SEC Permits Test-the-Waters Communications for All Issuers — Practical Considerations

Rule 163B establishes exemptions from Section 5(c) of the Securities Act, which prohibits written or oral offers before the filing of a registration statement, and Section 5(b)(1) of the Securities Act, which limits written offers to prospectuses allowed by Section 10 of the Securities Act after such filing.

Extending the reach of the TTW communications exemption to all issuers, as well as persons authorized to act on their behalf, is the SEC’s latest move to facilitate capital raising. Rule 163B will allow all issuers, including funds and larger companies, to evaluate market interest without committing to the significant costs and risks associated with registration in both initial public offerings and follow-on offerings. The ability to gauge market reaction before placing a substantial amount of information into the public market also enables issuers to be opportunistic and choose the most favorable time and market environment in which to pursue an offering. Issuers will now have greater flexibility to engage in “test-the-waters” activities in a range of new contexts previously available only to EGCs, including investment-grade, high-yield and convertible debt offerings, common and preferred equity offerings, securitizations and acquisition financings. We expect Rule 163B to be one of many efforts by the SEC to promote and streamline issuers’ access to the public markets.


The SEC adopted the final rule substantially as proposed and discussed in our previous Sidley Update, with minor variations. Rule 163B will become effective on December 3, 2019.

Below are practical considerations concerning Rule 163B as adopted:

• Availability to all issuers. Any type of issuer may use Rule 163B. This includes non-reporting issuers, foreign private issuers, EGCs, non-EGCs, well-known seasoned issuers (WKSIs), issuers of asset-backed securities and investment companies (such as registered investment companies and business development companies) irrespective of size, sector or any other specification.

• Applicability to underwriters. In addition to issuers, Rule 163B permits persons authorized to act on their behalf, including potential underwriters, to engage with prospective investors through TTW communications. This contrasts with Rule 163 under the Securities Act, which is construed to allow only WKSIs themselves to make use of such communications.

• Non-exclusivity. Issuers may concurrently rely on other Securities Act rules or exemptions (e.g., Section 5(d), Rule 163, Rule 164 or Rule 255) when determining how, when and what to communicate in relation to a contemplated securities offering (provided they also comply with the conditions of any other rule or exemption relied upon).

• Class of investors solicited. As proposed, Rule 163B limits eligible recipients of TTW communications to potential investors that are, or are reasonably believed to be, QIBs or IAIs. A few commenters requested that the scope of potential investors under Rule 163B be expanded to include SEC-registered investment advisers, which could help issuers gauge the potential viability of a fund offering. While the SEC declined to expand the final rule to include SEC-registered investment advisers, it did leave open the possibility that such an expansion may be possible in the future as part of its ongoing review of the definition of “accredited investor” under Rule 501(a) of Regulation D. The SEC solicited feedback on this potential expansion in a recent concept release on the exempt offering framework. For additional information, please see our related Sidley Update.

• Reasonable belief. In order for the communications to fall under Rule 163B, the issuer or any person acting on its behalf must reasonably believe that the communication is being made to QIBs or IAIs. While the SEC did not adopt a safe harbor for establishing reasonable belief, the adopting release recommends that issuers and parties acting on their behalf continue to rely on the methods currently used to establish a reasonable belief regarding an investor’s status pursuant to Rules 144A and 501(a). These methods include relying on (i) a certification from an executive officer of the investor, (ii) an investor’s most recent publicly available annual financial statements, (iii) information filed with the SEC or another U.S. governmental agency, (iv) information filed with a foreign governmental agency or (v) information in a recognized securities manual or published by a recognized securities ratings agency.

• General solicitation. The SEC indicated that TTW communications could constitute general solicitation, depending on the facts and circumstances surrounding the communications. As a result, issuers wishing to either conduct a private offering concurrently with TTW communications or pursue a private placement in lieu of a registered offering following TTW communications must analyze whether those communications would constitute general solicitations and, if so, whether the private exemption relied upon allows for general solicitation. Since many investment banks have policies around the use of TTW communications in the EGC context, we would expect that these policies can be quickly adapted to ensure that TTW communications do not constitute general solicitation, such as restricting the initial outreach to a limited number of potential investors that have a pre-existing, substantive relationship with the issuer or the investment bank or banks engaged by the issuer.

• Consistency with registration statement. The proposing release stated that information in a Rule 163B communication must not conflict with material information in the related registration statement. The SEC acknowledged that circumstances or messaging may change between pre-filing TTW communications and a subsequent registration statement, but reiterated that such communications must not contain material misstatements or omissions at the time the statements are made. The statement in the proposing release is intended to provide guidance to issuers on their obligations under the federal securities laws with respect to TTW communications and is not a condition to the availability of Rule 163B. Because issuers, underwriters and their legal teams review TTW communications with the same care as disclosure in offering documents, we do not expect the preservation of this guidance to materially affect how pre-filing TTW communications will be used.

• Underwriting agreements. Given TTW communications are available to all issuers in all types of securities offerings, the investment banks’ standard form underwriting agreements for most types of securities offerings will likely be modified to contemplate the possibility of TTW communications, just as they were modified when the SEC adopted rules permitting the use of free writing prospectuses.

• Securities law liability. Rule 163B communications, while exempt from Section 5 of the Securities Act as described above, are deemed “offers” under the Securities Act and, thus, will be subject to Section 12(a)(2) liability in addition to the anti-fraud and other provisions of the federal securities laws that are applicable to offers. As such, TTW communications should be diligenced in the same manner as disclosure included in offering documents and should be covered by representations and indemnification provisions in underwriting agreements or purchase agreements for any subsequent underwriting or placement.

• Regulation FD. The SEC notes that reporting issuers must be aware that Regulation FD applies to TTW communications under Rule 163B. Unless the recipients of the communication expressly agree to maintain the information in confidence or otherwise owe a duty of trust to the issuer, a TTW communication may trigger Regulation FD disclosure if it selectively shares material non-public information with certain securities market professionals and shareholders without simultaneously disclosing that information to the general public. As such, we expect that issuers subject to Regulation FD that want to engage in TTW communications will typically follow wall-cross procedures in connection therewith, including obtaining a confidentiality agreement and carefully limiting the communications to select potential investors.
  
  
  
  

• Redistribution of TTW materials. In the event that information from TTW communications is inadvertently shared with non-QIBs or non-IAIs, the SEC confirmed that an issuer will not face Section 5 liability so long as the issuer took reasonable steps to prevent the information from being released. Rule 163B would not impose any cooling-off period requirements under such circumstances.

• Directed selling efforts. In response to public comments, the SEC confirmed in the adopting release that (i) communications made under Rule 163B generally would not be deemed “Directed Selling Efforts” under Rule 902(c) for purposes of Regulation S and (ii) issuers may engage in communications under Rule 163B to non-U.S persons that are also QIBs or IAIs.

• No filing or legending requirements/No free writing prospectus. TTW communications are not required to be filed with the SEC or include any specific legends or disclaimers. In connection with the adoption of Rule 163B, the SEC is amending the definition of “free writing prospectus” in Rule 405 of the Securities Act to expressly exclude written communications pursuant to Rule 163B and Section 5(d) of the Securities Act (which permits EGCs to engage in TTW communications). We note that the SEC has historically not treated Section 5(d) communications as free writing prospectuses required to be filed with the SEC. This amendment to the definition of “free writing prospectus” clarifies that neither Rule 163B TTW communications nor Section 5(d) TTW communications would trigger a filing obligation. However, consistent with current practices for TTW communications of EGCs, the SEC staff anticipates requesting, in connection with its review of a registration statement, that any Rule 163B TTW communications used in connection with the offering be furnished to the staff for review.

• Anti-evasion. The final rule does not include a proposed anti-evasion provision making the rule unavailable for any communication that, while in technical compliance with the rule, is part of a plan or scheme to evade the requirements of Section 5 of the Securities Act. The SEC agreed with commenters’ feedback that it is unclear how anti-evasion language would apply to TTW communications and thus could deter issuers from using Rule 163B.