According to a Sept. 26, 2019 press release, the Securities and Exchange Commission recently voted to adopt a new rule, which allows all issuers to engage in “test the waters” communications with potential investors. According to the SEC, the rule was adopted in order to encourage more issuers to enter public equity markets.
The communications made under the rule are allowable as long as they are not intended to evade the requirements of Section 5 of the Securities Act, and issuers will still be required to ensure that their filings are compliant with the new rule.
In the past, companies were required to file registration statements on all securities, which had to be reviewed by the SEC and made effective before advertising them to the public. Section 5 of the 1933 Securities Act made it unlawful for any person to directly or indirectly advertise or communicate the sale of securities if the securities were not under an effective registration statement.
Emerging growth companies (EGCs) were exempt from this rule under the 2012 Jumpstart Our Business Startups Act (the JOBS Act) when Section 5(d) was added to the Securities Act. The EGCs were allowed to communicate to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) that they were contemplating issuing registered securities, either prior to or following the filing of their registration statements.
There are several beneficiaries of this rule, not just issuers other than EGCs. Mergers deemed to be offers and sales of securities under Rule 145(a) of the Securities Act that require a registration statement would be able to utilize these communications before filing a registration statement covering the merger. Additionally, IPO candidates who do not meet EGC criteria, or issuers without an effective registration statement covering the securities being offered, will benefit from the rule. However, even IPO users who do meet EGC criteria may choose to rely on the new rule since it offers greater protection under the “reasonable belief” standard for determining whether potential investors qualify as QIBs or IAIs. Under the new rule, communications should be with potential investors that are, or that the issuer reasonably believes to be, QIBs or IAIs.
From a practical standpoint, the benefit of this rule is limited for issuers with an effective shelf registration statement, as they are already able to offer their securities in marketing materials as long as the written communications meets SEC requirements or are exempt from those requirements. EGCs can continue to rely on Section 5(d) of the Securities Act.
Even though these communications are not required to be filed, they are still deemed to be offers within the meaning of Section 2(a)(3) of the Securities Act, and any misleading statements or omissions in the communications will be exposed to liabilities under the Securities Exchange Act of 1934.
The rule will become effective 60 days after publication in the Federal Register.
The full press release can be accessed on the SEC website: www.sec.gov.
For more information and a deeper dive on the SEC space, our SEC team is ready to co-create and co-develop solutions with your company: www.pkftexas.com/SECDesk.