Securities Offerings: Rule 163 and Testing the Waters
Consider This Before Raising Money for Your Startup
In December 2019, the U.S. Securities and Exchange Commission (SEC) introduced a significant change to the landscape of capital markets, one that aimed to encourage capital formation and invigorate the public markets. This change came in the form of Rule 163B, which allows all registrants and their agents to "test the waters" with potential investors, both before and after filing a registration statement. This newfound flexibility represents a departure from the previous restrictions that limited such communications primarily to emerging growth companies (EGCs). So, what does "test the waters" mean, and how has Rule 163B reshaped the way companies approach securities offerings?
Test the Waters: A Dive into Rule 163B
Prior to the implementation of Rule 163B, corporations faced considerable challenges in gauging investor interest in a securities offering prior to submitting a registration statement with the SEC. It was difficult to reach out to potential investors during this vital pre-filing stage due to Section 5 of the Securities Act. The Jumpstart Our Business Startups (JOBS) Act of 2012, which introduced a new class of public corporations known as EGCs, changed the rules of the game. These EGCs were given the opportunity to "test the waters" both prior to and during the filing of registration statements, giving them an important resource for market analysis.
EGCs now have the option to submit draft registration statements in confidence for initial public offerings (IPOs) and certain follow-up offers. The registration process for was sped up by this private submission procedure.
Navigating the Waters with Rule 163B
Companies should bear in mind a few important aspects of Rule 163B as they use their newly acquired capacity to gauge investor interest:
1. Investor Type Restrictions: Qualified Institutional Buyers (QIBs), Institutional Accredited Investors (IAIs), and Investors Reasonably Believed to be QIBs or IAIs are the only investor types to whom communications are restricted under Rule 163B. Although the rule does not specify how to go about forming certain kinds of beliefs, it does provide latitude in selecting suitable techniques. Companies must also take reasonable measures to guard against test-the-waters information being shared with unqualified parties.
2. No Filing or Legends Needed: Test-the-waters communications do not have to be filed with the SEC or have any particular legends included, in contrast to some SEC communications. Nonetheless, if Division of Corporation Finance Staff members examine registration statements, they have the right to request these communications.
3. Responsibility: Under Securities Act Section 12(a)(2) and the federal securities laws' anti-fraud provisions, companies test-the-waters statements may expose them to liability. This emphasizes how crucial it is to treat these correspondences with the same attention to detail as securities filings.
4. Non-Exclusivity: Rule 163B is not exclusive, so businesses may utilize other Securities Act communication exemptions and regulations in addition to it. Although this flexibility has its limitations, each rule's requirements must be met in order to benefit from it.
5. Regulation FD: According to Regulation FD, which requires the public disclosure of important non-public information purposefully communicated to particular securities market professionals and shareholders, test-the-waters communications are not exempt from Rule 163B. Confidentiality agreements between QIBs and IAIs are recommended in order to manage this.
Closing Thoughts: Entering the New Capital Market Era
Because Rule 163B gives businesses the chance to "test the waters" with possible investors, it has completely changed the manner that corporations approach securities offerings. More enterprises are encouraged to explore accessing the public markets as a result of this regulation shift, which increases flexibility and lowers uncertainty. It is imperative that businesses exercise caution when navigating these waters, taking into account the limitations, liabilities, and compliance obligations associated with Rule 163B. Rule 163B represents a major turning point in the continuous endeavors to boost capital creation and the U.S. capital markets as the financial landscape changes.
