U.S. public offerings: All companies may soon be permitted to test the waters

The SEC has proposed a new rule to permit any company to test the waters for a U.S. public offering.1 Testing the waters means gauging institutional investors’ appetite for an offering before the company devotes significant management time and expense to preparing a comprehensive disclosure document to be filed with the SEC.

Currently, only emerging growth companies (EGCs)—generally, those with annual revenues of US$1 billion or less—are permitted to test the waters. Discussions are permitted among companies, investment banks acting on their behalf, and qualified institutional buyers (QIBs) or institutional accredited investors (IAIs).

Permitting all companies to engage in testing the waters with QIBs and IAIs is meant to incentivize capital formation and reflects the SEC’s view that testing the waters, which originated in the 2012 Jumpstart Our Business Startups Act, is generally beneficial for companies, investors and the public capital markets.

Cross-border offerings by Canadian companies

The new rule would further harmonize the U.S. and Canadian IPO regimes. Any Canadian company, whether or not it qualifies as an EGC, would be able to test the waters for a cross-border IPO by contacting sophisticated investors in both jurisdictions.

However, the rules would not be harmonized for seasoned Canadian companies raising capital in the United States. At present in Canada, testing the waters is only permitted for IPOs—although this restriction could be dropped as part of initiatives underway by Canadian securities regulators to streamline public companies’ compliance burdens. In the meantime, a seasoned Canadian company could choose to by-pass the Canadian capital markets and test the waters for a U.S.-only public offering; or it could conduct a cross-border offering but only test the waters in the United States, provided that appropriate controls on communications are implemented to prevent violations of the Canadian rules. Importantly, the cross-border conflict is alleviated for companies with a Canadian shelf prospectus in place.

Disclosure precautions

The disclosure that is ultimately provided to all potential investors in the SEC registration statement cannot be inconsistent with what was provided to QIBs and IAIs during testing the waters activities. Also, public companies that are subject to Regulation FD, and underwriters acting on their behalf, must take precautions to ensure that their testing the waters communications do not constitute illegal selective disclosure. Subject to certain exceptions, material undisclosed information cannot be selectively provided to QIBs and IAIs during testing the waters activities without a public company simultaneously disclosing it to the market.

The due date for comments is 60 days after the proposed rule is published in the Federal Register; we expect the due date to be in mid-April.


1 Proposed new Rule 163B is available on the SEC website at https://www.sec.gov/rules/proposed/2019/33-10607.pdf.

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