Question 1

What are testing-the-waters communications?

Accepted Answer

Testing-the-waters communications are oral or written communications by an issuer, or by any person authorized to act on its behalf, with certain institutional investors, made to determine whether those investors might have an interest in a contemplated registered securities offering. They may take place either before or after a registration statement is filed with the SEC. Rule 163B(b)(1) states the permission and the exemption in two sentences: an issuer, or any person authorized to act on behalf of an issuer, 'may engage in oral or written communications with potential investors described in paragraph (c) of this section to determine whether such investors might have an interest in a contemplated registered securities offering, either prior to or following the date of filing of a registration statement with respect to such securities with the Commission,' and communications under the rule 'will be exempt from section 5(b)(1) (15 U.S.C. 77e(b)(1)) and section 5(c) of the Act (15 U.S.C. 77e(c)).' The accommodation exists in two parallel forms: Securities Act Section 5(d) (15 U.S.C. 77e(d)), added by the JOBS Act in 2012 for emerging growth companies, and Securities Act Rule 163B (17 CFR 230.163B), adopted in 2019 for all issuers. The rule's official heading is 'Exemption from section 5(b)(1) and section 5(c) of the Act for certain communications to qualified institutional buyers or institutional accredited investors.' The phrase 'testing the waters' appears nowhere in the codified rule text; the Commission uses 'test-the-waters communications' throughout the adopting release, which is itself titled 'Solicitations of Interest Prior to a Registered Public Offering.' The exemption reaches exactly two provisions of Section 5, leaving Sections 5(a) and 5(b)(2) intact: it governs communications and confers no authority to sell a security before the registration statement is effective.

Question 2

What is the statutory basis for emerging growth companies to test the waters?

Accepted Answer

Securities Act Section 5(d), codified at 15 U.S.C. 77e(d) and added by Section 105(c) of the Jumpstart Our Business Startups (JOBS) Act, Public Law 112-106 (April 5, 2012). The subsection, captioned 'Limitation,' reads in full: 'Notwithstanding any other provision of this section, an emerging growth company or any person authorized to act on behalf of an emerging growth company may engage in oral or written communications with potential investors that are qualified institutional buyers or institutions that are accredited investors, as such terms are respectively defined in section 230.144A and section 230.501(a) of title 17, Code of Federal Regulations, or any successor thereto, to determine whether such investors might have an interest in a contemplated securities offering, either prior to or following the date of filing of a registration statement with respect to such securities with the Commission, subject to the requirement of subsection (b)(2).' Four features of that text fix its scope. First, the opening words — 'notwithstanding any other provision of this section' — displace the prohibitions in Section 5 and nothing else; Section 105(c) did not touch the definition of 'offer' in Section 2(a)(3) or any liability provision of the Act. Second, the express reservation of 'the requirement of subsection (b)(2)' preserves Section 5(b)(2), which makes it unlawful to carry or cause to be carried a security in interstate commerce for the purpose of sale or delivery after sale unless it is accompanied or preceded by a prospectus meeting the requirements of Section 10(a). Third, the statute identifies the permitted audience by cross-reference to 17 CFR 230.144A and 17 CFR 230.501(a) and contains no reasonable-belief qualifier and no statement about filing — both of which Rule 163B later added in terms. Fourth, the codified amendment note records the drafting mechanics: 'Subsecs. (d), (e). Pub. L. 112-106 added subsec. (d) and redesignated former subsec. (d) as (e)' — the earlier subsection (d), on security-based swaps, added by the Dodd-Frank Act in 2010, became subsection (e).

Question 3

Which issuers are 'emerging growth companies' able to rely on Section 5(d)?

Accepted Answer

Section 2(a)(19) of the Securities Act (15 U.S.C. 77b(a)(19)), added by JOBS Act Section 101(a), defines an emerging growth company as 'an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year.' A separate, uncodified provision disqualifies older issuers outright: JOBS Act Section 101(d), carried as a note to 15 U.S.C. 77b, provides that notwithstanding Section 2(a)(19) an issuer is not an emerging growth company if the first sale of its common equity securities under an effective Securities Act registration statement occurred on or before December 8, 2011. An issuer that is an emerging growth company on the first day of a fiscal year continues to be treated as one until the earliest of the four events listed in Section 2(a)(19)(A) through (D): (A) the last day of the fiscal year during which it had total annual gross revenues at or above the indexed threshold; (B) the last day of the fiscal year following the fifth anniversary of the date of the first sale of its common equity securities under an effective Securities Act registration statement; (C) the date on which it has, during the previous three-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which it is deemed a 'large accelerated filer' as defined in 17 CFR 240.12b-2. The revenue figures in the opening sentence and in clause (A) are indexed; the $1,000,000,000 non-convertible-debt figure in clause (C) is not. A parallel definition sits in Exchange Act Section 3(a)(80), added by JOBS Act Section 101(b), and the same tests are codified for rule purposes in Securities Act Rule 405 and Exchange Act Rule 12b-2. Since Rule 163B took effect, failing any of these tests no longer forecloses testing the waters — it forecloses only the statutory route.

Question 4

What is the emerging growth company revenue threshold, and how is it indexed?

Accepted Answer

The threshold enacted in 2012 was $1,000,000,000; the current indexed figure is $1,235,000,000. Section 2(a)(19) directs the Commission to index the amount for inflation every five years to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the result to the nearest $1,000,000. The Commission made the first adjustment in 2017, raising the amount from $1,000,000,000 to $1,070,000,000, and the second in Release Nos. 33-11098 and 34-95715, 'Inflation Adjustments Under Titles I and III of the JOBS Act,' 87 FR 57394 — a final rule published and effective September 20, 2022 — which raised it to $1,235,000,000 by amending Securities Act Rule 405 and Exchange Act Rule 12b-2. The 2022 release sets out the arithmetic in four steps. The Commission took the CPI-U for December of the calendar year preceding the adjustment (December 2021, 278.802) and divided it by the CPI-U for December 2011 (225.672), the year before the JOBS Act established the definition, producing an inflation factor of 1.23543. It multiplied the initial $1,000,000,000 threshold by that factor, giving a raw adjusted amount of $1,235,430,000. Because the statutory rounding convention is applied to the increase rather than to the total, the Commission rounded the $235,430,000 increase to $235,000,000. Adding that rounded increase back to the initial $1,000,000,000 threshold produced $1,235,000,000. The revenue test operates on total annual gross revenues for the most recently completed fiscal year, not on market capitalization or public float.

Question 5

Which issuers may rely on Rule 163B?

Accepted Answer

All issuers. The SEC's small entity compliance guide for the rule states that it affects all issuers contemplating a registered securities offering, and lists them: reporting and non-reporting issuers; emerging growth companies; non-EGCs; well-known seasoned issuers; and investment companies, including registered investment companies and business development companies. The guide describes Rule 163B as extending to all issuers a test-the-waters accommodation previously available only to emerging growth companies under Securities Act Section 5(d). Rule 163B(b)(1) is drafted in terms of 'an issuer, or any person authorized to act on behalf of an issuer,' without qualification by size, revenue, reporting history or prior conduct; the rule's conditions attach to the audience (paragraph (c)) and to the character of the communication, not to the identity of the issuer. The compliance guide records three further points about scope. The rule is non-exclusive, a point taken up in its own section below. Funds and their advisers may have an interest in testing the waters to help assess market demand for a fund — for a particular investment strategy or fee structure, for example — before incurring the full costs of a registered offering. And Rule 163B provides no exemption from registration or from any other requirement of the Investment Company Act of 1940.

Question 6

When was Rule 163B adopted, and when did it take effect?

Accepted Answer

The Commission voted to adopt Rule 163B on September 26, 2019, as announced in SEC Press Release 2019-188, 'SEC Adopts New Rule to Allow All Issuers to Test-the-Waters.' The adopting release, No. 33-10699, 'Solicitations of Interest Prior to a Registered Public Offering' (File No. S7-01-19), is dated September 25, 2019. It was published in the Federal Register on October 4, 2019 at 84 FR 53011, spanning pages 53011 to 53036, and became effective on December 3, 2019 — 60 days after publication, as the press release stated it would. The codified rule text was published at 84 FR 53036. The eCFR source note for 17 CFR 230.163B reads '[84 FR 53036, Oct. 4, 2019, as amended at 85 FR 64276, Oct. 9, 2020]' and so records one subsequent amendment. That amendment came in the SEC's accredited-investor definition release, No. 33-10824, 85 FR 64234, effective December 8, 2020, which revised Rule 163B(c)(2) to add the new institutional accredited-investor categories in Rule 501(a)(9), (a)(12) and (a)(13) and added Note 1 on family clients, in order to maintain consistency between Rule 163B and Section 5(d).

Question 7

How do Securities Act Section 5(d) and Rule 163B coexist?

Accepted Answer

They run in parallel, and an emerging growth company may use either. Footnote 123 of the adopting release states the point directly: 'Given that Rule 163B is available to all issuers, an EGC may rely on Rule 163B in addition to Section 5(d).' Rule 163B did not amend, repeal or supersede the statute — Section 5(d) remains in force at 15 U.S.C. 77e(d) — and the Commission adopted the rule to extend the same accommodation to issuers Congress had not covered, acting in light of its experience with test-the-waters communications for emerging growth companies under Section 5(d). The two texts differ in four respects. Eligibility: Section 5(d) reaches only emerging growth companies, while Rule 163B reaches any issuer. Investor status: Rule 163B(c) permits communications with potential investors that are, 'or that an issuer or person authorized to act on its behalf reasonably believes are,' qualified institutional buyers or institutional accredited investors, whereas Section 5(d) names the categories without a reasonable-belief qualifier. Enumeration of institutional accredited investors: Rule 163B(c)(2) lists Rule 501(a)(1), (a)(2), (a)(3), (a)(7), (a)(8), (a)(9), (a)(12) and (a)(13), while Section 5(d) cross-refers to 17 CFR 230.501(a) as a whole and limits the audience to 'institutions that are accredited investors.' Filing: Rule 163B(b)(3) states in terms that communications made in reliance on the rule need not be filed, naming Rule 424(a), Rule 497(a) and Investment Company Act Section 24(b), while the statute is silent. The 2020 amendment to Rule 163B(c)(2) was made expressly to maintain consistency between the rule and the statute.

Question 8

Who may conduct testing-the-waters communications on an issuer's behalf?

Accepted Answer

The issuer, or any person authorized to act on the issuer's behalf. Rule 163B(b)(1) permits the communications by 'an issuer, or any person authorized to act on behalf of an issuer'; the SEC's compliance guide states that any issuer, or person authorized to act on behalf of the issuer 'including an underwriter,' may engage in the exempt communications. Securities Act Section 5(d) uses the parallel formulation — 'an emerging growth company or any person authorized to act on behalf of an emerging growth company.' The authorization language does three things in the rule's structure. It defines who is inside the exemption: on the face of the text the accommodation covers the issuer and persons the issuer has authorized, and no one else. It allocates the reasonable-belief judgment: Rule 163B(c) frames the standard as what 'an issuer or person authorized to act on its behalf reasonably believes,' so the underwriter or other agent conducting the outreach may form the belief about a prospective investor's status. And it fixes who is making the offer: Rule 163B(b)(2) deems 'any oral or written communication by an issuer, or any person authorized to act on behalf of an issuer, made in reliance on this rule' to be an offer as defined in Section 2(a)(3), which places the authorized person's communications, as well as the issuer's, inside the Section 12(a)(2) and antifraud framework. Rules governing what research analysts of participating firms may publish or say around an offering are a separate regime, covered on the IPO Center's research quiet periods page.

Question 9

Which investors may be approached in testing-the-waters communications?

Accepted Answer

Only two classes. Under Rule 163B(c), communications may be made with potential investors that are, or that the issuer or its authorized representative reasonably believes are, (1) qualified institutional buyers as defined in Rule 144A, or (2) institutions that are accredited investors as defined in Rule 501(a)(1), (2), (3), (7), (8), (9), (12) or (13) of Regulation D. Rule 144A(a)(1)(i) sets the principal QIB test: an entity of an enumerated type, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with it. What makes an institution a qualified institutional buyer or an institutional accredited investor — the entity categories in Rule 144A(a)(1), the ownership and net-worth thresholds that go with them, the exclusions from the computation in Rule 144A(a)(2) and the basis of measurement in Rule 144A(a)(3) — is set out on the Investors and IPO Demand page and is not restated here. What this page carries is the audience Rule 163B(c) fixes for testing-the-waters communications: the paragraphs of Rule 501(a) it enumerates, and the Note 1 gloss on the 'family client' category, are taken up in the next section.

Question 10

Which institutions count as 'institutional accredited investors' under Rule 163B?

Accepted Answer

Rule 163B(c)(2) lists eight paragraphs of the accredited-investor definition in 17 CFR 230.501(a): (a)(1) banks, savings and loan associations, brokers and dealers registered under Exchange Act Section 15, investment advisers registered with the Commission or a state or relying on the exemption in Advisers Act Section 203(l) or (m), insurance companies, registered investment companies and business development companies, Small Business Investment Companies and Rural Business Investment Companies, state employee benefit plans with total assets over $5,000,000, and ERISA plans meeting the stated fiduciary or asset conditions; (a)(2) private business development companies under Advisers Act Section 202(a)(22); (a)(3) 501(c)(3) organizations, corporations, Massachusetts or similar business trusts, partnerships and limited liability companies not formed for the specific purpose of acquiring the securities offered, with total assets over $5,000,000; (a)(7) trusts with total assets over $5,000,000, not so formed, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii); (a)(8) entities all of whose equity owners are accredited investors; (a)(9) entities of a type not listed in (a)(1), (2), (3), (7) or (8), not so formed, owning investments over $5,000,000; (a)(12) family offices as defined in Advisers Act Rule 202(a)(11)(G)-1 with assets under management over $5,000,000, not so formed, whose investment is directed by a person with the knowledge and experience to evaluate the merits and risks; and (a)(13) family clients of such a family office whose investment is directed by it. The categories Rule 163B does not list are as significant as those it does. Rule 501(a)(4) (directors, executive officers and general partners of the issuer), (a)(5) and (a)(6) (natural persons meeting net-worth or income tests), (a)(10) (natural persons holding designated professional certifications) and (a)(11) (knowledgeable employees of certain private funds) are omitted, so individual accredited investors are outside the accommodation however wealthy or sophisticated. Note 1 to Rule 163B(c)(2) closes the one category that straddles the line: 'Though the definition of "family client" from Rule 501(a)(13) includes both natural persons and institutions, only family clients that are institutions may be considered institutional accredited investors.' Rule 501(a)(9) measures 'investments' as that term is defined in Investment Company Act Rule 2a51-1(b), not total assets. The lead-in to Rule 501(a) also carries its own reasonable-belief standard, extending each category to a person 'who the issuer reasonably believes comes within' it at the time of the sale.

Question 11

What does the 'reasonably believes' standard in Rule 163B require?

Accepted Answer

Rule 163B(c) permits communications with potential investors that are, 'or that an issuer or person authorized to act on its behalf reasonably believes are,' qualified institutional buyers or institutional accredited investors. The Commission adopted that standard as proposed and declined to prescribe how the belief is to be formed. The adopting release states that Rule 163B does not specify the steps that an issuer could or must take to establish a reasonable belief regarding investor status, and does not require the issuer to verify investor status; the release explains that the approach is intended to allow methods that are cost-effective but appropriate in light of the facts and circumstances of each contemplated offering and each potential investor. The release fixes one outer limit and one reference point. The limit: an issuer 'could not, for example, form such reasonable belief if it has knowledge that the investor is not a QIB or IAI.' The reference point: the Commission stated that issuers may continue to rely on the methods they already use to establish a reasonable belief about an investor's status in other contexts, naming Rule 144A and Rule 501(a). Rule 144A(d)(1) supplies four non-exclusive methods on which a seller and any person acting on its behalf are entitled to rely in determining whether a prospective purchaser is a qualified institutional buyer: the purchaser's most recent publicly available financial statements; the most recent publicly available information in documents filed by the purchaser with the Commission or another U.S. federal, state or local governmental agency or self-regulatory organization, or with a foreign governmental agency or self-regulatory organization; the most recent publicly available information in a recognized securities manual; or a certification by the chief financial officer, a person fulfilling an equivalent function, or another executive officer specifying the amount of securities owned and invested on a discretionary basis. The first three carry currency conditions — information as of a date within 16 months preceding the date of sale for a U.S. purchaser and 18 months for a foreign purchaser.

Question 12

When may testing-the-waters communications take place, and which Section 5 restrictions are lifted?

Accepted Answer

Either before or after the filing of a registration statement. Rule 163B(b)(1) exempts qualifying communications from Securities Act Section 5(c) and Section 5(b)(1). The adopting release states what each prohibits: 'Section 5(c) prohibits any written or oral offers prior to the filing of a registration statement,' and 'Once an issuer has filed a registration statement, Section 5(b)(1) limits written offers to a "statutory prospectus" that conforms to the information requirements of Securities Act Section 10.' Securities Act Section 5(d) gives emerging growth companies the same timing flexibility in the statutory phrase 'either prior to or following the date of filing of a registration statement.' Two boundaries follow from the way the exemption is drawn. It names only Sections 5(b)(1) and 5(c): Section 5(a), which makes it unlawful to sell or deliver a security unless a registration statement is in effect, and Section 5(b)(2), which conditions delivery after sale on a Section 10(a) prospectus, are untouched, so testing the waters permits solicitation of interest but neither a sale nor a shortened path to effectiveness. And the accommodation attaches to registered offerings. The release states that an issuer conducting only offerings that qualify for an exemption from Section 5 would not specifically benefit from Rule 163B, 'since the rule only relates to communications about contemplated registered securities offerings that Sections 5(c) or 5(b)(1) of the Securities Act would otherwise restrict.' Section 5(b)(1) reaches only written offers — and Rule 405 defines a written communication to include radio and television broadcasts and other graphic communications — so the rule has no work to do for live oral offers made after a registration statement is filed. The wider set of communications permitted between filing and effectiveness — Rule 134 notices, the preliminary prospectus and free writing prospectuses — is covered on the IPO Center's waiting-period communications page.

Question 13

What does Rule 163B's non-exclusivity provision mean?

Accepted Answer

Rule 163B(a) provides: 'Attempted compliance with this rule does not act as an exclusive election, and the issuer also may claim the availability of any other applicable exemption or exclusion. Reliance on this rule does not affect the availability of any other exemption or exclusion from the requirements of section 5 of the Act (15 U.S.C. 77e).' The adopting release describes the effect as allowing an issuer to rely concurrently on other Securities Act communications rules or exemptions when determining how, when and what to communicate in connection with a contemplated securities offering. All commenters who addressed the provision supported it, and the Commission adopted it as proposed. The Commission did not adopt proposed Rule 163B(a)(2), which would have made the rule unavailable for any communication that, while in technical compliance, was part of a plan or scheme to evade the requirements of Section 5; it was persuaded by commenters who said the language would raise uncertainty and risk limiting the utility of the rule. The release attaches one condition and works through one recurring interaction. The condition: although an issuer may solicit interest from qualified institutional buyers and institutional accredited investors without legending or filing those materials in compliance with Rule 163B, if it decides to claim the availability of another exemption or communication rule for the same communications, it must also comply with the conditions of that other exemption or rule. The interaction concerns concurrent or subsequent private offerings. In the Commission's view, whether a test-the-waters communication constitutes a general solicitation depends on the facts and circumstances of the manner in which it is conducted, and an issuer conducting Rule 163B communications alongside communications relating to a private offering can conduct them in a way that preserves the availability of both Rule 163B and any offering exemption otherwise relied on. Where an issuer pursues a private placement in lieu of a registered offering immediately after testing the waters, the release frames the analysis as three questions: whether the communication constituted a general solicitation; if so, whether the private-offering exemption relied on permits general solicitation; and, if it does not, whether the private-placement investors were solicited by means of the test-the-waters communication or through some other means.

Question 14

Must testing-the-waters communications be filed with the SEC or carry a legend?

Accepted Answer

No to both, and the authority for each negative is different. Filing is disclaimed by the rule itself: Rule 163B(b)(3) provides that a communication made in reliance on the rule 'is not required to be filed with the Commission, including pursuant to § 230.424(a) or § 230.497(a) of Regulation C under the Act or section 24(b) of the Investment Company Act of 1940 (15 U.S.C. 80a-24(b)) and the rules and regulations thereunder.' A legend requirement is absent rather than disclaimed — the rule text imposes none — and the SEC's compliance guide states the position expressly: 'Rule 163B does not require issuers to file test-the-waters communications or to include legends or disclaimers.' The adopting release confirms both points twice over: the reasonable-alternatives discussion in its economic analysis records that, similar to Section 5(d), the final rule will not require issuers to use legends with test-the-waters communications and will not require issuers to publicly file them, and its final regulatory flexibility analysis states that communications complying with the rule 'do not need to include a legend or be filed with the Commission, provided that the communications do not trigger a disclosure obligation pursuant to any other rules.' Three consequences follow. First, no free writing prospectus conditions attach: the Rule 405 definition of 'free writing prospectus' excludes, at clause (4), 'a written communication used in reliance on Rule 163B (§ 230.163B) or on section 5(d) of the Act,' so the legend, filing and record-retention conditions Rule 433 imposes on free writing prospectuses — treated on the IPO Center's waiting-period communications page — never arise. Second, the absence of a filing requirement is not an absence of staff access. The release states that Commission staff in the Division of Corporation Finance anticipates requesting, in connection with its review of a registration statement, that any test-the-waters communication used in connection with the offering be furnished for review, as is its practice when reviewing offerings conducted by emerging growth companies; the authority cited is Rule 418 (17 CFR 230.418), under which the Commission or its staff may, where deemed appropriate, request supplemental information — including reports or memoranda prepared for external use in connection with the proposed offering. Third, the release records the Commission's observation that information in a Rule 163B communication must not conflict with material information in the related registration statement, and its statement that the materials must not contain material misstatements or omissions at the time the statements are made.

Question 15

Are testing-the-waters communications still 'offers' subject to liability?

Accepted Answer

Yes. Rule 163B(b)(2) provides that any oral or written communication made in reliance on the rule 'will be deemed an "offer" as defined in section 2(a)(3) of the Act (15 U.S.C.77b(a)(3)).' The adopting release states that such communications, though exempt from Sections 5(b)(1) and 5(c), 'would be considered "offers" as defined in Section 2(a)(3) of the Securities Act and would therefore be subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.' Section 12(a)(2), codified at 15 U.S.C. 77l(a)(2), gives the purchaser a rescission or damages remedy against a person who offers or sells a security by means of a prospectus or oral communication containing an untrue statement of a material fact or a material omission; its elements are set out in the glossary below. Note 69 of the release states the position in full: 'Liability under Section 12(a)(2) will attach to test-the-waters oral and written communications under the rule both before and after a registration statement has been filed. Communications under the final rule will also be subject to the anti-fraud provisions of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder.' Section 17(a), at 15 U.S.C. 77q(a), reaches fraud in the offer or sale of any security by three routes, also set out below. The release also grounds the breadth of 'offer', noting that the term 'has been interpreted broadly and goes beyond the common law concept of an offer,' citing Diskin v. Lomasney & Co., 452 F.2d 871 (2d Cir. 1971) and SEC v. Cavanagh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998).

Question 16

What happens if testing-the-waters communications reach investors outside the permitted audience?

Accepted Answer

Communications with potential investors that are not — and are not reasonably believed to be — qualified institutional buyers or institutional accredited investors fall outside Rule 163B and Section 5(d) and remain subject to Section 5 of the Securities Act, including the Section 5(c) prohibition on offers before a registration statement is filed. Investor.gov explains that the failure to comply with applicable restrictions on making 'offers' is referred to as 'gun-jumping,' and that the scope of communications potentially subject to restriction is quite broad because the SEC and courts have broadly construed the term 'offer.' The adopting release addresses onward transmission separately from the issuer's own outreach. Responding to a comment about a qualified institutional buyer or institutional accredited investor passing test-the-waters information to non-qualifying parties in breach of a confidentiality agreement or otherwise contrary to steps the issuer had taken, the Commission stated that where an issuer has taken reasonable steps to prevent test-the-waters communications from being shared with non-QIBs and non-IAIs and the information is nonetheless shared, 'such circumstances, in themselves, would not give rise to Section 5 liability for the issuer or the need for any cooling-off period.' Investor.gov also notes that the federal securities laws do not define 'quiet period'; the term refers to the period surrounding the filing of a registration statement, lasting at a minimum from filing until SEC staff declare the registration statement effective.

Question 17

How do testing-the-waters communications differ from a road show?

Accepted Answer

Rule 433(h)(4) fixes three elements for a road show: it is an offer; it carries a presentation regarding an offering by one or more members of the issuer's management; and it discusses one or more of the issuer, that management and the securities being offered. A statutory prospectus, or a portion of one filed as part of a registration statement, is excluded from the definition. Testing-the-waters communications instead operate under Rule 163B or Section 5(d), are limited to qualified institutional buyers and institutional accredited investors, need not involve management, and may occur before any registration statement has been filed. The road show as an event, its formats and its conduct are covered on the IPO Center's IPO road show page. The regulatory treatment diverges at the definitional level. Under Rule 433(d)(8)(i), a road show for an offering that is a written communication is a free writing prospectus and so sits inside the Rule 433 regime, but as a general matter it need not be filed. Rule 433(d)(8)(ii) states the exception: a written road show for an offering of common equity or convertible equity securities by an issuer that, at the time the registration statement for the offering is filed, is not required to file Exchange Act Section 13 or 15(d) reports must be filed, unless the issuer makes at least one version of a bona fide electronic road show available without restriction. By contrast, clause (4) of the Rule 405 definition of 'free writing prospectus' excludes written communications used in reliance on Rule 163B or on Section 5(d) altogether, so the Rule 433 conditions never engage. Audience runs the other way as well: Rule 163B confines the communication to two classes of institution, while Rule 433(d)(8)(ii) expressly contemplates a bona fide electronic road show made available without restriction to any person. The road show is also the event that fixes the public-filing deadline for a previously confidential draft registration statement, addressed on the IPO Center's confidential submission page.

Question 18

How does Regulation FD apply to testing-the-waters communications?

Accepted Answer

It applies only if the issuer is already an Exchange Act reporting issuer, which a company testing the waters before its initial public offering generally is not. Regulation FD defines its own subject: under 17 CFR 243.101(b), an 'issuer' subject to the regulation 'is one that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)),' including closed-end investment companies but not other investment companies, foreign governments or foreign private issuers. A company that has neither registered a class under Exchange Act Section 12 nor incurred a Section 15(d) reporting obligation falls outside that scope test — the ordinary position of an issuer whose first registration statement is contemplated or pending, since the Section 15(d) duty attaches on effectiveness — so Regulation FD does not reach its pre-IPO solicitations of interest. An issuer that already holds either status is within Regulation FD even if it has not yet sold common equity to the public. For an issuer that is already reporting — one testing the waters for a follow-on offering, for instance — 17 CFR 243.100(a) requires public disclosure of material nonpublic information selectively disclosed to the persons described in Rule 100(b)(1), simultaneously for an intentional disclosure and promptly for a non-intentional one, unless an exclusion in Rule 100(b)(2) applies. The adopting release traces the same sequence and notes that many qualified institutional buyers and institutional accredited investors are of the types covered by Rule 100(b)(1), so a communication under the rule that includes material nonpublic information could fall within Rule 100(a) unless an exclusion under Rule 100(b)(2) applies. Three exclusions in Rule 100(b)(2) bear on these communications: disclosure to a person who owes a duty of trust or confidence to the issuer, 'such as an attorney, investment banker, or accountant'; disclosure to a person who expressly agrees to maintain the information in confidence; and disclosure made in connection with a registered securities offering by one of six enumerated means, which include a registration statement or prospectus contained in it, a free writing prospectus used after filing, any other Section 10(b) prospectus, a Rule 135 notice, a Rule 134 communication, and 'an oral communication made in connection with the registered securities offering after filing of the registration statement for the offering.' A written test-the-waters communication, and any communication made before filing, is not among those enumerated means. Rule 101(e) prescribes how the public disclosure is made — a Form 8-K furnished or filed, or another method reasonably designed to provide broad, non-exclusionary distribution — and Rule 102 provides that a failure to disclose required solely by Rule 100 is not itself a Rule 10b-5 violation.

Question 19

Where are the governing texts and official guidance on testing the waters published?

Accepted Answer

In five places, all free of charge. The rule text of 17 CFR 230.163B is published in the Electronic Code of Federal Regulations. The adopting release, No. 33-10699, is published in the Federal Register at 84 FR 53011 (October 4, 2019) and on the SEC's website as Release 33-10699. Securities Act Section 5(d) is codified at 15 U.S.C. 77e(d) and published in the U.S. Government Publishing Office edition of the United States Code on govinfo, alongside the enacted text of the JOBS Act at Public Law 112-106. The SEC publishes a small entity compliance guide, 'Solicitations of Interest Prior to a Registered Public Offering,' dated December 3, 2019. And the adoption was announced in SEC Press Release 2019-188 (September 26, 2019), which carries a fact sheet summarizing the rule. Each is a U.S. Government work in the public domain under 17 U.S.C. 105, and they differ in what they contain and in how they age. The eCFR text is the operative rule as currently in force, updated continuously, and is the only one of the five that shows later amendments to the rule, such as the 2020 revision of Rule 163B(c)(2). The Federal Register version of the adopting release is fixed at publication and contains material found nowhere else — the comment summary, the Commission's responses on investor status, non-exclusivity and fund use, the economic analysis, and the amendatory instructions. The U.S. Code compilation on govinfo shows the statute as amended together with the notes tracing each change to its public law.

Feature	Securities Act Section 5(d) (EGCs)	Rule 163B, 17 CFR 230.163B (all issuers)
Legal basis and date	Statute — Section 5(d) of the Securities Act, 15 U.S.C. 77e(d), added by JOBS Act Section 105(c), Public Law 112-106 (April 5, 2012) · source	SEC rule — adopted by Commission vote September 26, 2019 in Release No. 33-10699 (dated September 25, 2019), published at 84 FR 53011 (October 4, 2019), effective December 3, 2019 · source
Eligible issuer	Emerging growth companies only, as defined in Securities Act Section 2(a)(19) — revenue under the indexed threshold ($1,235,000,000 since September 20, 2022) and no first registered common-equity sale on or before December 8, 2011 · source	All issuers, including reporting and non-reporting issuers, EGCs, non-EGCs, well-known seasoned issuers, and investment companies including registered investment companies and business development companies · source
Who may communicate	The emerging growth company or any person authorized to act on its behalf · source	The issuer or any person authorized to act on its behalf, including an underwriter · source
Permitted audience	Qualified institutional buyers and institutions that are accredited investors, as defined in 17 CFR 230.144A and 17 CFR 230.501(a) · source	Qualified institutional buyers (Rule 144A) and institutions that are accredited investors under Rule 501(a)(1), (2), (3), (7), (8), (9), (12) or (13) · source
Investor-status standard	The statute names the categories with no reasonable-belief qualifier · source	Investors that are, or that the issuer or a person authorized to act on its behalf reasonably believes are, QIBs or IAIs; the rule prescribes no verification steps · source
Timing	Either prior to or following the date of filing of a registration statement · source	Either prior to or following the date of filing of a registration statement · source
Section 5 provisions displaced	Operates 'notwithstanding any other provision of this section,' expressly subject to the Section 5(b)(2) prospectus-delivery requirement · source	Exempt from Section 5(b)(1) and Section 5(c) only; Sections 5(a) and 5(b)(2) are untouched · source
Non-exclusivity	No exclusive-election provision appears in the statutory text · source	Rule 163B(a): attempted compliance is not an exclusive election, and reliance does not affect any other exemption or exclusion from Section 5 · source
Filing and legending	The statute states no filing or legending requirement · source	Expressly not required to be filed (including under Rule 424(a), Rule 497(a) or Investment Company Act Section 24(b)); the SEC compliance guide states no legend or disclaimer is required · source
Free writing prospectus status	Excluded — Rule 405 clause (4) removes a written communication used in reliance on Section 5(d) from the definition · source	Excluded — Rule 405 clause (4) removes a written communication used in reliance on Rule 163B from the definition · source
Liability status	JOBS Act Section 105(c) amended Section 5 only, leaving the Section 2(a)(3) definition of 'offer' and the Act's liability provisions unamended · source	Deemed 'offers' under Section 2(a)(3) by Rule 163B(b)(2); subject to Section 12(a)(2) and the antifraud provisions, and must not conflict with material information in the related registration statement · source
Regulation FD	Applies only where the issuer has a class registered under Exchange Act Section 12 or must report under Section 15(d) — generally not a pre-IPO company · source	Same test; the adopting release cautions that issuers subject to Regulation FD must consider whether an exclusion under Rule 100(b)(2) applies · source
Staff access to the materials	Division of Corporation Finance practice has been to request EGC test-the-waters materials in connection with its review · source	Rule 418 supplemental-information authority; the release states staff anticipates requesting the communications in connection with registration statement review · source

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