October 7, 2019 | On September 26, 2019, the U.S. Securities and Exchange Commission (SEC) adopted a new rule, significantly expanding the “testing-the-waters” (TTW) accommodation previously reserved for emerging growth companies, or ECGs, defined as companies with less than $1.07 billion in annual revenues and which do not qualify as a large accelerated filer. Rule 163B now makes the TTW accommodation available to issuers of any size or reporting status. Issuers may now gauge potential market interest for a registered public offering both prior to or after the filing of a registration statement. Issuers, or any person authorized to act on their behalf, including underwriters, may now make oral or written offers to test the waters (TTW communications) to test market interest. The rule will be effective 60 days after publication in the Federal Register.


The TTW Rule was originally created in 2012 as part of the Jumpstart Our Business Startups Act (JOBS Act). Section 5(d) of the JOBS Act (known as the TTW Rule) permitted an EGC or authorized representative to engage in TTW communications. The new TTW Rule allows EGCs a more practical approach to gauging market interest before spending large sums on a public offering.

Expansion of the Rule

Under new Rule 163B, all issuers and persons acting on their behalf will be able to engage with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) to “test the waters.” In doing so, the SEC has made the market more competitive, and all companies contemplating an IPO may take advantage of the new rule in order to obtain better information.

Other Considerations

  • The new rule is a non-exclusive exemption, so as issuers consider a securities offering, they may rely on other communication rules or exemptions
  • TTW communications are not subject to SEC filing or legend requirements
  • TTW communications are not considered a free-writing prospectus
  • If an issuer reasonably believes potential investors meet requirements to obtain QIB or IAI status, an issuer is not required to verify that status
  • TTW communications are still considered offers as defined in Section 2(a)(3) of the Act and are still subject to Section 12(a)(2) liability in addition to anti-fraud provisions of federal securities laws.
  • If an issuer is subject to Regulation FD, that issuer must consider whether any information exchanged through the TTW Rule will also trigger Reg FD obligations
  • Issuers are advised to take reasonable caution when sharing TTW communications so they are not shared with non-QIBs and non-IAIs. If reasonable steps are taken, and such information is still shared, the issuer would not be subject to Section 5 liability
  • If an issuer is also preparing a private offering, the issuer must consider if the communications were conducted in such a way subject to the TTW Rule that a private placement exemption would no longer be available

For more information, please contact Croke Fairchild Morgan & Beres.