- The Securities and Exchange Commission (SEC) voted last week to adopt a rule extending its "test-the-waters" accommodation — currently available only to emerging growth companies — to all issuers.
- The rule permits all issuers to gauge market interest in a possible initial public offering (IPO) or other registered securities offering through discussions with certain institutional investors prior to, or following, the filing of a registration statement.
- The SEC said the extension could help stem a persistent drop in the number of IPOs in recent years. "The final rule could encourage additional registered securities offerings," it said.
In recent years, IPOs have dropped by 50%, estimates show. Reasons for the drop range from increased regulatory burdens to a growing view among emerging companies that selling to a larger company makes more sense than competing for capital in public markets.
The rule adds a section under the Securities Act of 1933 permitting issuers to engage in verbal or written communications with certain potential investors, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The SEC defines these potential investors as either qualified institutional buyers or institutional accredited investors.
The SEC said companies that haven't yet filed their registration will likely benefit the most.
"Testing the waters before public filing enables issuers to lower the risk of proprietary information disclosure and possibly to avoid incurring the cost of preparing a registration statement," the agency said.
"The final rule benefits from the staff's experience with the test-the-waters accommodation that has been available to EGCs [emerging growth companies] since the Jumpstart Our Business Startups Act (JOBS Act)," said SEC chairman Jay Clayton. "Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings."
The new rule is one of several SEC initiatives that build on provisions in the JOBS Act, enacted in 2012, intended to encourage companies to access public markets.
The rule takes effect 60 days after publication in the Federal Register. At press time, it was not yet published.