Testing the Waters
Testing the Waters is a securities-offering practice that allows eligible issuers or authorized persons to communicate with specified institutional investors to gauge interest in a contemplated registered offering before or after filing.
How it works
Rule 163B permits oral or written Testing-the-Waters communications with Qualified Institutional Buyers and institutional Accredited Investors before or after a Registration Statement is filed. The communications remain offers under Securities Act Section 2(a)(3), but Rule 163B exempts them from Sections 5(b)(1) and 5(c). Emerging growth companies also have statutory Testing-the-Waters authority under Securities Act Section 5(d). Rule 163B communications are not required to be filed with the SEC under that rule.
The practice can occur before filing
Rule 163B specifically permits qualifying communications before a Registration Statement exists.
It can also continue after filing
The rule applies both before and after the filing date for the contemplated registered offering.
The audience is institutional
Potential investors must be QIBs, institutional Accredited Investors or reasonably believed to have the required status.
The communication remains an offer
Rule 163B exempts the communication from specified Section 5 restrictions but does not reclassify it as something other than an offer.
Worked example: reasonable belief
An issuer contacts an investment fund after reviewing information supporting a reasonable belief that the fund is a QIB. The issuer can use Rule 163B without obtaining a formal QIB certification in the rule itself.
Why issuers use the process
Investor feedback can help an issuer decide whether to proceed, size the transaction and assess likely pricing before incurring full offering costs.
Common mistakes
Treating Testing the Waters as public advertising; assuming natural-person Accredited Investors qualify under Rule 163B; assuming the communication is not an offer; and ignoring antifraud liability.
Example
Before publicly filing a follow-on offering, an issuer meets privately with several QIBs to discuss the contemplated financing and gauge likely demand. The meetings can qualify as Testing the Waters if Rule 163B’s investor and communication conditions are satisfied.
Example
Before publicly filing a follow-on offering, an issuer meets privately with several QIBs to discuss the contemplated financing and gauge likely demand. The meetings can qualify as Testing the Waters if Rule 163B’s investor and communication conditions are satisfied.
Professional note
Testing the Waters does not permit unrestricted public solicitation. The audience is limited, and antifraud rules continue to apply to what the issuer says.
Related terms
- Accredited investor
An investor who meets SEC income or net worth thresholds and may access private offerings.
- Securities Act Section 5
Securities Act Section 5 is the core federal provision regulating offers, sales and prospectus use for securities that must be registered, unless an exemption or other exclusion applies.
- Gun-Jumping
Gun-Jumping is the securities-law term for offering, promotional or sales activity that violates Securities Act restrictions on communications or transactions before the applicable registration conditions have been satisfied.
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