SEC proposes to expand ‘test-the-waters’ modernization reform to all securities issuers

The Securities and Exchange Commission voted last week (Feb. 19) to propose an expansion of a popular modernization reform that would permit investor views about potential offerings to be taken into account at an earlier stage in the process than is the case today.

The new rule and related amendments would expand the so-called “test-the-waters” accommodation, currently available to emerging growth companies (EGCs) to all issuers including investment company issuers.

This proposal would allow all prospective issuers, not just EGCs, to gauge market interest in a possible initial public offering or other proposed registered securities offering by permitting discussions with certain investors prior to the filing of a registration statement. The proposed reform builds on a similar provision of the Jumpstart Our Business Startups Act (JOBS Act) that has been limited to EGCs.

Generally, companies with more than $1 billion in annual revenues do not qualify as EGCs and, therefore, have not benefitted from JOBS Act provisions intended to foster capital formation in the public markets. The proposed rule follows action taken by the SEC’s Division of Corporation Finance in 2017 to extend another EGC reform to all issuers the ability to initially submit certain filings in draft, non-public form. As a result of that policy change, all issuers, not just EGCs, have been able to make non-public filings with the SEC as they begin the process of becoming a public company.

“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,” said SEC Chairman Jay Clayton. “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.”

The proposed test-the-waters rule and related amendments are intended to provide increased flexibility to issuers with respect to their communications with institutional investors about contemplated registered securities offerings, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.

The proposal will have a 60-day public comment period following its publication in the Federal Register. To view the SEC’s 76-page proposal, click here.