U.S. public offerings: All companies will soon be able to test-the-waters

All companies will be permitted to gauge investors’ interest in advance of a potential U.S. public offering under expanded SEC rules becoming effective later in 2019. Confidential testing-the-waters discussions will be permitted among companies, investment banks acting on their behalf, and qualified institutional buyers or institutional accredited investors, before or after a registration statement is filed with the SEC. Currently, only emerging growth companies—generally, those with annual revenues of US$1 billion or less—have the freedom to test-the-waters.

Expanding the U.S. rule to all companies is a welcome regulatory change that the SEC hopes will incentivize public capital formation. Testing-the-waters helps reduce risk as companies and investment banks can assess the market’s appetite for a public offering before significant management time and expense is devoted to preparing a comprehensive disclosure document.

Comparison to Canada

The U.S. regime, once effective at approximately the beginning of December, will be significantly broader than the Canadian regime, as the former will permit any company to test- the-waters for any public offering, whereas the Canadian regime is limited to IPOs and imposes a two-week cooling-off period after testing-the-waters is complete before a preliminary prospectus may be filed. Moreover, Canada’s securities regulators announced in 2018 that liberalizing the Canadian rules is not a regulatory priority.

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