News & Events

Anthem Insights: SEC Expands “Testing the Waters” Communications to All

John Basnage

John Basnage

On 26 September 2019 the US Securities and Exchange Commission adopted rules under which companies can “test the waters” for interest in a prospective public offering.  The SEC’s new Rule 163B under the Securities Act of 1933 (Securities Act) in effect allows companies and persons authorized to act on their behalf, such as underwriters, to engage in oral discussions with, and provide written materials to, certain institutional investors before or after filing a registration statement to determine whether the investors might have an interest in the offering.  The investors that may be solicited are limited to two categories of institutional investors: qualified institutional buyers (QIBs) and institutional accredited investors (IAIs).  Rule 163B will come into effect on 3 December 2019.  A copy of the Rule is available here


The Jumpstart Our Business Startups Act of 2012 (JOBS Act), among other things, eased regulatory and compliance burdens on a category of smaller companies known as emerging growth companies (EGCs) to encourage public and private capital formation.  One of the effects of the JOBS Act was to remove “gun-jumping” restrictions that prohibited EGCs from communicating with investors prior to filing publicly a registration in respect of a proposed public offering to gauge their interest and solicit nonbinding indications of interests, a practice that was common in many public markets outside the United States.

Typically, testing-the-waters (TTW) activities resemble a traditional post-registration roadshow in which senior management meets with potential investors on the basis of a scripted presentation, which may or may not be accompanied by written materials.  Management is typically accompanied by representatives from the lead underwriters. 

Certain large companies that fell within the definition of “well-known seasoned issuers” (WKSIs) were able to communicate with, and make offers to, potential investors prior to filing a registration statement under the SEC’s existing Rule 163, but the accommodations in Rule 163 did not extend to underwriters, and were therefore of limited use.

The SEC’s new Rule 163B extends TTW accommodations to all companies.  It provides exemptions from the restriction on pre-filing offers (gun-jumping) contained in Section 5(c) of the Securities Act and the requirement than a written offer conform to the requirements of a prospectus under Section 5(b)(1) of the Securities Act.

Who can use

Rule 163B can be used by a company whether or not it is an EGC or a WKSI and whether or not it already has accessed US public markets, so is available for IPOs, follow-on offerings, secondary offerings and exchange offers  The Rule can also be used by a company’s authorized representatives, such as underwriters.  Importantly, a company contemplating a follow-on offering can now “wall-cross” (confidentially premarket to) potential institutional investors to gauge interest.

Content, legending and filing

There are no specific content, legending or filing requirements.  In its adopting release the SEC indicated that information in a TTW communication must not conflict with material information in a registration statement, although this is not an actual requirement of Rule 163B and the SEC also acknowledged that company information may change or evolve from the time of the TTW communication to the time the subsequent registration statement is filed.  

TTW communications are “offers” under the Securities Act and are therefore subject to the liability provisions under both Section 12(a)(2) and Section 17(a) under the Securities Act and Rule 10b-5 under the Securities Exchange Act of 1934.  It is anticipated therefore that companies and their underwriters will restrict information contained in TTW communications to that which is expected to be included in the subsequent registration statement and has been reasonably diligenced. 

Unlike written communications under existing Rule 163, a TTW communication does not constitute a “free writing prospectus” that needs to be filed.  

Who can be approached

A company and its underwriters can only test the waters with persons “reasonably believed” to be QIBs or IAIs.  Generally, a QIB is a specified institution that, acting for its own account or the accounts of other QIBs, owns and invests on a discretionary basis in the aggregate at least $100 million in securities of unaffiliated companies (and is typically investing on the basis of Rule 144A under the Securities Act). An IAI is any institutional investor that is also an “accredited investor” for purposes of Regulation D under the Securities Act.

The SEC has stated that companies may rely on the steps normally taken in connection with Rule 144A and Regulation D to assess a person’s QIB or AIA status; the SEC has not mandated additional verification procedures.  The SEC’s approach is intended to provide companies with flexibility to use methods that they believe are cost-effective and appropriate in light of relevant facts and circumstances.  Companies must take reasonable steps to ensure that TTW communications are not shared with non-QIBs and non-IAIs.

Testing the waters and private placements

Rule 163B addresses communications made in advance of a registered public offering; it does not restrict a company from subsequently entering into a private placement in place of the registered offering, or from conducting a concurrent private placement.

A company that engages in a private placement subsequently to conducting TTW communications in reliance on Rule 163B will, however, need to consider whether the TTW communications constitute “general solicitation or general advertising” that could preclude the company’s reliance on the private placement exemption.  If investors do in fact become interested in a private placement pursuant to TTW communications, the communications may very well constitute “general solicitation or general advertising” that is inconsistent with exemption on which the private placement is intended to be conducted.

The SEC confirmed that in the context of an offshore offering under Regulation S under the Securities Act, a TTW communication generally will not constitute prohibited “directed selling efforts”.

Regulation FD

Although generally not relevant for non-US companies that qualify as “foreign private issuers”, companies that are subject to Regulation FD will need to consider whether information contained in a TTW communication triggers a Regulation FD filing obligation.

For more information contact John Basnage at


This memorandum was prepared as a service to clients and other friends of Anthem Advisory to report on recent developments that may be of interest to them. The information in it is therefore general, and should not be considered or and may not be relied on as legal advice.