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SEC Wants to Expand its “Test-the Waters” Reforms to Include All IPO Issuers

Reading Time: 2 minutes by on February 21, 2019 Business, News, Regulation
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The new rule will allow the expansion of the “test-the-waters” that involves startups to include all issuers to include investment company issuers. The proposal will enable every prospective issuer to test the market interest for proposed IPOs or proposed registered securities offerings, including Initial Coin Offerings (ICOs) by giving room for interaction with particular investors before they can file a registration statement. This according to according to an official press release, February 19, 2019.

Remove Restrictions

The United States Securities and Exchange Commission (SEC) voted to the removal of restrictions on firms that are allowed to use the “test-the-waters” program. Since its creation in 2012, the program has in been limited to companies with less than $1 billion in annual revenue and is a product of the Jumpstart Our Business Startups Act (JOBS Act).

The new proposal seeks to allow all prospective issuers, and not just Emerging Growth Companies (ECGs). This will expand the bracket to include all issuers to include investment company issuers. This allows the companies to gauge the market interest for prospective registered securities offerings and potential initial public offerings.

Arrest the Decline IPOs

Former Wall Street lawyer and SEC boss Jay Clayton has been on the forefront in trying to make the process of going public eye-catching and arrest the decline of IPOs. Clayton announced when he took the reins of the agency in 2017 they would allow companies to file early documents for offerings, a privilege that was only limited to ECGs. He stated:

“Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings.”

The proposal to extend the test-the-waters regulation and affiliated amendments will provide a much needed flexibility to issuers regarding their communication with corporate investors about prospective registered securities offerings, such as Initial Coin Offerings (ICOs). This will provide a cost-effective was for evaluating market interest before incurring the costs associated with such offerings. The proposal has an open 60-day period for public input after it’s published in the Federal Register.

The Jumpstart Our Business Startups Act (JOBS Act) has excluded companies with more than $1 billion in annual revenues from benefitting from its provisions. The fresh proposal follows an initiative by the Division of Corporation Finance in 2017 to promote another ECG reform to include all issuers. Subsequently, all issuers can make non-public filings with SEC at the beginning of the process.  Clayton explained:

“I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”


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