“Testing-the-Waters” for All

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On September 26, 2019, the U.S. Securities and Exchange Commission (SEC) voted to adopt new Rule 163B under the Securities Act of 1933, as amended (Securities Act), to expand the “testing-the-waters” (TTW) accommodation — currently available only to emerging growth companies (EGCs) — to all issuers regardless of size or reporting status. The new rule enables all issuers, or any person authorized to act on their behalf, including underwriters, to make oral and written offers (TTW communications) to sophisticated investors prior to or after the filing of a registration statement to gauge market interest in a possible registered public offering.

The new rule will become effective 60 days after publication in the Federal Register.


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 TTW rule. The TTW rule permits an EGC — a company with less than $1.07 billion in annual revenues and that does not qualify as a “large accelerated filer” — or persons authorized to act on the EGC’s behalf, to engage in TTW 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. Technology and life sciences companies that are EGCs routinely rely on the TTW rule to meet with investors prior to their IPO in order to familiarize investors with their business, gauge investor interest in a potential offering, and get feedback about their business and metrics.

Rule 163B

Under the new rule, all issuers, including non-reporting issuers, EGCs, non-EGCs, well-known seasoned issuers, and investment companies, as well persons acting on their behalf, will be able to “test-the-waters” with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). Prior to the new rule, only EGCs, and persons acting on their behalf, were allowed to engage in pre-filing communications with QIBs and IAIs. The new rule encourages public capital formation and will level the playing field for non-EGCs that are contemplating a registered public offering.

Key Takeaways

Some takeaways of the new rule:

  • The new rule is a nonexclusive exemption — an issuer may rely on other Securities Act communication rules or exemptions related to a contemplated securities offering.
  • TTW communications are not subject to SEC filing or legend requirements and are not considered to be a free writing prospectus.
  • Issuers will not be required to otherwise verify an investor’s QIB or IAI status as long as they reasonably believe the potential investor meets the requirements of the rule.
  • These TTW communications, while exempt from restrictions imposed by Section 5 of the Securities Act, will still be considered “offers” as defined in Section 2(a)(3) of the Securities Act and are therefore subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.
  • Issuers subject to Regulation FD (Reg FD) will need to consider whether any information in a TTW communication will trigger disclosure obligations under Reg FD or whether an exemption under Reg FD will apply. To the extent such TTW communication includes material nonpublic information (MNPI), or the fact that the issuer intends to pursue a registered public offering is deemed MNPI, the issuer must either (1) publicly disclose the MNPI or (2) obtain confidentiality agreements from potential investors (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).
  • While the new rule does not contain an express condition that TTW communications must not conflict with material information in the related registration statement, TTW communications should be generally consistent with the registration statement, and, consistent with the current review practice, the SEC staff could request that an issuer furnish the TTW communications to the SEC staff.
  • Where an issuer has taken reasonable steps to prevent TTW communications from being shared with non-QIBs and non-IAIs, and such information is nonetheless shared, such circumstances, in themselves, do not give rise to Section 5 liability for the issuer or the need for any cooling-off period.
  • If an issuer engages in TTW 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 valid private placement exemption. However, if an issuer seeks to pursue a private placement in lieu of a registered public offering immediately after engaging in TTW communications, the issuer should consider whether the communication was conducted in such a way as to constitute a general solicitation, which could preclude any private placement exemption.