U.S. Securities Law Briefing: SEC Proposes Expansion of “Testing the Waters" to All Issuers

As expected, the U.S. Securities and Exchange Commission (the “SEC”) has issued a proposed rule that would expand an exception to the strict communications rules governing U.S. public offerings by permitting all issuers to communicate with certain institutional investors at an earlier stage of the offering process.

The proposal is another in the series of offering-friendly, and in particular IPO-friendly, reforms that both Congress and the SEC have implemented beginning with the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). There will be a 60-day public comment period following the proposed rule’s publication in the Federal Register.

The U.S. Securities Act of 1933 (the “Securities Act”) restricts communications by issuers contemplating a registered securities offering during the initial phases of the offering process. Written and oral communications with potential investors prior to filing a registration statement are generally prohibited, with potentially severe consequences for “gunjumping” violations. The current restrictions have historically prevented market participants from engaging in pilot-fishing, market-testing and premarketing in many SEC-registered transactions, most significantly in U.S. IPOs. The JOBS Act provided an exception to these prohibitions by permitting emerging growth companies (“EGCs”)1 to communicate — or “test the waters” — with qualified institutional buyers (“QIBs”)2 or institutional accredited investors (“IAIs”)3 prior to or following the date of filing of a registration statement with the SEC.

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