assess the demand for and valuation of their securities, which in turn could improve the ability of issuers to conduct successful offerings and lower their cost of capital, thereby encouraging additional participation in the public markets. In summarizing the rationale for the proposed rule, the SEC proposing release stated that increasing the number of registered offerings could prove to be beneficial, resulting in improved issuer disclosure, increased transparency and resiliency in the marketplace and better-informed investors.


Some takeaways of the proposed rule:

  • The proposal is non-exclusive, and an issuer could rely on other Securities Act communication rules or exemptions related to a contemplated securities offering.
  • There are no SEC filing requirements (the communications would be excluded from the definition of a free writing prospectus) or legend requirements.
  • Issuers would not be required to verify investor status as long as they reasonably believe the potential investor meets the requirements of the rule.
  • These communications, while exempt from restrictions imposed by Section 5 of the Securities Act, would still be considered “offers” as defined in Section 2(a)(3) of the Securities Act and therefore subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.
  • “Testing-the-waters” communications may not conflict with material information in the related registration statement and, consistent with the current review practice, the SEC staff could request that an issuer furnish the communications to the SEC staff.
  • Issuers subject to Regulation FD (Reg FD) would need to consider whether information in such a communication would trigger disclosure obligations under Reg FD or whether an exemption under Reg FD would apply. The proposing release notes that to avoid application of Reg FD, an issuer could consider obtaining a confidential agreement from a potential investor engaged using Rule 163B since Reg FD is generally inapplicable if the selective disclosure is made to an individual owing a duty of trust or confidence to the issuer or who expressly agrees to maintain the disclosed information in confidence.

Request for Comment

The proposal will be subject to a 60-day public comment period following publication in the Federal Register.

For more information, please see the SEC’s proposed rule.