SEC Expands Access to Test-the-Waters Communications

By Stephen Barlas
December 1, 2019

The U.S. Securities & Exchange Commission (SEC) has made it easier for some companies to file for initial public offerings (IPOs) by expanding its test-the-waters policy. The 2012 Jumpstart Our Business Startups (JOBS) Act allowed emerging growth companies (EGCs) to communicate with two experienced classes of investors prior to and after deciding to issue stock.


The two categories with whom potential issuers can talk are qualified institutional buyers or institutional accredited investors. At the end of September 2019, the SEC said all stock issuers, not just EGCs, could test the waters with those two groups. The thing to watch for going forward is whether any of the information disclosed under this rule might run afoul of restrictions in Regulation Fair Disclosure (Reg. FD), which requires public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders.


This new rule from the SEC is designed partly to lower the costs and improve the chances of success of filing an IPO. In comments to the SEC after the proposed rule was issued, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness stated: “We believe test-the-waters communications aid issuers in assessing investor demand and structuring their offerings, and expect that expanding the use of this technique beyond EGCs would motivate more private companies to consider a public offering.”


Stephen Barlas has covered Washington, D.C., for trade and professional magazines since 1981 and since 1984 for Strategic Finance and its predecessor Management Accounting. You can reach him at sbarlas@verizon.net.
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