RegulationSeptember 30, 2019

SEC Finalizes ‘Test-The-Waters’ Policy Expansion, Allowing Companies to Solicit Investor Interest Before IPOs

New rule removes Obama-era revenue cap of <$1 billion for companies to solicit investor feedback before going public.

Reported by Steffan Navedo-Perez

Regulations put in place by the Obama administration that allowed companies to solicit investor feedback before going public has been expanded. In a vote last week, the Security and Exchange Commission (SEC) announced it has approved the removal of a previous $1 billion annual revenue cap, allowing companies of all sizes to solicit feedback.

The rule allows “any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be qualified institutional buyers and institutional accredited investors, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering.”

There are no filing or legending requirements, and the communications are deemed “offers.”

It’s an expansion of legislation enacted in 2012 called the “Jumpstarting Our Business Startups Act” (JOBS Act) that included provisions that allowed for “emerging growth companies,” or companies reporting under $1 billion in revenue, to solicit feedback from investors before going public.

SEC Chairman Jay Clayton applauded the success of the program since it was first introduced and noted “I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors,” in a prepared statement issued this past February. “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 agency’s initial proposition before entering a 60-day noted that the rule “could improve the likelihood of successfully raising capital in a registered offering,” and could “reduce the risk of having to withdraw a publicly filed registration statement and can also tailor offering size and other terms included in the initial filing more closely to market interest.”

The new rule also reduces the risk of a company disclosing its financial statements before an IPO, to potentially no gain if it decides not to go public before finalizing the decision. “The provision will provide all issuers with flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protectionism,” the SEC said.