Everyone into the Pool!

The Securities and Exchange Commission announced recently that it is adopting new Rule 163B to allow all issuers to “Test-the-Waters” with potential investors whom they reasonably believe are Qualified Institutional Buyers (QIBs) and/or Institutional Accredited Investors (IAIs).  In 2012, the JOBS Act allowed Emerging Growth Companies (EGCs) to engage in Testing-the-Waters discussions, but companies either too large or too seasoned to qualify as EGCs did not receive this benefit.

Rule 163B will afford non-EGCs, or persons authorized on their behalf, the same flexibility currently granted to EGCs.  As such, they can soon engage in oral or written communications with potential large institutional investors either prior to or following the filing of a registration statement.  The new rule can be used by issuers contemplating an IPO as well as reporting issuers, though reporting issuers should keep in mind Regulation FD and other concerns regarding the selective disclosure of material nonpublic information when contemplating Testing-the-Waters activities.

This new rule closes an important gap between EGCs and non-EGCs, which was somewhat exacerbated in 2017 when the SEC granted non-EGCs the same option available to EGCs to make confidential submissions of certain registration statements.  Not surprisingly, many non-EGCs wanted to avail themselves of the benefit of submitting an IPO registration statement confidentially.  Since a confidential submission is not a “filing” under the SEC rules, and certain offers cannot be made until after the first “filing”, a non-EGC registrant previously was faced with the choice of either taking advantage of the confidential submission rules, or filing publicly and having more flexibility to communicate with potential investors.

The new rule will become effective 60 days after publication in the Federal Register.   The full text of the press release is here.

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