On September 26, 2019, the SEC announced (available here) that it has adopted a new rule, Rule 163B (available here) under the Securities Act of 1933, that allows all issuers to “test-the-waters." This accommodation, which had previously been available only to emerging growth companies (EGCs), allows issuers and authorized persons (e.g., underwriters) to engage in discussions with, and provide written offering material to, certain institutional investors prior to, or following, the filing of a registration statement, to determine market interest in potential registered securities offerings. Rule 163B will become effective 60 days after publication in the Federal Register.
In connection with the adoption of Rule 163B, SEC Chairman Jay Clayton noted in a public statement (available here) that Rule 163B will provide “both Main Street and institutional investors with more opportunities to invest in public companies." This is consistent with one of the tenets of the SEC's current Strategic Plan (discussed in our prior blog post available here) to increase the number of public companies for the benefit of Main Street investors.
The SEC initially proposed a new rule allowing all issuers to test-the-waters (the “Proposed Rule") on February 19, 2019 (available here, and discussed in our prior blog post available here). Rule 163B in the form adopted by the SEC is largely consistent with the Proposed Rule, with few exceptions.
Among other things, the SEC noted the following:
- All issuers – including non-reporting issuers, EGCs, non-EGCs, well-known seasoned issuers and investment companies (including registered investment companies and business development companies) – and “persons authorized to act on behalf of" the issuers – including issuers' investment bankers and other advisors – are eligible to engage in oral or written communications with potential investors that the issuers reasonably believe are qualified institutional buyers or institutional accredited investors.
- 163B communications will be considered “offers" under Section 2(a)(3) of the Securities Act, and as a result, will be subject to Section 12(a)(2) liability, as well as the anti-fraud provisions of the federal securities laws.
- Issuers will not be required to file 163B communications with the SEC or include any special legend on the communication.
- Information in a test-the-waters communication must not conflict with material information in the related registration statement.
- Regulation FD applies to 163B communications and issuers must consider whether any information in such communication triggers any obligations under Regulation FD where material nonpublic information needs to be publicly disclosed or shared only on a confidential basis.
We discuss Rule 163B in greater detail in our client alert (available here).
Our thanks to Jenny Choi in New York and Melanie Gertz in San Francisco for their assistance in preparing this summary and the related client alert.