Risk & Compliance

SEC OKs Rule to Extend ‘Test-the-Waters’ Tool

All companies will now be able to gauge the interest of institutional investors in a possible public offering before filing a registration statement.
Matthew HellerSeptember 27, 2019

The U.S. Securities and Exchange Commission has voted to extend its “test-the-waters” accommodation in a move to encourage more companies to go public amid a 50% drop in listings over the past decade.

A final rule approved on Thursday allows any company to gauge market interest in a possible public offering through discussions with certain institutional investors before, or after, the filing of a registration statement.

Under the Jumpstart Our Business Startups Act in 2012, the “test-the-waters tool” had only been available to emerging growth companies.

“The final rule benefits from the staff’s experience with the test-the-waters accommodation that has been available to EGCs” since the JOBS Act,” SEC Chairman Jay Clayton said in a news release. “Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.”

The expansion of the TTW accommodation is one of several initiatives the SEC has taken recently to encourage companies to access public markets. EGCs accounted for 87% of IPOs between 2012 and 2017, according to a report by Ernst & Young.

The new Rule 163B allows companies to test the waters with potential investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors for the purpose of determining “whether such potential investors might have an interest in a contemplated registered securities offering.”