This proposed reform builds on a similar provision from the Jumpstart Our Business Startups (JOBS) Act, which was intended to promote capital formation in public markets. Typically companies with more than $1 billion in annual revenues do not qualify as EGCs and have thus not benefited from this JOBS Act provision. The proposed rules would make it possible for any issuer to take part in testing-the-waters opportunities. The SEC has previously proposed to extend another EGC reform to all issuers, namely the ability to initially submit certain filings in a draft, non-public form. Now all issues, not just EGCs, are able to make non-public filings with the SEC as they begin the process of becoming a public company.

The expansion of the test-the-waters rule (Proposed Securities Act Rule 163B) is intended to provide increased flexibility to issuers with respect to their communications with qualified institutional buyers and accredited investors about contemplated registered securities offerings, as well as a cost-effective way to evaluate market interest prior to incurring the costs associated with an offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement.

The following are some key points under the Proposed Securities Act Rule 163B:

• There would be no filing or legending requirements.
• The test-the-waters communications may not conflict with material information in the related registration statement.
• Issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or if an exemption under Regulation FD would apply.

The public comment period will be open for sixty days after the proposed changes are published in the Federal Register. The proposed rule changes can be read here. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the reference number (S7-01-19) in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, please remember to include reference number S7-01-19.

Sources:

SEC Proposes to Expand “Test-the-Waters” Modernization Reform to All Issuers (www.sec.gov)
Solicitations of Interest Prior to a Registered Public Offering (www.sec.gov)