Risk & Compliance

SEC Proposes Rule to ‘Test the Waters’ Before IPOs

The move is part of a push to make it easier for companies to go public amid a 50% decline in U.S. listings over the past two decades.
Lauren MuskettFebruary 20, 2019

The Securities and Exchange Commission has proposed expanding a rule to allow companies to privately test out the interest of prospective investors before going public. The move is part of a broad push by SEC chairman Jay Clayton to make it easier for companies to go public amid a 50% decline in U.S. listings over the past two decades.

“Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies,” Clayton said in a statement.

Current rules restrict such test offerings to smaller companies. Under the SEC’s definition, such “emerging growth companies” are defined as issuers with total annual gross revenue of less than $1 billion during the most recently completed fiscal year. New rules would apply both institutional and accredited investors.

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“I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. 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,” Clayton said.


The rule will have a 60-day public comment period following its publication in the Federal Register.

“This will benefit issuers as it provides a realistic window into the level of investor interest in an IPO as well as more accurately priced IPOs. Currently, the process is somewhat opaque,” said Dina Ellis Rochkind, a lawyer with Paul Hastings. “Expanding these provisions to all potential issuers is another step in the right direction.”

Clayton said the proposal is also subject to consultation and a final vote by the SEC commissioners.

Last August, Clayton, who is a Trump appointee, said he wanted to facilitate investment by individuals in companies that have not yet gone public.