All issuers considering a registered securities offering will now be able to engage in “testing-the-waters” communications with certain investors prior to and after the filing of a registration statement.
The rule is intended to enable all issuers to function more efficiently and cost-effectively in the public capital markets.
The rule will become effective on December 3, 2019.

Effective as of December 3, 2019, under new Rule 163B (Rule 163B) adopted by the Securities and Exchange Commission (the SEC), any issuer contemplating a public offering of its securities, and those authorized to act on the issuer’s behalf, including underwriters, will be permitted to engage in oral or written communications with certain potential investors in order to gauge market interest in the offering on a confidential, commitment-free basis. Rule 163B will expand the accommodations already afforded to emerging growth companies (EGCs) under Section 5(d) of the Securities Act of 1933 (the Securities Act) to “test the waters,” i.e., engaging in oral or written communications with qualified institutional buyers and institutional accredited investors, regardless of whether a registration statement relating to the securities has been filed or whether the strict prospectus requirements under the Securities Act have been complied with, to all issuers, irrespective of their annual revenues or SEC reporting history. By permitting all issuers to better evaluate the demand for and valuation of their securities in this way, Rule 163B is intended to mitigate the cost of capital in the registered offering context without undercutting existing investor protections.


Section 5(c) of the Securities Act prohibits any person, directly or indirectly, from engaging in any activity that could be construed as making an offer of an issuer’s securities prior to the filing of a registration statement relating to those securities with the SEC. The SEC and courts have taken an expansive view of what constitutes an “offer,” treating any oral or written communication that is meant to stimulate market interest in a contemplated offering or an issuer as being within the purview of Section 5(c).

Safe harbors to Section 5(c) violations are available, for example, under Rule 163A under the Securities Act, which exempts communications that are made more than 30 days prior to the filing of a registration statement, but this rule only covers communications that do not refer to the offering that is or will be the subject of the applicable registration statement, is contingent upon the issuer having taken “reasonable steps within its control” to prevent repetition of the communication during the 30-day run-up to filing and does not extend to communications made by underwriters. Rule 163 under the Securities Act, in turn, permits well-known seasoned issuers (WKSIs) to make offers prior to filing a registration statement, but any related written communications must include a specified legend and must be promptly filed with the SEC upon the filing of the related registration statement, with certain exceptions. Like Rule 163A, Rule 163 does not cover communications made by underwriters.

After an issuer has filed a registration statement, Section 5(b)(1) of the Securities Act requires that written offers of the related securities only be made by means of a preliminary prospectus meeting the information requirements of Section 10 of the Securities Act. Oral offers are permitted during this time, but are subject to the anti-fraud provisions of the securities laws, including Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder, which address material misstatements and omissions made in connection with the sale of a security. Accordingly, oral communications made after the filing of a registration statement generally should not stray from the scope of the information memorialized in the related Section 10 prospectus.

The philosophy behind these provisions is one of full, fair and regulated disclosure in registered securities offerings to enable informed investment decision-making by the investing public. The consequences for violations of these provisions can be significant, including mandatory cooling-off periods, in the case of gun-jumping publicity in advance of an initial public offering (IPO), or compulsory filing of written material that does not conform to the information requirements of Section 10 of the Securities Act and that would, by its nature, not contain cautionary risk factor disclaimers for the benefit of the issuer and the underwriters. Furthermore, Section 12(a)(1) of the Securities Act entitles any investor who purchases securities in an offering that violates Section 5 to the right to rescind the deal and recover the purchase price paid, plus interest.

With the enactment of the Jumpstart Our Business Startups Act (the JOBS Act) in 2012, Congress created a new category of issuer, the EGC, with the goal of stimulating economic growth by increasing access to the public capital markets. Under the JOBS Act, Congress amended Section 5 of the Securities Act to add subsection (d), freeing EGCs and their agents (including underwriters) to participate in testing-the-waters (TTW) activities prior to or following the date of filing of a registration statement relating to the securities being contemplated for sale, meaning EGCs can measure demand for a potential offering in advance of having to commit the resources necessary to execute a registered public offering. The exemption under Section 5(d) of the Securities Act applies narrowly to solicitations of potential investors that are, or that a given EGC reasonably believes to be, qualified institutional buyers (QIBs), as defined in Rule 144A, or institutional investors that are accredited investors (IAIs), as defined in Rule 501 of Regulation D, in each case under the Securities Act. (These categories of investors are those that the SEC views as being financially sophisticated enough to protect themselves in the absence of SEC-approved disclosure.)

In practice, TTW communications and materials are often used by EGCs before or after they confidentially submit their draft registration statements to the SEC for comment, a step that precedes public filing of a registration statement for an EGC, as authorized by the JOBS Act. An EGC may wait to test the waters until after receiving the SEC’s non-public comments on an initial confidential submission so as to have the benefit of the SEC’s viewpoint on its disclosure before it engages with investors in TTW activities. TTW materials also often serve as a starting place for investor decks used in connection with road show presentations that take place during the marketing of an offering.

Rule 163B

The SEC approved Rule 163B to exempt TTW communications by all issuers (and their underwriters and other authorized persons) that are directed at QIBs and IAIs from Sections 5(b)(1) and 5(c) of the Securities Act. While such TTW communications will now be permitted, these premarketing efforts must not be materially inaccurate or incomplete, as the anti-fraud provisions of the securities laws (including Rule 10b-5 under the Exchange Act), in addition to Section 12(a)(2) of the Securities Act, will apply. Rule 163B communications likewise must not conflict with material information in the related registration statement, assuming one has been or will be filed with the SEC at the time of the exempted activity. The SEC may request that an issuer furnish its TTW materials to SEC staff for review, consistent with their current practice when reviewing registered offerings by EGCs.

There is no requirement that Rule 163B communications themselves be filed with the SEC, nor will they need to bear any specific legends under the securities laws. Rule 405 under the Securities Act has specifically been amended to carve out Rule 163B written communications from the definition of “free writing prospectus,” obviating the need for issuers engaging in such communications to comply with the strict filing and legending requirements that govern free writing prospectuses pursuant to Section 433 under the Securities Act. Finally, an issuer relying on Rule 163B to assess market interest in its securities that also has a class of securities registered under Section 12 of the Exchange Act or is required to file reports under Section 15(d) of the Exchange Act needs to be cognizant of Regulation FD under the Securities Act (Regulation FD), which prohibits selective disclosure of material non-public information without simultaneous public disclosure thereof (or an available exception).

Practical Implications

  • Use in Non-EGCs’ IPOs. Rule 163B will be of particular significance to companies planning IPOs that do not qualify as EGCs, as these non-EGCs, under the current statutory framework, are prohibited from any sort of solicitation activity during what is commonly referred to as the “quiet period” of an IPO (i.e. the phase before the registration statement is filed) and, correspondingly, are extremely limited in the form and content of the written communications they are permitted to engage in during the “waiting period” (i.e. the time before the registration statement is declared effective by the SEC). Under Rule 163B, TTW communications by these issuers will now be permitted with QIBs and IAIs during these periods.
  • Use in the Secondary Market. Rule 163B will also be useful in the follow-on offering context to already-public non-EGCs that do not currently have a registration statement on file (including infrequent WKSIs that do not yet have an automatic shelf registration statement on Form S-3 on file), in which cases the filing of a registration statement alone may signal to the market that an offering is on the horizon. (A WKSI may elect to rely on Rule 163B instead of Rule 163 under the Securities Act, for instance, in connection with a confidential pre-offering marketing effort (i.e., “wall-crossing”), the materials for which it might prefer not to file with the SEC.) Rule 163B communications will also incrementally benefit issuers that are more active in the secondary market, including WKSIs, with registration statements already on file. Under the current rules, these sorts of frequent issuers cannot engage in any premarketing activity that could be viewed as a written offer under Section 5(b)(1) of the Securities Act, and will often participate in “non-deal” road shows that are silent on the topic of an imminent transaction and attempt to avoid any communications being viewed as “written” communications under mostly antiquated practices often associated with “live road shows.” With the accommodations created under Rule 163B, the mental gymnastics around what constitutes a “deal” versus a “non-deal” roadshow (and whether written materials prepared in connection with the latter would be considered a “free writing prospectus”) can be dispensed with.
  • Use in Conjunction with Confidential Submission Process. As a general matter, given the SEC’s goal of broadening the existing exemption for TTW communications currently available to EGCs under Section 5(d) of the Securities Act to all issuers, we anticipate that the practical approach to TTW activities by EGCs that has evolved since the enactment of the JOBS Act will inform general market practice in registered securities offerings for non-EGCs who wish to avail themselves of Rule 163B. In June 2017, the SEC expanded the accommodation it had previously granted exclusively to EGCs under the JOBS Act allowing for confidential submissions of draft registration statements to any issuer conducting an IPO, including non-EGCs, as well as any issuer conducting a follow-on offering of securities within 12 months of the effective date of its initial registration statement. Rule 163B communications by non-EGCs embarking on an IPO and those issuers contemplating securities offerings that have not yet been public for one year are likely to rely on the confidential submission process and TTW tools in tandem, testing the waters after receiving SEC comments on an initial non-public draft registration statement submission, consistent with the tried-and-true method of EGCs.
  • Underwriting Agreements. We expect that the TTW coverage contained in the representations and warranties and other provisions in underwriting agreements customarily used in connection with registered offerings by EGCs will make its way into standard underwriting agreements for all issuers.
  • Legends, Content and Handling. While legends are not required to be included in written TTW materials under Rule 163B, issuers will likely nonetheless use the same types of legends that have routinely been used by EGCs in their TTW communications. A sample legend is included as Annex A Given the requirement that the substance of Rule 163B communications aligns with the information contained or expected to be contained in the registration statement relating to the securities being offered, written TTW materials should be carefully reviewed against the as-filed or drafted public disclosure (in keeping with the customary approach to traditional road show materials). The experience of EGCs under Section 5(d) of the Securities Act has signaled that the SEC is particularly focused on TTW written communications, so issuers who plan to rely on Rule 163B will want to maintain adequate records of the related materials in case required to furnish copies to SEC staff for review retrospectively. In addition, the amendment to Rule 405 under the Securities Act to exclude Rule 163B communications from the definition of “free writing prospectus” means that issuers need not worry that copies of presentation decks and handouts left behind at investor meetings will be deemed “written communications” subject to the various requirements under the Securities Act, which is a concern of EGCs operating under the current statutory framework. As a practical matter, however, in light of the applicability of the anti-fraud provisions of the federal securities laws to these materials, issuers should nonetheless consider following the lead of EGCs in opting to collect all copies of TTW documents at the conclusion of investor meetings, including to ensure that such materials are not shared with potential investors that are not QIBs or IAIs.  
  • Regulation FD. Regulation FD specifically excludes from its scope communications made to any person that expressly agrees to maintain the information transmitted in confidence. Accordingly, issuers will presumably navigate Regulation FD in the Rule 163B context by having confidentiality agreements in place with the QIBs and IAIs with which they plan to engage, similar to the process currently used by issuers subject to Regulation FD in connection with wall-crossings and other confidentially marketed offerings.

Annex A

Sample Legend

This presentation is made pursuant to Rule 163B under the Securities Act of 1933, as amended, and is intended solely for investors that are either qualified institutional buyers or institutions that are accredited investors (as such terms are defined under Securities and Exchange Commission rules) solely for the purpose of determining whether such investors might have an interest in a securities offering contemplated by us. Any such offering of securities will only be made by means of a registration statement (including a prospectus) filed with the Securities and Exchange Commission{, after such registration statement becomes effective}. {No such registration statement has become effective as of the date of this presentation.} This presentation shall not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction. In the event we conduct an offering, before you invest, you should read the prospectus in the registration statement and other documents we file with the Securities and Exchange Commission for more complete information about us and the offering. {When available,} you may get these documents for free by visiting EDGAR on the Securities and Exchange Commission website at http://www.sec.gov.