
[Federal Register Volume 84, Number 40 (Thursday, February 28, 2019)]
[Proposed Rules]
[Pages 6713-6732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03098]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-10607, File No. S7-01-19]
RIN 3235-AM23


Solicitations of Interest Prior to a Registered Public Offering

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing a new rule under the Securities Act of 1933 
that would permit issuers to engage in oral or written communications 
with potential investors that are, or are reasonably believed to be, 
qualified institutional buyers or institutional accredited investors, 
either prior to or following the filing of a registration statement, to 
determine whether such investors might have an interest in a 
contemplated registered securities offering. If adopted the rule would 
extend such accommodation currently available to emerging growth 
companies to all issuers.

DATES: Comments should be received by April 29, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment forms (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-01-19 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.
All submissions should refer to File Number S7-01-19. This file number 
should be included in the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
website (https://www.sec.gov/rules/proposed.shtml). Comments also are 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Maryse Mills-Apenteng, Special 
Counsel, at (202) 551-3430, Office of Rulemaking, Division of 
Corporation Finance; Angela Mokodean, Senior Counsel, or Amanda 
Hollander Wagner, Branch Chief, at (202) 551-6921, Investment Company 
Regulation Office, Division of Investment Management; U.S. Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

[[Page 6714]]


SUPPLEMENTARY INFORMATION: The Commission is proposing for public 
comment 17 CFR 230.163B (new ``Rule 163B'') under the Securities Act of 
1933 [15 U.S.C. 77a et seq.] (``Securities Act'') and amendments to 17 
CFR 230.405 (``Rule 405'') under the Securities Act.

Table of Contents

I. Introduction
II. Proposed Amendments
    A. Proposed Exemption
    B. Eligibility
    C. Investor Status
    D. Non-Exclusivity of the Proposed Rule
    E. Considerations for Use by Investment Companies
III. Economic Analysis
    A. Introduction and Broad Economic Considerations
    B. Baseline and Affected Parties
    1. Baseline
    2. Affected Parties
    C. Anticipated Economic Effects
    1. Potential Benefits to Issuers
    2. Potential Costs to Issuers
    3. Potential Benefits to Investors
    4. Potential Costs to Investors
    5. Variation in Economic Impact Due to Issuer Characteristics
    6. Variation in Economic Impact Due to Investor Characteristics
    D. Reasonable Alternatives
    E. Request for Comment
IV. Paperwork Reduction Act
V. Small Business Regulatory Enforcement Fairness Act
VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rule
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
VII. Statutory Authority

I. Introduction

    In 2012, Congress passed the Jumpstart Our Business Startups Act 
(the ``JOBS Act''),\1\ which created new Section 5(d) of the Securities 
Act.\2\ Section 5(d) permits an emerging growth company (``EGC'') \3\ 
and any person authorized to act on its behalf to engage in oral or 
written communications with potential investors that are qualified 
institutional buyers (``QIBs''), as that term is defined in paragraph 
(a) of 17 CFR 230.144A (``Rule 144A''), and institutional accredited 
investors (``IAIs'') \4\ before or after filing a registration 
statement to gauge such investors' interest in a contemplated 
securities offering.\5\ The Commission's rules have long recognized 
that QIBs and accredited investors have a level of financial 
sophistication and ability to sustain investment losses that render the 
protections of the Securities Act's registration process 
unnecessary.\6\
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    \1\ Public Law 112-106, 126 Stat. 306 (2012).
    \2\ 15 U.S.C. 77e(d).
    \3\ The Section 5(d) exemption is available to ``emerging growth 
companies.'' An emerging growth company refers to an issuer that had 
total annual gross revenues of less than $1.07 billion during its 
most recently completed fiscal year and, as of December 8, 2011, had 
not sold common equity securities under a registration statement. 
That issuer continues to be an emerging growth company for the first 
five fiscal years after the date of the first sale of its common 
equity securities pursuant to an effective registration statement, 
unless one of the following occurs: Its total annual gross revenues 
are $1.07 billion or more; it has issued more than $1 billion in 
non-convertible debt in the past three years; or it becomes a 
``large accelerated filer,'' as defined in 17 CFR 240.12b-2 (``Rule 
12b-2'') under the Exchange Act of 1934 [15 U.S.C. 78a et seq.] (the 
``Exchange Act''). See Rule 405 and Rule 12b-2 (defining ``emerging 
growth company'').
    \4\ An institutional accredited investor refers to any 
institutional investor that is also an accredited investor, as 
defined in 17 CFR 230.501 (``Rule 501'') of Regulation D.
    \5\ Communications between an issuer and potential investors for 
the purpose of assessing investor interest before having to commit 
the time and expense necessary to carry out a contemplated 
securities offering are often referred to as ``testing the waters,'' 
and we use this term and its derivations throughout this release to 
refer to such communications.
    \6\ See, e.g., Regulation D Revisions; Exemption for Certain 
Employee Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 
3015 (Feb. 2, 1987)] (describing the concept of ``accredited 
investor'' as a keystone of Regulation D ``intended to encompass 
those persons whose financial sophistication and ability to sustain 
the risk of loss of investment or ability to fend for themselves 
render the protections of the Securities Act's registration process 
unnecessary''); Resale of Restricted Securities; Changes to Method 
of Determining Holding Period of Restricted Securities Under Rules 
144 and 145, Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 
30, 1990)] (noting that ``qualified institutional buyers,'' the 
definition of which is ``focused on assets invested in securities, 
should target, with more precision than the asset test originally 
proposed, sophisticated institutions with experience in investing in 
securities''). See also ``Report on the Review of the Definition of 
`Accredited Investor,''' a report by the staff of the U.S. 
Securities and Exchange Commission, December 28, 2015 (providing a 
comprehensive review of the accredited investor definition, 
including background information on its origin).
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    Permitting issuers to ``test the waters'' is intended to provide 
increased flexibility to issuers with respect to their communications 
about contemplated registered securities offerings, as well as a cost-
effective means for evaluating market interest before incurring the 
costs associated with such an offering.\7\ Although the test-the-waters 
provisions under Section 5(d) are available only to EGCs, such issuers 
make up a substantial portion of the IPO market. By one estimate, EGCs 
``dominate the [IPO] market, accounting for 87% of IPOs that have gone 
effective since the JOBS Act was enacted in April 2012.'' \8\
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    \7\ See H. Rept. 112-406--Reopening American Capital Markets to 
Emerging Growth Companies Act of 2011.
    \8\ Update on emerging growth companies and the JOBS Act, 
November 2016, Ernst and Young, LLP. See also infra note 88.
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    Evidence suggests that a significant percentage of EGC issuers 
conducting IPOs have availed themselves of the accommodation afforded 
by Section 5(d),\9\ and there have been calls for the Commission to 
consider expanding the test-the-waters accommodation to issuers that 
are not EGCs,\10\ as well as recent proposed legislation to effect such 
a change statutorily.\11\ In our observation, pre-filing solicitations 
pursuant to Section 5(d) have not been a significant cause for concern 
with respect to investor protection. We believe that extending the 
test-the-waters accommodation to a broader range of issuers than 
provided in Section 5(d) may benefit more issuers seeking capital in 
our public markets and level the playing field with respect to 
permissible investor solicitations for EGCs and other issuers 
contemplating a registered securities offering. We believe that the 
ability to test the waters may also encourage additional participation 
in the public markets. Increased participation in our public markets, 
in turn, promotes more investment opportunities for more investors, 
including retail investors, as well as transparency and resiliency in 
the marketplace.
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    \9\ See, e.g., Tom Zanki, Testing The Waters' Expansion Could 
Make IPOs Easier, Law360 (April 30, 2018), https://www.law360.com/articles/1038641 (citing IPO studies by Proskauer Rose LLP, which 
showed that 38% and 23% of EGCs used the test-the-waters 
accommodation in 2015 and 2016, respectively, with heavy 
concentration in the health care and technology-telecommunications-
media sectors).
    \10\ See, e.g., A Financial System That Creates Economic 
Opportunities: Capital Markets, U.S. Dep't of the Treasury (2017), 
https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``Treasury 
Report'') and Expanding the On-Ramp: Recommendations to Help More 
Companies Go and Stay Public, Sec. Industry and Fin. Markets 
Association & Center for Capital Markets Competitiveness, U.S. 
Chamber of Commerce, et al., (2018), https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/05/CCMC_IPO-Report_v17.pdf (``SIFMA Report'').
    \11\ See H.R. 3903 ``Encouraging Public Offerings Act of 2017''; 
and S. 2347 ``Encouraging Public Offerings Act of 2018.'' On July 
17, 2018, the U.S. House of Representatives passed a House Amendment 
to S. 488 ``Encouraging Employee Ownership Act,'' which incorporates 
H.R. 3903.
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    Notwithstanding Section 5(d), the Securities Act generally 
restricts communications by issuers contemplating a registered 
securities offering during various phases of the offering process. 
Under Section 5 of the Securities Act and related Securities Act rules, 
the communication restrictions

[[Page 6715]]

depend primarily on the timing of the communication. Generally, written 
and oral offers prior to filing a registration statement are 
prohibited, absent an exemption.\12\ Any violation of these 
restrictions--whether before, during or after a public offering--is 
commonly referred to as ``gun-jumping.''
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    \12\ See Securities Act Section 5(c).
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    Over the years, the Commission has undertaken several initiatives 
to liberalize communications during the offering process. As part of 
the Securities Offering Reform rulemaking, the Commission adopted, 
among other Securities Act communications reforms, 17 CFR 230.163 
(``Rule 163'') to provide an exemption from Section 5(c) for pre-filing 
communications by well-known seasoned issuers (``WKSIs''), without 
limitation as to the type of investors that may be solicited, subject 
to certain filing and legending requirements.\13\ Similarly, in its 
2015 amendments to Regulation A, the Commission adopted 17 CFR 230.255 
(``Rule 255'') that allows eligible issuers conducting an offering 
under Regulation A to engage in test-the-waters communications with 
potential investors, without restriction as to the type of investors, 
subject to compliance with certain disclaimer and filing 
requirements.\14\ Each of these initiatives has contributed to the 
modernization of the Securities Act communications rules.\15\
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    \13\ See Securities Offering Reform, Release No. 33-8591 (Jul. 
19, 2005) [70 FR 44721 (Aug. 3, 2005)]. See also infra note 53 and 
accompanying text (discussing legislation directing the Commission 
to extend the securities offering rules that are available to other 
issuers required to file reports under Section 13(a) or Section 
15(d) of the Exchange Act (which include Rule 163) to business 
development companies and certain registered closed-end investment 
companies).
    \14\ See Amendments for Small and Additional Issues Exemptions 
under the Securities Act (Regulation A), Release No. 33-9741 (Mar. 
25, 2015) [80 FR 21805 (Apr. 20, 2015)] (``Regulation A Adopting 
Release'').
    \15\ In addition to these initiatives, in 1995 the Commission 
proposed to expand permissible pre-IPO solicitations of interest 
(the ``1995 Proposal'') for most issuers, subject to certain filing 
and legending requirements, ``to reduce the regulatory impediments 
and cost of accessing public markets consistent with investor 
protection interests.'' See Solicitations of Interest Prior to an 
Initial Public Offering, Release No. 33-7188 (Jun. 27, 1995) [60 FR 
35648 (Jul. 10, 1995)] (``1995 Proposing Release''). The 1995 
Proposal would not have imposed restrictions on investors to whom 
test-the-waters communications could be directed but did exclude 
certain specified categories of issuers, such as registered 
investment companies, asset-backed securities (``ABS'') issuers, and 
blank check and penny stock issuers. See also infra notes 122 and 
125. The 1995 Proposal, however, was never adopted.
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    As we continue to assess the effectiveness of the Securities Act 
offering communications framework, and in light of our experience with 
permissible test-the-waters communications under Section 5(d), we are 
proposing new Rule 163B to allow all issuers, including non-EGC 
issuers, to engage in test-the-waters communications with potential 
investors that are, or that the issuer reasonably believes to be, QIBs 
or IAIs, either prior to or following the date of filing of a 
registration statement related to such offering.\16\ If adopted, the 
rule would provide an exemption from Section 5(b)(1) and Section 5(c) 
of the Securities Act for such communications.
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    \16\ EGCs would be able to rely on the proposed rule and would 
continue to be able to rely on the statutory accommodation in 
Section 5(d).
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    We believe that, by allowing more issuers to engage with certain 
sophisticated institutional investors while in the process of preparing 
for a contemplated registered securities offering, the proposed rule 
could help issuers to better assess the demand for and valuation of 
their securities and to discern which terms and structural components 
of the offering may be most important to investors. This in turn could 
enhance the ability of issuers to conduct successful offerings and 
lower their cost of capital. To the extent this is the case, the 
proposed rule could encourage additional registered offerings in the 
U.S. We believe that increasing the number of registered offerings can 
have long-term benefits for investors and our markets, including 
improved issuer disclosure, increased transparency in the marketplace, 
better informed investors, and a broader pool of issuers in which any 
investor may invest.
    We believe that many benefits of the proposed rule if finalized 
would similarly apply to investment company issuers. Test-the-waters 
communications may help investment company issuers better assess market 
demand for a particular investment strategy, as well as appropriate fee 
structures, prior to incurring the full costs of a registered offering. 
However, we also recognize that certain features of investment 
companies discussed below may make their use of the proposed rule more 
limited than other issuers.\17\
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    \17\ See infra Sections II.E. and III.C.5.
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II. Proposed Amendments

A. Proposed Exemption

    We are proposing an exemption from the gun-jumping provisions of 
Section 5 of the Securities Act for test-the-waters communications by 
an issuer contemplating a registered securities offering. Specifically, 
the proposed exemption would permit any issuer or person authorized to 
act on behalf of an issuer,\18\ including an underwriter, either prior 
to or following the filing of a registration statement, to engage in 
oral or written communications with potential investors that are, or 
that the issuer reasonably believes are, QIBs or IAIs, to determine 
whether such investors might have an interest in the contemplated 
offering.
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    \18\ Under the proposed rule, an issuer or a person authorized 
to act on its behalf would be required to have a reasonable belief 
that a potential investor is a qualified institutional buyer or 
institutional accredited investor. See proposed Rule 163B(b)(1). In 
this release, for ease of discussion, we sometimes refer only to the 
issuer having a reasonable belief, though the reasonable belief 
requirement of proposed Rule 163B applies equally to any person 
authorized to act on an issuer's behalf.
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    Section 5(c) prohibits any written or oral offers prior to the 
filing of a registration statement. Once an issuer has filed a 
registration statement, Section 5(b)(1) limits written offers to a 
``statutory prospectus'' that conforms to the information requirements 
of Securities Act Section 10.\19\ Under the proposed rule, 
communications soliciting interest in a registered securities offering 
with potential investors that are, or are reasonably believed to be, 
QIBs or IAIs would be exempt from Section 5(b)(1) and Section 5(c). The 
proposed rule would not be available, however, for any communication 
that, while in technical compliance with the rule, is part of a plan or 
scheme to evade the requirements of Section 5 of the Act.
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    \19\ After effectiveness of a registration statement, a written 
offer, other than a statutory prospectus, may be made only if a 
final prospectus meeting the requirements of Securities Act Section 
10(a) is sent or given prior to or at the same time as the written 
offer. See Securities Act Section 2(a)(10) [15 U.S.C. 77b(a)(10)]. A 
free writing prospectus, as defined in Securities Act Rule 405, 
which is a Section 10(b) prospectus, may also be used after 
effectiveness of a registration statement subject to the conditions 
of Securities Act Rules 164 and 433. The proposed rule does not 
modify or otherwise exempt these requirements.
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    Test-the-waters communications that comply with the proposed rule 
would not need to be filed with the Commission, nor would they be 
required to include any specified legends. We do not believe it is 
necessary to impose such requirements because communications under the 
proposed rule would be limited to investors that are, or are reasonably 
believed to be, QIBs and IAIs. These types of investors are generally 
considered to have the ability to assess investment opportunities, 
thereby reducing the need for the additional safeguards provided by a 
filing or legending requirement. Consistent with this approach, we are 
proposing to amend Rule 405 to exclude a written communication used in 
reliance on the

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proposed rule from the definition of free writing prospectus. As a 
result, any such communication that is limited to gauging interest in a 
contemplated registered securities offering would not be considered a 
``free writing prospectus'' as that term is defined in Securities Act 
Rule 405. Furthermore, we are proposing that communications made under 
the proposed rule would not be required to be filed pursuant to 17 CFR 
230.424(a) (``Rule 424(a)'') or 17 CFR 230.497(a) (``Rule 497(a)'') of 
Regulation C \20\ under the Securities Act or Section 24(b) of the 
Investment Company Act of 1940 \21\ (the ``Investment Company Act'') 
and the rules and regulations thereunder.\22\
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    \20\ 17 CFR 230.401 through 230.498.
    \21\ 15 U.S.C. 80a-24.
    \22\ See proposed Rule 163B(b)(3); see also infra Section II.E 
(discussing the exemption from the filing requirements of 17 CFR 
230.497 (``Rule 497'') and Section 24(b) of the Investment Company 
Act and the rules and regulations thereunder for communications made 
by registered investment companies and business development 
companies under the proposed rule).
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    We believe that the flexibility afforded in exempting test-the-
waters communications from Sections 5(b)(1) and (c) would still 
maintain investor protections. The proposed rule would only allow test-
the-waters communications with certain institutional investors, which, 
as noted above, do not need the protections of the Securities Act's 
registration process. Further, these communications, while exempt from 
the gun-jumping provisions of Section 5, would nonetheless still be 
considered ``offers'' as defined in Section 2(a)(3) of the Securities 
Act \23\ and would therefore be subject to Section 12(a)(2) liability 
in addition to the anti-fraud provisions of the federal securities 
laws.\24\
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    \23\ Securities Act Section 2(a)(3) [15 U.S.C. 77b(a)(3)] 
defines ``offer'' as any attempt or offer to dispose of, or 
solicitation of an offer to buy, a security or interest in a 
security, for value. The term ``offer'' has been interpreted broadly 
and goes beyond the common law concept of an offer. See Diskin v. 
Lomasney & Co., 452 F.2d 871 (2d. Cir. 1971); SEC v. Cavanagh, 1 F. 
Supp. 2d 337 (S.D.N.Y. 1998).
    \24\ Section 12(a)(2) of the Securities Act provides purchasers 
of an issuer's securities in a registered offering private rights of 
action for materially deficient disclosure in oral communications 
and prospectuses and imposes liability on sellers for offers or 
sales by means of an oral communication or prospectus that includes 
an untrue statement of material fact or omits to state a material 
fact that makes the statements made, in light of the circumstances 
on which they were made, not misleading. Liability under Section 
12(a)(2) would attach to test the waters oral and written 
communications under the proposed rule both before and after a 
registration statement has been filed. Communications under the 
proposed rule would also be subject to the anti-fraud provisions of 
Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 
10b-5 thereunder.
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    Additionally, information provided in a test-the-waters 
communication under the proposed rule must not conflict with material 
information in the related registration statement. As is currently the 
practice of Commission staff when reviewing offerings conducted by 
EGCs, the Commission or its staff could request that an issuer furnish 
the staff any test-the-waters communication used in connection with an 
offering.\25\
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    \25\ See 17 CFR 230.418 of the Securities Act.
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    Further, issuers subject to Regulation FD would need to consider 
whether any information in the test-the-waters communication would 
trigger any obligations under Regulation FD, or whether an exception to 
Regulation FD would apply.\26\ Regulation FD requires public disclosure 
of any material nonpublic information that has been selectively 
disclosed to certain securities market professionals or shareholders 
\27\ if the issuer 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.\28\ Thus, communications made under the 
proposed rule that also include material nonpublic information could be 
subject to 17 CFR 243.100(a) of Regulation FD unless an exclusion under 
17 CFR 243.100(b)(2) of Regulation FD applies. For example, Regulation 
FD generally does not apply if the selective disclosure was made to a 
person who owes a duty of trust or confidence to the issuer or to a 
person who expressly agrees to maintain the disclosed information in 
confidence.\29\ Thus, to avoid the application of Regulation FD, an 
issuer could consider obtaining confidentiality agreements from any 
potential investor engaged under the proposed rule.\30\
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    \26\ See 17 CFR 243.100 et seq. of the Securities Act.
    \27\ See 17 CFR 243.100(b)(1) of Regulation FD. Many QIBs and 
IAIs are the types of securities market professionals or 
shareholders covered by Regulation FD.
    \28\ See 17 CFR 243.101(b) of Regulation FD. Regulation FD 
applies to closed-end investment companies as defined in Section 
5(a)(2) of the Investment Company Act [15 U.S.C. 80a-5(a)(2)] but 
not other investment companies. Regulation FD also does not apply to 
any foreign government or foreign private issuer, as those terms are 
defined in Securities Act Rule 405.
    \29\ See Regulation FD Rule 100(b)(2). Regulation FD also 
provides a limited exception for communications in connection with 
certain registered securities offerings if the disclosure is made 
by: A registration statement filed under the Securities Act; a free 
writing prospectus used after filing a registration statement for 
the offering or a communication falling within the exception to the 
definition of prospectus contained in clause (a) of section 2(a)(10) 
of the Securities Act; any other Section 10(b) prospectus; a notice 
permitted by 17 CFR 230.135 under the Securities Act; a 
communication permitted by 17 CFR 230.134 (``Rule 134'') under the 
Securities Act; or an oral communication made in connection with the 
registered securities offering after filing of the registration 
statement for the offering under the Securities Act. See id.
    \30\ See Regulation FD Rule 100(b)(2)(ii). If the issuer 
determines not to proceed with the offering and the filing of a 
registration statement at that time, the issuer may choose to 
disclose information regarding the communications publicly in order 
to release the potential investors from the terms of such 
confidentiality agreement.
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Request for Comment
    1. Would the proposed exemption from Section 5(b)(1) and Section 
5(c) to allow solicitations of interest from QIBs and IAIs prior to and 
following the filing of a registration statement provide issuers with 
appropriate flexibility in determining when to proceed with a 
registered public offering? Do test-the-waters communications aid 
issuers in assessing demand for their offerings? Do they aid issuers in 
structuring their offerings? Does this information potentially lead to 
a lower cost of capital? Would the additional flexibility provided by 
the proposed rule result in a greater number of issuers pursuing a 
registered public offering? Why or why not?
    2. In what circumstances and how do EGCs currently take advantage 
of the accommodations of Securities Act Section 5(d)? What are the 
reasons why an EGC may choose not to avail itself of the 
accommodations?
    3. Does the proposed expansion of permissible test-the-waters 
communications raise investor protection concerns? If so, how? Does the 
proposed expansion of permissible test-the-waters communications raise 
concerns of inappropriate marketing, conditioning, or hyping? How might 
such concerns be alleviated?
    4. Should test-the-waters communications under the proposed rule be 
deemed ``offers'' under Securities Act Section 2(a)(3) that are subject 
to Section 12(a)(2) liability, as proposed? Why or why not?
    5. Should we require written communications under the proposed rule 
to be filed with the Commission, for example, as an exhibit to a 
registration statement, and to become subject to Section 11 liability? 
Why or why not? If so, at what point should they be required to be 
filed?
    6. Should legends or disclaimers be required on any written 
materials used in compliance with the proposed rule? Why or why not? If 
so, should we prescribe the content of those legends or disclaimers?
    7. Should we permit written or oral solicitations of interest to be 
made by an issuer before and after a registration statement is filed, 
as proposed? Why or

[[Page 6717]]

why not? Should we treat pre-filing and post-filing test-the-waters 
communications differently? If so, how should they be treated?
    8. In what circumstances does Regulation FD affect the use of the 
current accommodation for test-the-waters communications under Section 
5(d)? Should there be a specific exception to Regulation FD for some or 
all communications made in compliance with the proposed rule? If so, 
under what circumstances and how should such an exception apply?

B. Eligibility

    Any issuer, or person authorized to act on behalf of the issuer, 
would be able to rely on the proposed rule to engage in exempt oral or 
written communications with potential investors that are, or that the 
issuer or person authorized to act on behalf of the issuer reasonably 
believes are, QIBs or IAIs. All issuers--including non-reporting 
issuers, EGCs, non-EGCs, WKSIs, and investment companies (including 
registered investment companies and business development companies 
(``BDCs'')) \31\--would be eligible to rely on the proposed rule.\32\ 
We believe that, in light of our experience with test-the-waters 
communications for EGCs under Section 5(d), and given the sophisticated 
nature of the institutional investors to which communications under the 
proposed rule could be directed, it is appropriate to expand the 
accommodations to all issuers.\33\
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    \31\ See infra Section II.E (discussing the proposed rule's 
application to investment companies).
    \32\ Under Section 5(d), test-the-waters communications are only 
permitted for as long as an issuer qualifies as an EGC, which can be 
up to five years after the date of the first sale of the issuer's 
common equity securities pursuant to an effective registration 
statement. Since the proposed rule would be available to all 
issuers, there would be no similar limitation on qualification. An 
EGC would have the option of relying on the proposed rule or on 
Section 5(d) when it engages in any test-the-waters communications.
    \33\ This is in contrast with the 1995 Proposal, which would 
have excluded certain specified categories of issuers but which 
would have allowed testing the waters with all investors, not just 
QIBs or IAIs.
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Request for Comment
    9. Should the proposed rule be available to all issuers as 
proposed? Why or why not?
    10. Should certain groups of issuers, such as non-reporting 
issuers, ABS issuers, certain or all types of ``ineligible issuers'' as 
defined in Rule 405, such as blank check issuers or penny stock 
issuers, be excluded from the rule? If so, which issuers should be 
excluded and why? Should communications related to certain types of 
securities offerings be excluded from the rule? If so, which types of 
offerings and why?

C. Investor Status

    If adopted, the rule would permit an issuer to engage in pre- and 
post-filing solicitations of interest with potential investors that 
are, or that the issuer reasonably believes to be, QIBs and IAIs.\34\ A 
QIB is a specified institution that, acting for its own account or the 
accounts of other QIBs, in the aggregate, owns and invests on a 
discretionary basis at least $100 million in securities of unaffiliated 
issuers.\35\ Banks and other specified financial institutions must also 
have a net worth of at least $25 million.\36\ A registered broker-
dealer qualifies as a QIB if, in the aggregate, it owns and invests on 
a discretionary basis at least $10 million in securities of issuers 
that are not affiliated with the broker-dealer.\37\ IAIs are any 
institutional investor that is also an accredited investor, as defined 
in paragraph (a) of Rule 501 of Regulation D. Specifically, for the 
purposes of the proposed rule, an IAI would be an institution that 
meets the criteria of Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or 
(a)(8). The proposed limitation to these institutional investors is 
intended to ensure that test-the-waters communications are directed to 
investors that are financially sophisticated and therefore do not 
require the same level of protections of the Securities Act's 
registration process as other types of investors.
---------------------------------------------------------------------------

    \34\ Although this discussion refers to the ``issuer,'' under 
the proposed rule an issuer or a person authorized to act on its 
behalf would be required to reasonably believe a potential investor 
is a qualified institutional buyer or institutional accredited 
investor. See proposed Rule 163B(b)(1).
    \35\ 17 CFR 230.144A(a)(1)(i).
    \36\ 17 CFR 230.144A(a)(1)(vi).
    \37\ 17 CFR 230.144A(a)(1)(ii).
---------------------------------------------------------------------------

    Under the proposed rule, any potential investor solicited must 
meet, or issuers must reasonably believe that the potential investor 
meets, the requirements of the rule. We believe this standard would 
avoid imposing an undue burden on issuers compared to requiring issuers 
to verify investor status, as in 17 CFR 230.506(c) (``Rule 506(c)'') of 
Regulation D. For example, under the proposed rule, an issuer could 
reasonably believe that a potential investor is a QIB or IAI even 
though the investor may have provided false information or 
documentation to the issuer. We do not believe an issuer should be 
subject to a violation of Section 5 in such circumstances, so long as 
the issuer established a reasonable belief with respect to the 
potential investor's status based on the particular facts and 
circumstances.
    We are not proposing to specify the steps an issuer could or must 
take to establish a reasonable belief that the intended recipients of 
test-the-waters communications are QIBs or IAIs.\38\ Identifying 
specific steps or providing additional guidance that could be used by 
an issuer to establish a reasonable belief regarding an investor's 
status could create a risk that such steps or guidance would become a 
de facto minimum standard. Instead, we believe issuers should continue 
to rely on the methods they currently use to establish a reasonable 
belief regarding an investor's status as a QIB or accredited investor 
pursuant to Securities Act Rules 144A and 501(a), respectively. By not 
specifying the steps an issuer could or must take to establish a 
reasonable belief as to investor status, this approach is intended to 
provide issuers with the flexibility to use methods that are cost-
effective but appropriate in light of the facts and circumstances of 
each contemplated offering and each potential investor.
---------------------------------------------------------------------------

    \38\ Although Securities Act Rule 501(a) does not provide 
specific details as to the actions an issuer can take to form a 
reasonable belief that an entity meets the definition of an 
institutional accredited investor, Rule 144A(d)(1) sets forth non-
exclusive means to determine whether a prospective purchaser is a 
QIB. The rule provides that a seller and any person acting on its 
behalf are entitled to rely upon the following non-exclusive methods 
of establishing the prospective purchaser's ownership and 
discretionary investment of securities: (i) The prospective 
purchaser's most recent publicly available financial statements; 
(ii) the most recent publicly available information appearing in 
documents filed by the prospective purchaser with the Commission or 
another U.S. federal, state, or local government agency or self-
regulatory organization, or with a foreign governmental agency or 
self-regulatory organization; (iii) the most recent publicly 
available information appearing in a recognized securities manual; 
or (iv) a certification by the chief financial officer, a person 
fulfilling an equivalent function, or other executive officer of the 
purchaser, specifying the amount of securities owned and invested on 
a discretionary basis by the purchaser as of a specific date on or 
since the close of the purchaser's most recent fiscal year.
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Request for Comment
    11. Should issuers be required to establish a reasonable belief 
that the potential investors involved in proposed Rule 163B 
communications are QIBs and IAIs, as proposed? If not, what would be 
the appropriate standard? Are existing guidance and practice sufficient 
for issuers to be able to establish a reasonable belief with respect to 
QIB and IAI status? Should the proposed rule provide a non-exclusive 
list of methods that could be used to establish a reasonable belief as 
to whether an investor is a QIB or IAI? Why or why not?

[[Page 6718]]

    12. Should the proposed exemption limit communications to QIBs and 
IAIs, as proposed? Why or why not? If not, what different types of 
investors should issuers be permitted to communicate with? 
Alternatively, should there be no restrictions on the types of 
investors that issuers could communicate with under this rule? Why or 
why not? If there are no restrictions on the types of investors that 
issuers could communicate with, should the rules impose any filing or 
legending requirements for the communications? Why or why not?

D. Non-Exclusivity of the Proposed Rule

    The proposed rule would be non-exclusive. Attempted compliance with 
proposed Rule 163B would not act as an exclusive election and an issuer 
could rely on other Securities Act communications rules or exemptions 
when determining how, when, and what to communicate related to a 
contemplated securities offering. An issuer would not be precluded, for 
instance, from relying on the proposed rule and Securities Act Section 
5(d), Securities Act Rules 163, or 17 CFR 230.164 (``Rule 164''), or 
Rule 255 of Regulation A. The following table summarizes some of the 
existing provisions that issuers may rely on in addition to, or in lieu 
of, the proposed rule:

------------------------------------------------------------------------
           Provision                             Summary
------------------------------------------------------------------------
Section 5(d)..................   Allows EGCs and those acting on
                                 their behalf to test the waters with
                                 QIBs and IAIs before and after filing a
                                 registration statement to gauge their
                                 interest in a contemplated registered
                                 offering.
Rule 163......................   Allows WKSIs to make oral and
                                 written offers before a registration
                                 statement is filed, subject to certain
                                 conditions.
                                 Does not restrict
                                 communications to any particular group
                                 of potential investors.
                                 The communications may be made
                                 by or on behalf of the WKSI, but may
                                 not be made on behalf of the WKSI by an
                                 offering participant who is an
                                 underwriter or dealer.\39\
                                 Not available for
                                 communications related to business
                                 combination transactions or
                                 communications by registered investment
                                 companies or BDCs.\40\
                                 Written communications are
                                 subject to certain legending
                                 requirements and a requirement to file
                                 such communications promptly upon the
                                 filing of a registration statement.\41\
Rule 164......................   Allows certain issuers to use
                                 free writing prospectuses (``FWPs'')
                                 after filing a registration statement,
                                 on the condition that such FWPs are
                                 accompanied by legends and are publicly
                                 filed.\42\
                                 Ineligible issuers, as defined
                                 in Rule 405 cannot rely on Rule 164
                                 except where the FWPs of such
                                 ineligible issuers, other than penny
                                 stock, blank check, and shell companies
                                 (other than business combination-
                                 related shell companies), solely
                                 contain a description of the terms of
                                 the securities being offered and the
                                 offering.
                                 Registered investment companies
                                 and BDCs also currently cannot rely on
                                 Rule 164 to use FWPs.\43\
Rule 255......................   Permits issuers to engage in
                                 solicitations of interest in Regulation
                                 A offerings before and after filing a
                                 Form 1-A, so long as the solicitation
                                 materials meet certain conditions, such
                                 as including legends or disclaimers and
                                 filing requirements.\44\
------------------------------------------------------------------------

    While an issuer contemplating a registered securities offering may 
solicit interest from QIBs and IAIs without legending or filing those 
materials in compliance with new Rule 163B, if the same issuer decides 
to claim the availability of another exemption or communication rule 
with respect to those communications, the conditions of the other 
exemption or rule relied upon must be satisfied.
---------------------------------------------------------------------------

    \39\ See Rule 163(c).
    \40\ While registered investment companies and BDCs cannot 
currently rely on Rule 163, Congress has directed the Commission to 
extend the securities offering rules that are available to other 
issuers required to file reports under Section 13(a) or Section 
15(d) of the Exchange Act (which include Rule 163) to BDCs and 
certain registered closed-end investment companies. See infra note 
53 and accompanying text.
    \41\ See Rule 163(b).
    \42\ See Rule 164(b) and Rule 433(d).
    \43\ See infra note 53 and accompanying text.
    \44\ See 17 CFR 230.255(b).
---------------------------------------------------------------------------

    For instance, a WKSI may intend to solicit interest from QIBs under 
the new rule and, in compliance with the rule, omit any legending. If 
the issuer decides later during the offering process to expand pre-
filing solicitations of interest to include potential investors not 
within the scope of Rule 163B, for example accredited investors that 
are natural persons, the issuer may instead be able to claim an 
exemption under Rule 163. To avail itself of that exemption, the issuer 
must have complied with Rule 163's legending requirements from the 
start of any communications with non-QIBs or non-IAIs, and would have 
to file the legended materials if a registration statement is filed. 
Similarly, if an issuer engaged in test-the-waters communications with 
institutional investors to determine whether to pursue either a 
registered securities offering or an offering under Regulation A, the 
issuer must comply with the legending and filing requirements of 
Securities Act Rule 255 until such time that it determines not to 
pursue the Regulation A offering.\45\
---------------------------------------------------------------------------

    \45\ Test-the-waters communications under Regulation A must 
state that: (i) No money is being solicited or will be accepted, if 
sent in response; (ii) no sales will be made or commitment to 
purchase accepted until delivery of an offering circular that 
includes complete information about the issuer and the offering; and 
(iii) a prospective purchaser's indication of interest is non-
binding. See Securities Act Rule 255.
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Request for Comment
    13. Should the proposed rule be non-exclusive, as proposed? Why or 
why not?
    14. How would the proposed rule affect reliance on Section 5(d), 
Rule 163, Rule 164, or Rule 255, if at all? In light of the proposed 
rule, are there changes that we should consider making to those rules?
    15. Are there other rules not addressed above that we should 
consider that could affect or be affected by the proposed rule? If so, 
how should we address the interaction between such other rules and the 
proposed rule?

E. Considerations for Use by Investment Companies

    Issuers that are, or are considering becoming, registered 
investment companies or BDCs (together, ``funds'') would be eligible to 
engage in test-the-waters communications under the proposed rule. Funds 
and their advisers may have an interest in engaging in test-the-waters 
communications to help assess market demand for a fund--for example, 
for a particular investment strategy or fee structure--before incurring 
the full costs of a registered offering. Thus, we believe it would be 
appropriate to allow funds to rely on the proposed rule. However, as 
discussed below, funds' use of test-the-waters communications under the 
proposed rule, and the associated benefits, may be more limited than 
for other issuers in practice, particularly with respect to pre-filing 
communications.
    Fund communications contemplated by proposed Rule 163B generally 
would be considered ``sales literature'' and are

[[Page 6719]]

currently subject to their own rules under the Securities Act and 
Investment Company Act.\46\ Under the current framework, compliance 
with these rules is generally necessary for certain communications not 
to be deemed an offer that otherwise could be a non-conforming 
prospectus whose use may violate Section 5 of the Securities Act.\47\ 
For example, after a fund has filed a registration statement, it may 
engage in communications that are advertisements under Rule 482 under 
the Securities Act,\48\ or that are deemed to be sales literature under 
Rule 34b-1 under the Investment Company Act.\49\ Communications under 
Rule 482 and Rule 34b-1 are also subject to certain filing,\50\ 
disclosure,\51\ and legending requirements.\52\ In addition, Congress 
has directed the Commission to extend the securities offering rules 
that are available to other issuers required to file reports under 
Section 13(a) or Section 15(d) of the Exchange Act (which include 
certain communications rules) to BDCs and certain registered closed-end 
investment companies.\53\ Under the proposal, funds could rely on 
proposed Rule 163B to engage in permissible test-the-waters 
communications without complying with these other communications rules.
---------------------------------------------------------------------------

    \46\ See, e.g., Section 24(g) of the Investment Company Act [15 
U.S.C. 80a-24(g)]; 17 CFR 230.482 (``Rule 482'') under the 
Securities Act; and 17 CFR 270.34b-1(``Rule 34b-1'') under the 
Investment Company Act.
    \47\ However, BDCs that are EGCs can currently engage in the 
communications that proposed Rule 163B contemplates pursuant to 
Securities Act Section 5(d). See 15 U.S.C. 77e(d).
    \48\ Rule 482 establishes requirements for advertisements or 
other sales materials with respect to the securities of registered 
investment companies and BDCs. The rule does not apply to certain 
specified communications, including advertisements excepted from the 
definition of prospectus under section 2(a)(10) of the Securities 
Act.
    \49\ Rule 34b-1 provides that any advertisement, pamphlet, 
circular, form letter, or other sales literature (``sales 
literature'') addressed to or intended for distribution to 
prospective investors that is required to be filed with the 
Commission by Section 24(b) of the Investment Company Act will have 
omitted to state a fact necessary in order to make the statements 
made therein not materially misleading unless it includes certain 
specified information. See infra note 59 (discussing the scope of 
Section 24(b) of the Investment Company Act).
    \50\ See 17 CFR 230.482(h) under the Securities Act; Rule 497(i) 
under the Securities Act; Section 24(b) of the Investment Company 
Act [15 U.S.C. 80a-24(b)]; 17 CFR 270.24b-2 under the Investment 
Company Act; 17 CFR 270.24b-3 under the Investment Company Act.
    \51\ For example, Rule 482 and Rule 34b-1 restrict, among other 
things, the manner in which registered open-end funds present 
performance information. See 17 CFR 230.482(b)(3), (d), (e), and (g) 
under the Securities Act; 17 CFR 270.34b-1(b) under the Investment 
Company Act.
    \52\ See, e.g., 17 CFR 230.482(b)(2) under the Securities Act; 
17 CFR 230.482(b)(3)(i) under the Securities Act.
    \53\ See Section 803(b) of Small Business Credit Availability 
Act, Public Law 115-121, title VII; Section 509(a) of Economic 
Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. 115-
174.
---------------------------------------------------------------------------

    Because funds are primarily investment vehicles (i.e., they are 
formed to issue securities that provide investors with an interest in 
the pool of assets held by the fund), a fund typically conducts an 
exempt or registered offering within a relatively short period of time 
after it is organized in comparison to most other types of issuers. We 
understand that, as part of this process, funds typically register as 
investment companies \54\ during a seeding period in which the fund's 
sponsor tests the fund's investment strategy and establishes a 
performance track record for marketing purposes.\55\ Under the proposed 
rule, a fund could engage in test-the-waters communications with QIBs 
and IAIs during the seeding period without filing a Securities Act 
registration statement. However, if a fund is contemplating a 
registered offering at the time of its organization, we recognize it is 
common practice to simultaneously file a registration statement under 
both the Investment Company Act and the Securities Act to take 
advantage of certain efficiencies.\56\ If funds collectively continue 
to prefer to file a single registration statement under both Acts under 
these circumstances, funds may be less likely to use the proposed rule 
for pre-filing communications than other issuers.\57\ In any event, 
however, funds that preliminarily engage in exempt offerings--including 
certain registered closed-end funds and BDCs--could rely on the 
proposed rule to engage in pre-filing communications if they are 
considering a subsequent registered offering.\58\
---------------------------------------------------------------------------

    \54\ Absent any available exemptions under Section 3 or Section 
6 of the Investment Company Act, a fund is generally required to 
register as an investment company before offering its shares. See 
Section 7 of the Investment Company Act [15 U.S.C. 80a-7].
    A fund that qualifies for the business development company 
exemption in Section 6(f) of the Investment Company Act is not 
required to register as an investment company and may rely on this 
exemption for a period of time before electing to be regulated as a 
BDC. See Sections 6(f) and 54 of the Investment Company Act [15 
U.S.C. 80a-6(f) and 80a-53]; Form N-6F and Form N-54A under 17 CFR 
274.15 and 274.54 of the Investment Company Act.
    \55\ A fund may be able to qualify for one of the private fund 
exemptions in Section 3(c)(1) or 3(c)(7) of the Investment Company 
Act during the seeding period. We understand, however, that, in 
practice, funds currently do not typically rely on these exemptions 
during the seeding period. Moreover, if a fund is planning to 
conduct a registered public offering, these exemptions generally 
would become unavailable if it makes, or proposes to make, a public 
offering. See Section 3(c)(1) of the Investment Company Act [15 
U.S.C. 80a-3(c)(1)] (requiring that an issuer ``is not making and 
does not presently propose to make a public offering of its 
securities''); Section 3(c)(7) of the Investment Company Act [15 
U.S.C. 80a-3(c)(7)] (requiring that an issuer ``is not making and 
does not at [the time of acquisition of its securities by qualified 
purchasers] propose to make a public offering of its securities'').
    \56\ Registered investment companies generally are able to use 
the same Commission form, and provide much of the same information, 
to register under the Investment Company Act and to register a 
securities offering under the Securities Act. Simultaneously filing 
under both Acts allows a fund to make fewer filings with the 
Commission, which can reduce certain associated burdens.
    \57\ Since a BDC is not required to register under the 
Investment Company Act, it may to some extent be more likely to use 
the proposed rule to engage in pre-filing communication when it is 
contemplating a registered offering close in time to the fund's 
inception. See supra note 54.
    \58\ Registered open-end funds may be less likely to use the 
proposed rule because they typically offer their shares to retail 
investors in registered offerings.
---------------------------------------------------------------------------

    In addition, funds may benefit from test-the-waters communications 
after filing a Securities Act registration statement. Proposed Rule 
163B would allow them to communicate with QIBs and IAIs about a 
contemplated offering without either being an EGC or complying with the 
requirements of Section 24(b) of the Investment Company Act or Rules 
482 or 34b-1, including the associated filing, disclosure, and 
legending requirements. To promote consistent treatment of different 
types of issuers' test-the-waters communications under proposed Rule 
163B and for similar policy reasons as explained above with respect to 
other issuers, we are proposing to exclude funds' test-the-waters 
communications conducted under proposed Rule 163B from the filing 
requirements in Rule 497 under the Securities Act and in Section 24(b) 
of the Investment Company Act and the rules thereunder.\59\
---------------------------------------------------------------------------

    \59\ Rule 497 requires investment companies to file every form 
of prospectus given to any person prior to the effective date of the 
registration statement that varies from the form of prospectus 
included in its registration statement. Section 24(b) of the 
Investment Company Act generally requires filing of any sales 
literature that a registered open-end company, registered unit 
investment trust, or registered face-amount certificate company, or 
an underwriter of any such fund, intends to distribute to 
prospective investors in connection with a public offering of the 
fund's securities. 15 U.S.C. 80a-24(b). The definition of ``sales 
literature'' could include communications under proposed Rule 163B. 
See Investment Company Act Release No. 89 (Mar. 13, 1941) [11 FR 
10992 (Sept. 27, 1946)] (``So it may be said that every written 
communication used by the issuer or an underwriter with the 
intention of inducing or procuring, or of facilitating the 
inducement or procurement, of any sale of the securities of any of 
the companies enumerated in section 24(b) is within the purview of 
that section.'').
---------------------------------------------------------------------------

Request for Comment
    16. Would funds or persons acting on their behalf rely on the 
proposed rule in

[[Page 6720]]

practice? If so, in what contexts would they use the proposed rule, and 
what would be the associated benefits? For example, would the proposed 
rule impact communications during the product development stage before 
a registration statement is filed? Why or why not? Are there ways we 
should modify the proposed rule with respect to fund issuers in 
recognition of differences between funds and corporate issuers (e.g., 
differences in general investor bases)?
    17. Would certain types of funds (such as BDCs and registered 
closed-end funds) be more likely to benefit from the proposed rule than 
other types of funds (such as open-end funds)? Should certain or all 
funds be excluded from the scope of the proposed rule? Why or why not?
    18. Do BDCs that are EGCs currently engage in test-the-waters 
communications? If so, under what circumstances have test-the-waters 
communications been useful? If test-the-waters communications have not 
been useful to BDCs that are EGCs, why have they not been useful? Have 
these communications been limited due to any restrictions in the 
Investment Company Act or other legal requirements? If so, should we 
provide any exemptions from these requirements? Why or why not?
    19. Are there legal or other restrictions that would impede the 
ability of fund sponsors, underwriters, or others to engage in test-
the-waters communications under the proposed rule in connection with 
forming a new registered investment company or BDC? If so, how should 
we address such restrictions? For example, could Section 7 of the 
Investment Company Act restrict or limit the usefulness of test-the-
waters communications in practice? \60\ Should we provide an exemption 
from Section 7 of the Investment Company Act for test-the-waters 
communications conducted under the proposed rule, for some or all types 
of fund issuers? Why or why not?
---------------------------------------------------------------------------

    \60\ See supra note 54.
---------------------------------------------------------------------------

    20. Should we restrict the types of information that funds can 
provide under the proposed rule? For example, should we limit open-end 
fund performance information in test-the-waters communications, similar 
to Rule 482? Why or why not? Should we apply other requirements, such 
as filing, disclosure, or legending requirements, to funds' written 
test-the-waters communications?
    21. Would a private fund that is considering converting to a 
registered investment company or BDC benefit from engaging in test-the-
waters communications with QIBs and IAIs to inform this decision, or 
would the decision to convert be driven by communications with existing 
investors? If a private fund would have a use for test-the-waters 
communications, are there legal or other restrictions that would limit 
the ability of the private fund, or persons authorized to act on its 
behalf, to rely on the proposed rule? For example, would language in 
Section 3(c)(1) or 3(c)(7) of the Investment Company Act restricting 
public offerings have a potential chilling effect on otherwise 
permissible test-the-waters communications under the proposed rule? 
\61\ If so, how should we address this issue?
---------------------------------------------------------------------------

    \61\ See supra note 55.
---------------------------------------------------------------------------

    22. To the extent that open-end funds would benefit from the 
ability to engage in pre- or post-filing test-the-waters communications 
with QIBs and IAIs, are there differences between series funds (i.e., 
where a single registrant can create new funds by filing post-effective 
amendments to its registration statement) \62\ and non-series funds 
that the rule should take into account?
---------------------------------------------------------------------------

    \62\ Many open-end funds are organized as single registrants 
with several series under Sections 18(f)(1) and (2) of the 
Investment Company Act and Rule 18f-2 thereunder. See 15 U.S.C. 80a-
18(f)(1) and (2); 17 CFR 270.18f-2. A registrant may add a series--
which is often treated as a separate fund under our rules and which 
has its own investment objective, policies, and restrictions--by 
filing a post-effective amendment to its registration statement. 
See, e.g., 17 CFR 230.485 under the Securities Act.
---------------------------------------------------------------------------

III. Economic Analysis

A. Introduction and Broad Economic Considerations

    We are mindful of the costs imposed by and the benefits obtained 
from our rules. Securities Act Section 2(b) \63\ and Investment Company 
Act Section 2(c) \64\ require us, when engaging in rulemaking that 
requires us to consider or determine whether an action is necessary or 
appropriate in (or, with respect to the Investment Company Act, 
consistent with) the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 77b(b).
    \64\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    As noted above, Securities Act Section 5(d) was enacted under the 
JOBS Act and permits EGCs to engage in communications with QIBs or IAIs 
to determine their interest in an offering before or after the filing 
of a registration statement. However, companies that do not presently 
qualify as EGCs (including companies that previously qualified as EGCs 
but that have lost EGC status, larger companies, companies that first 
issued common equity pursuant to a Securities Act registration 
statement before December 8, 2011, asset-backed issuers, and registered 
investment companies) cannot avail themselves of Section 5(d) when 
raising capital through registered offerings, resulting in potential 
competitive impacts. The lower flexibility in raising capital through 
registered offerings may contribute to decreased willingness among non-
EGCs to rely on registered offerings or impair their ability to raise 
capital through registered offerings at a lower cost. The proposed rule 
would expand the permissibility of test-the-waters communications to 
all issuers and potential issuers in contemplated registered securities 
offerings, regardless of whether such issuers qualify as EGCs.
    Test-the-waters communications would provide issuers, particularly 
non-EGC issuers that are unable to rely on Section 5(d), with 
additional tools to gather valuable information about investor interest 
before a potential registered offering. By allowing issuers to gauge 
market interest \65\ in a contemplated registered securities offering, 
these communications could result in a more efficient and potentially 
lower-cost and lower-risk capital raising process for issuers. By 
extending the flexibility presently afforded to EGCs to all issuers, 
including non-EGCs, the proposed rule would result in greater 
harmonization of offering process requirements between EGC and non-EGC 
issuers (including issuers that previously had EGC status but no longer 
qualify as EGCs). As the use of test-the-waters communications would 
remain voluntary, we anticipate that the issuers most likely to engage 
in these communications would be those issuers that expect the benefits 
of this strategy to outweigh the costs. Specifically, we expect that 
the issuers that are most likely to use the proposed rule would be 
those that are seeking to better assess the demand for and valuation of 
their securities, as well as those that are seeking more information 
from potential investors regarding the attractiveness of various terms 
or structural elements of

[[Page 6721]]

the offering.\66\ This could in turn enhance the ability of issuers to 
conduct successful offerings and potentially lower their cost of 
capital.
---------------------------------------------------------------------------

    \65\ Test-the-waters communications with institutional investors 
can help issuers gauge market interest in an offering because 
institutions account for a key part of the pool of investors in 
public offerings, particularly for larger companies. See, e.g., 
Lowry, M., R. Michaely, and E. Volkova, 2017. Initial public 
offerings: a synthesis of the literature and directions for future 
research. Foundations and Trends in Finance 11(3-4), 154-320.
    \66\ We also recognize that the benefits of the proposed rule 
may be more limited for certain issuers in practice, which may make 
them less likely to use the proposed rule regardless of these 
factors. See supra Section II.E and infra Section III.C.5.
---------------------------------------------------------------------------

    By reducing the potential costs and risks associated with 
conducting a registered securities offering, the proposed rule might 
make registered securities offerings more attractive to certain 
issuers, particularly non-EGC issuers, that otherwise would have relied 
on private placements or not pursued a securities offering.\67\ The 
resulting potential increases in the number of registered offerings and 
reporting companies may improve capital formation and efficiency of 
allocation of investor capital. However, because some of the issuers 
undertaking registered offerings as a result of proposed Rule 163B 
might have otherwise raised capital in private markets, the net impact 
on total capital formation is difficult to assess.
---------------------------------------------------------------------------

    \67\ For instance, one study found a significant increase in IPO 
activity, particularly among pharmaceutical and biotechnology 
companies, in the two years after the JOBS Act enactment 
(``[c]ontrolling for market conditions, we estimate that the JOBS 
Act has led to 21 additional IPOs annually, a 25% increase over pre-
JOBS levels''). See Michael Dambra, Laura Field, & Matthew 
Gustafson, The JOBS Act and IPO Volume: Evidence That Disclosure 
Costs Affect the IPO Decision, 116 J. Fin. Econ. 121, 121-143 (2015) 
(``DFG Study''), at 121. The study notes several caveats related to 
the interpretation of the finding, including that ``the recent 
sustained bull market makes it impossible to investigate the 
interaction between the JOBS Act provisions and market conditions'' 
and that the estimated increase in the annual IPO volume outside 
biotechnology and pharmaceutical industries is ``small relative to 
the intertemporal volatility of IPO volume.'' As a result, the 
authors caution that ``our results should be viewed as preliminary, 
warranting future research on the topic.'' See DFG Study, at 123.
    In addition, we note that the confounding effects of other 
provisions commonly used by EGCs along with testing the waters, such 
as the ability to confidentially submit a draft registration 
statement for nonpublic review by the staff of the Commission prior 
to public filing, makes it difficult to isolate the incremental 
effect of the availability of testing the waters on IPO activity 
among issuers eligible for EGC status. See DFG Study, at 124 (``[i]n 
practice, issuers usually combine TTW with a second de-risking 
provision, allowing EGCs to file their IPO draft registration 
statement confidentially.'') and Congressional Research Service 
(2018) Capital Markets, Securities Offerings, and Related Policy 
Issues (July 26, 2018), https://crsreports.congress.gov/product/pdf/R/R45221 (``CRS Report''), at 18.
    We also note that inferences from studies of EGC issuers may not 
be directly applicable to non-EGC issuers because non-EGC issuers 
are different from EGC issuers. See infra notes 89-91.
---------------------------------------------------------------------------

    The proposed rule also might provide information to some potential 
investors about a broader range of potential future offerings at an 
earlier stage, before a registration statement is publicly filed, which 
might on the margin enable such investors to formulate a more informed 
investment strategy. However, the proposed rule might have adverse 
effects on such investors if the test-the-waters communications contain 
incomplete or misleading information and if solicited investors 
improperly rely on such communications rather than on the filed 
offering materials when making investment decisions. We expect such 
potential adverse effects on investors to be mitigated by several 
factors, including the general applicability of anti-fraud provisions 
of the federal securities laws and liability under Section 
12(a)(2),\68\ as well as the limitation of permissible test-the-waters 
communications under the proposed rule to QIBs and IAIs, which 
generally have a sophisticated ability to process investment 
information.
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    \68\ See supra note 24.
---------------------------------------------------------------------------

    By extending to all issuers the flexibility to test the waters 
currently available only to EGCs, the proposed rule also would 
eliminate the competitive disadvantage of those non-EGC issuers that 
might find test-the-waters communications to be of value to their 
capital raising efforts. This competitive disadvantage is particularly 
pronounced today for non-EGCs that are close to meeting--but marginally 
fail to meet--EGC eligibility criteria. In turn, to the extent that 
EGCs compete with non-EGCs for investor capital and in the product 
market, the incremental benefits that accrue to non-EGCs under the 
proposed rule (the ability to pursue a more efficient capital raising 
strategy while limiting the risk of early disclosure of proprietary 
information) might have an adverse competitive effect on EGCs.
    Potential users of the proposed rule include, for example, issuers 
contemplating an IPO as well as reporting issuers that are interested 
in conducting follow-on and other registered offerings. Regulation FD 
may limit use of the proposed rule by some issuers in the second group. 
As discussed in Section II.A above, issuers subject to Regulation FD 
that selectively disclose material nonpublic information regarding the 
issuer to specified parties are required to disclose such information 
publicly. Accordingly, reporting issuers that selectively disclose 
material nonpublic information to QIBs and IAIs in reliance on the 
proposed rule may be required to disclose publicly certain test-the-
waters communications notwithstanding the fact that the proposed rule 
would not require such disclosure. This may reduce reliance on proposed 
Rule 163B. However, some issuers that would be able to rely on proposed 
Rule 163B are not subject to Regulation FD \69\ or may avail themselves 
of an exception under Regulation FD, such as the exception involving 
confidentiality agreements.\70\
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    \69\ See supra note 28 and accompanying text.
    \70\ See supra notes 29-30 and accompanying text. For instance, 
some capital raising methods involve sharing material nonpublic 
information about a contemplated registered securities offering with 
outsiders who expressly agree to maintain the information in 
confidence until the deal is publicly disclosed. However, there is 
an inherent risk that a deal may not be consummated. If the deal 
fails to go forward, the outside investors will typically remain 
bound by the confidentiality agreements until the material nonpublic 
information is either no longer material or publicly disclosed by 
the issuer.
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    Where possible, we have attempted to quantify the economic effects 
of the proposed rule. However, in some cases we are unable to do so. 
For example, it is difficult to quantify the extent to which issuers 
would elect to test the waters in connection with a contemplated 
registered securities offering under the proposed rule; the extent to 
which the option to engage in test-the-waters communications would 
affect the willingness of potential issuers newly eligible for testing 
the waters under the proposed rule to undertake registered securities 
offerings; the effects of test-the-waters communications on the amount 
and cost of capital raised; and the effect of expanding permissible 
test-the waters communications on the ability of QIBs and IAIs to form 
informed assessments of issuer quality and the securities offered for 
the purposes of determining interest in a contemplated offering.
    We have been able to gain some insight into the potential economic 
effects of the proposed rule based on the experience of EGC issuers 
that have been permitted to test the waters pursuant to Securities Act 
Section 5(d) since April 2012. However, these insights are potentially 
limited by the differences between EGC and non-EGC issuers (including 
non-EGC issuers that are investment companies) and the offerings they 
undertake; \71\ the voluntary nature of reliance on Section 5(d) among 
EGC issuers; \72\ the potential confounding effects resulting from 
reliance on other JOBS Act provisions by EGC issuers simultaneously 
with reliance on test-the-waters accommodations; and the generally 
favorable market conditions observed in

[[Page 6722]]

the post-JOBS Act period.\73\ Moreover, while the flexibility not to 
pursue a registered offering after gauging investor interest can be 
valuable to issuers, we do not have information on issuers that test 
the waters under the existing rules but subsequently do not proceed 
with a registered offering.
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    \71\ See infra notes 89-91.
    \72\ See infra note 82.
    \73\ See, e.g., Susan Chaplinsky, Kathleen W. Hanley, & S. Katie 
Moon, The JOBS Act and the Costs of Going Public, 55 J. Acct. Res. 
795, 795-836 (2017) (``CHM Study''), at 828 (using a three-year 
period post-JOBS Act and finding that ``with few exceptions, the 
equity-market conditions of our post-Act sample period have been 
generally favorable to IPO issuance. We leave to future work how 
issuers' disclosure decisions and investors' reaction to them may 
change under less favorable equity market conditions.'') and DFG 
Study, at 123 (using a two-year period post-JOBS Act and finding 
that ``the recent sustained bull market makes it impossible to 
investigate the interaction between the JOBS Act provisions and 
market conditions. Thus, the effects of the JOBS Act we find could 
differ in a bear market.'').
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    Below we discuss the potential effects of the proposed rule 
relative to the economic baseline, which includes existing requirements 
regarding solicitation of investor interest in connection with 
registered securities offerings; current practices of EGC issuers 
related to testing the waters; and information about filers and other 
parties affected by solicitation requirements.

B. Baseline and Affected Parties

1. Baseline
    Section 5(c) of the Securities Act generally prohibits issuers or 
other persons from offering securities prior to the filing of a 
registration statement. Once a registration statement has been filed, 
Section 5(b)(1) generally requires issuers to use a prospectus that 
complies with Securities Act Section 10 for any written offers of 
securities. As noted above, Securities Act Section 5(d) nonetheless 
allows EGCs to engage in test-the-waters communications with QIBs and 
IAIs both before and after filing the registration statement. Under the 
current rules, only issuers that qualify for EGC status can rely on a 
test-the-waters provision in advance of a contemplated registered 
offering.\74\ Registered investment companies are ineligible for EGC 
status.\75\ Permissible test-the-waters solicitations, in oral or 
written form, may be used before or after the filing of a Securities 
Act registration statement for an initial or follow-on registered 
offering.
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    \74\ See supra note 3.
    \75\ However, BDCs, which are closed-end funds exempt from 
registration under the Investment Company Act, are eligible for EGC 
status.
---------------------------------------------------------------------------

    There is some evidence related to the use of test-the-waters 
communications by EGC issuers in IPOs. Because disclosure of whether 
the issuer has tested the waters is not required in the registration 
statement, studies have used various alternative sources of information 
to estimate the incidence of test-the-waters communications. Thus, 
estimates have varied depending on the sources used, the interpretation 
of references to testing the waters in those sources, and sample 
construction.\76\ Some studies have estimated the incidence of test-
the-waters communications by IPO issuers based on issuer responses to 
staff comment letters associated with IPO registration statement 
filings.\77\ Using this method, recent industry studies found that in 
2015 and 2016, respectively, 38% and 23% of EGC IPOs referenced testing 
the waters in comment letter responses.\78\ Based on the analysis of 
comment letter responses, staff has estimated that approximately 35% of 
EGC IPOs during 2012-2017 have used the test-the-waters provision.\79\ 
Other studies have estimated the use of the test-the-waters provision 
based on whether the underwriting agreement mentions allowing the 
underwriter to test the waters. One academic study found, based on an 
analysis of underwriting agreements filed as exhibits to registration 
statements, that approximately 71% of EGC IPOs authorized underwriters 
to test the waters.\80\ Another academic study found that approximately 
68% of EGC IPOs authorized underwriters to test the waters or, where 
information was not available in the underwriting agreement, mentioned 
testing the waters in comment letter responses.\81\ Because 
underwriting agreement data does not indicate whether the underwriter 
actually engaged in test-the-waters communications, those estimates are 
considerably higher than the estimates based solely on staff comment 
letters. Because estimates based on staff comment letters reference 
actual use of test-the-waters materials, we believe they are more 
relevant for the purposes of this baseline analysis.
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    \76\ The estimates in the reviewed studies have focused on 
priced exchange-listed IPOs. As a caveat, information about the use 
of the test-the-waters provision by issuers that decide not to file 
a registration statement is not available.
    \77\ Because only some issuers in follow-on offerings receive 
staff comment letters, this estimate only applies to IPOs. We note 
that estimates based on staff comment letters will likely not 
account for oral test-the-waters communications not involving 
written materials.
    \78\ See supra note 9. The studies covered a subset of EGC IPOs.
    \79\ EGC IPOs are identified based on Ives Group's Audit 
Analytics data on priced offerings. Staff comment letters and 
responses containing ``Section 5(d)'' and ``testing the waters'' 
keywords are retrieved from Intelligize and manually classified. 
Missing or ambiguous responses are supplemented with staff analysis 
of cover letters submitted by issuers in response to staff reviews 
of registration statements, where available.
    \80\ See CHM Study, at 820 (Table 6). The statistic is based on 
313 EGC IPOs conducted between April 2012 and April 2015.
    \81\ See DFG Study, at 136 (Table 8). The statistic is based on 
155 EGC IPOs conducted between April 2012 and March 2014.
---------------------------------------------------------------------------

    The practice of testing the waters is voluntary. Today it is used 
by those EGCs that may be most likely to benefit from it, for example, 
because of a high level of uncertainty about potential investor demand 
for their securities offering.\82\ The estimated rate of use of the 
test-the-waters provision has varied by sector, with heavy 
concentration of EGC IPOs that engaged in testing the waters in the 
biotechnology, pharmaceutical, technology, media, and 
telecommunications industries.\83\
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    \82\ Issuers may elect to test the waters if they have high 
costs of proprietary information disclosure or significant 
uncertainty about the interest of potential investors in the 
offering.
     According to one law firm study, companies using test-the-
waters communications were heavily concentrated in the health care 
and technology-telecommunications-media sectors. See supra note 9.
     Another report similarly concluded, based on the experience 
during the first two years after the JOBS Act was enacted, that the 
test-the-waters provision may be especially valuable for companies 
in industries where valuation is uncertain and the timing of the IPO 
depends on regulatory or other approval (e.g., the biotech and 
pharmaceutical industries). See CRS Report, at 6.
     According to one academic study, ``smaller firms, 
biotech[nology]/pharma[ceutical] firms, and research-intensive firms 
are more likely to elect the testing-the-waters provision, which is 
consistent with the JOBS Act lowering the cost of proprietary 
disclosure.'' See DFG Study, at 122. See also CHM Study, at 823 for 
a more general discussion of how the characteristics of EGCs affect 
their choice to avail themselves of the accommodations available 
under Title I of the JOBS Act (for example, stating that ``issuers 
that disclose less information are those that are more likely to 
have higher proprietary information costs and characteristics that 
may make them dif[filig]cult for investors to value''). As a caveat, 
the cited academic studies generally exclude self-underwritten IPOs, 
penny stocks, and IPOs that are not listed on an exchange. 
Therefore, it is unclear if the conclusions would apply to these 
types of issuers.
    \83\ Id.
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2. Affected Parties
    We anticipate that the proposed rule would affect issuers, 
investors, and intermediaries.
i. Issuers
    The proposed rule would affect current and potential issuers in 
contemplated registered securities offerings. While the proposed rule 
would be available to all issuers, including EGCs, it would 
particularly affect non-EGC issuers that are not allowed to test the 
waters under Section 5(d). EGC issuers would remain eligible to rely on 
Section 5(d). To the extent

[[Page 6723]]

that EGC issuers would rely on the proposed rule, the proposed rule 
would affect such EGC issuers. The proposed rule also would indirectly 
affect any issuers that do not rely on the proposed rule to the extent 
that they compete with issuers that rely on the proposed rule for 
investor capital or in the product market.
    We estimate that there were approximately 2,096 EGCs and 8,942 non-
EGCs that filed Securities Act registration statements or periodic 
reports during 2017,\84\ excluding ABS issuers and registered 
investment companies. We estimate that in 2017 there were approximately 
1,672 ABS issuers \85\ and approximately 12,620 registered investment 
companies,\86\ which were ineligible for EGC status.\87\ While EGCs 
made up a minority of all filers with registration statements declared 
effective, they accounted for a majority of new issuers in traditional 
IPOs.\88\
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    \84\ The estimate is based on the number of unique filers of 
registration statements on Form S-1, S-3, S-4, S-11, F-1, F-3, F-4, 
or F-10, or periodic reports on Form 10-K, 10-Q, 20-F, or 40-F, or 
amendments to them, during calendar year 2017, as well as any BDCs 
included in the SEC's September 2017 BDC report at https://www.sec.gov/open/datasets-bdc.html. The BDC report does not exclude 
filers that have not yet begun selling shares to the public or 
filers that have ceased operations but have not yet withdrawn their 
registration statement or election to be regulated as a BDC. EGCs 
are identified as of the end of 2017 based on Ives Group's Audit 
Analytics data. We include filers of periodic reports because the 
proposed rule is available to seasoned issuers that have already 
become reporting companies.
    \85\ The estimate is based on the number of unique CIKs with 
ABS-related filings during calendar year 2017 (ABS-15G, ABS-EE, SF-
1, SF-3, 10-D, or amendments to them). The estimate is not limited 
to ABS issuers that filed annual reports.
    \86\ We estimate that there are 9,360 mutual funds, 1,821 
exchange-traded funds (1,829 ETFs less 8 UIT ETFs), 711 closed-end 
funds, 5 variable annuity separate accounts registered as management 
investment companies on Form N-3 (covering 14 investment options), 
and 724 UITs (predominantly variable annuity separate accounts 
registered as UITs on Form N-4 and Form N-6). See Release No. 33-
10506 (Jun. 5, 2018) [83 FR 29158], at 29184, fn. 342 and 
accompanying text and Release No. 33-10569 (Oct. 30, 2018) [83 FR 
61730], at 61733, fn. 23. This estimate is not limited to registered 
investment companies that filed annual reports.
    \87\ See Jumpstart Our Business Startups Act Frequently Asked 
Questions: Generally Applicable Questions on Title I of the JOBS 
Act, https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm (``JOBS Act Title I FAQs'').
    \88\ Based on Ives Group's Audit Analytics data, during calendar 
year 2017, EGC issuers accounted for approximately 187 out of 212, 
or approximately 88%, of priced exchange-listed IPOs (excluding 
deals identified as mergers, spin-offs, or fund offerings). During 
the period from April 5, 2012 through December 31, 2017, EGC issuers 
accounted for approximately 1,018 out of 1,183, or approximately 86% 
of such IPOs.
---------------------------------------------------------------------------

    The proposed rule also could affect issuers that are not yet 
reporting companies but that elect to test the waters as part of 
exploring the possibility of a future registered securities offering. 
In addition, because there is no requirement to disclose the use of 
testing the waters under Section 5(d), we do not have data on EGCs that 
have tested the waters but have elected not to file a registration 
statement for the contemplated offering.
    In drawing inferences from the experience of EGCs with the use of 
test-the-waters communications, it is important to recognize that there 
are considerable differences between an average EGC and an average non-
EGC issuer. For example, non-EGC IPO issuers tend to have significantly 
higher revenues than EGCs due to the size-based eligibility criteria 
for EGC status.\89\ Further, non-EGC issuers include older companies 
that first issued common equity pursuant to a Securities Act 
registration statement before December 8, 2011 \90\ or that lost their 
EGC status because more than five fiscal years have elapsed since their 
first registered common equity sale. Non-EGC issuers also include ABS 
issuers and registered investment companies, which have unique 
operational and regulatory characteristics.\91\
---------------------------------------------------------------------------

    \89\ For example, one study comparing a subset of exchange-
listed EGC IPOs to exchange-listed non-EGC IPO controls noted that 
``[a] high percentage of EGCs are unprofitable and substantially 
younger than the control sample and the majority of these IPOs occur 
in only two industries--biotech[nology] and pharmaceuticals--that 
have limited near-term prospects and little revenue to recognize.'' 
See CHM Study, at 828. See also DFG Study, at 127 and 129 (Table 3).
    \90\ An ``issuer shall not be an emerging growth company for 
purposes of [the Securities Act and the Exchange Act] . . . if the 
first sale of common equity securities of such issuer pursuant to an 
effective registration statement under the Securities Act of 1933 
occurred on or before December 8, 2011.'' See JOBS Act Title I FAQs.
    \91\ See id.
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ii. Investors
    The proposed rule would affect current and potential QIBs and IAIs 
that might be solicited in conjunction with contemplated registered 
securities offerings. Due to their portfolio size and/or investment 
expertise, we expect that such investors have considerable ability to 
assess investment opportunities and acquire and analyze information 
about securities and their issuers. Such investors are generally viewed 
as sophisticated for purposes of private placements, which are often 
associated with considerably higher information asymmetry than 
registered offerings. Under Title I of the JOBS Act, EGCs were provided 
the flexibility to test the waters with these relatively sophisticated 
investors.
    We lack information necessary to estimate the number of QIBs and 
IAIs that would be solicited in connection with registered offerings 
under the proposed rule. Because it is not an item of disclosure 
required of issuers, we do not have information on the number of QIBs 
and IAIs that were solicited through test-the-waters communications in 
connection with EGC offerings in reliance on Section 5(d). We also lack 
data to generate a comprehensive estimate of the overall number of QIBs 
and IAIs that may be potentially solicited under the proposed rule 
because disclosure of investor status across all such investors is not 
required and because we lack comprehensive data that would cover all 
categories of potential QIBs and IAIs.
    For instance, we can gather limited information about certain 
investors that may be QIBs from EDGAR filings. Based on staff analysis 
of these filings, we estimate that for calendar year 2017, 6,111 unique 
filers filed Form 13F on behalf of 6,580 institutional investment 
managers. However, a number of QIBs, including large institutions that 
primarily invest in securities other than Section 13(f) securities 
(e.g., unregistered equity securities; nontraded registered equity 
securities; or registered non-equity securities),\92\ as well as 
certain types of dealers as specified in Rule 144A will not be captured 
by this estimate. We similarly lack information for a comprehensive 
estimate of the overall number of IAIs because disclosure of accredited 
investor status across all institutional investors is not required and 
because, while we have information to estimate the number of some 
categories of IAIs (some of which may also be included in the Form 13F 
estimate), we lack comprehensive data that would allow us to estimate 
the unique number of investors across all categories of IAIs under Rule 
501.\93\
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    \92\ Form 13-F must be filed only by institutional investment 
managers that exercised investment discretion over $100 million in 
Section 13(f) securities. ``Section 13(f) securities'' are equity 
securities of a class described in Section 13(d)(1) of the Exchange 
Act that are admitted to trading on a national securities exchange 
or quoted on the automated quotation system of a registered 
securities association. See Form 13F and Rule 13f-1(c) under the 
Exchange Act.
    \93\ In addition, Form ADV filers report information about the 
number of clients of different types, such as pooled investment 
vehicles, banking institutions, corporations, charities, pension 
plans, etc., some of which are potential IAIs. However, the data 
available to us does not allow identification of unique clients (to 
account for cases where a client has multiple advisers) or IAIs that 
do not retain services of a Form ADV filer.
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    In addition to QIBs and IAIs, other investors may be indirectly 
affected by

[[Page 6724]]

the proposed rule, as discussed in Section III.C below. For example, 
the proposed rule could increase the shareholder value of affected 
issuers by lowering the cost of raising capital or enabling issuers to 
pursue a more efficient capital raising strategy, which would benefit 
existing investors in these issuers. Furthermore, the proposed rule 
could encourage additional registered securities offerings. Due to data 
availability, we cannot estimate the number of investors that might be 
affected by such indirect benefits. According to a recent study based 
on the 2016 Survey of Consumer Finances, approximately 65 million 
households owned stocks directly or indirectly (through other 
investment instruments).\94\
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    \94\ See Jesse Bricker, Lisa J. Dettling, Alice Henriques, 
Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, Sarah Pack, John 
Sabelhaus, Jeffrey Thompson, & Richard A. Windle, Changes in U.S. 
Family Finances from 2013 to 2016: Evidence From the Survey of 
Consumer Finances, 103 Fed. Res. Bull. 1, 1-42 (2017), at 20, 
https://www.federalreserve.gov/publications/files/scf17.pdf. The 
proposed test-the-waters provision could be used irrespective of 
security type, so the overall set of potentially indirectly affected 
investors is likely to be larger.
---------------------------------------------------------------------------

iii. Intermediaries
    Similar to Section 5(d), proposed Rule 163B would permit the 
issuer, or any person authorized to act on behalf of an issuer, to 
engage in test-the-waters communications. EGC issuers commonly 
authorize underwriters to engage in test-the-waters communications on 
their behalf with prospective investors.\95\ Thus, the proposed rule 
would potentially affect such underwriters or other third parties 
engaged in a similar role.
---------------------------------------------------------------------------

    \95\ See supra notes 80-81 and accompanying text.
---------------------------------------------------------------------------

    We estimate that there were approximately 958 registered broker-
dealers that reported being underwriters or selling group participants 
for corporate securities in 2018.\96\ We do not have data on how many 
underwriters actually engaged in test-the-waters communications in 
connection with offerings on behalf of EGCs. Further, we lack data on 
other persons that have engaged in test-the-waters communications on 
behalf of EGCs. With respect to persons who could be authorized to act 
on behalf of fund issuers, we estimate that approximately 280 
registered broker-dealers reported being mutual fund underwriters or 
sponsors in 2018 (of which approximately a quarter also reported being 
underwriters for corporate securities).\97\ We anticipate that fund 
advisers also might engage in test-the-waters communications on behalf 
of the funds they advise. We estimate that there are approximately 
1,831 investment advisers to registered investment companies and 
approximately 109 investment advisers to BDCs.\98\ We do not have data 
to predict how many of these fund intermediaries would actually engage 
in test-the-waters communications, or how many additional persons 
authorized to act on behalf of a fund issuer might participate in test-
the-waters communications related to fund offerings under the proposed 
rule.
---------------------------------------------------------------------------

    \96\ This estimate is based on Form BD filings as of October 
2018.
    \97\ Id. Form BD does not separately elicit underwriting 
activity for other types of funds, so more detailed information 
about the number of broker-dealers that underwrite those funds' 
offerings is not available to us.
    \98\ This estimate is based on Form ADV filings as of October 
2018.
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C. Anticipated Economic Effects

    Below we evaluate the anticipated costs and benefits of the 
proposed rule and the anticipated effects of the proposed rule on 
efficiency, competition, and capital formation.
    On a market-wide basis, providing the option to test the waters to 
all issuers is expected to improve the efficiency and lower the cost of 
implementing the capital raising strategy for issuers considering a 
registered securities offering.\99\ While EGC issuers would also be 
permitted to rely on proposed Rule 163B, non-EGC issuers are expected 
to be most affected by the proposed rule because they cannot rely on 
Section 5(d).
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    \99\ See, e.g., Treasury Report, at 30 (stating that ``[w]hen 
combined with the ability to file a registration statement 
confidentially with the SEC, testing the waters reduces the 
company's risk associated with an IPO. The company has a better 
gauge of investor interest prior to undertaking significant expense 
and, in the event the company elects not to proceed with an IPO, 
information has been disclosed only to potential investors and not 
to the company's competitors.'') See also SIFMA Report, at 10-11.
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1. Potential Benefits to Issuers
    Expanding the availability of test-the-waters communications could 
improve the likelihood of successfully raising capital in a registered 
offering and enable a more efficient and potentially lower-cost capital 
raising process. Specifically, testing the waters could help issuers 
gauge market interest in a potential offering, determine the categories 
of investors with the most favorable assessment of the issuer, as well 
as identify the potential concerns and questions that prospective 
investors may have regarding the offering and its terms. By gathering 
this information, issuers may reduce the risk of having to withdraw a 
publicly filed registration statement and can also tailor offering size 
and other terms included in the initial filing more closely to market 
interest.
    We expect the greatest benefit of testing the waters to be realized 
by issuers that solicit investors before public filing. As discussed 
below, testing the waters before public filing enables issuers to lower 
the risk of proprietary information disclosure and possibly to avoid 
incurring the cost of preparing a registration statement. However, 
testing the waters after public filing may also benefit some 
issuers.\100\ Specifically, the option to test the waters can benefit 
the issuers affected by the proposed rule in several ways:
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    \100\ In the context of Regulation A, the Commission determined 
that issuers may benefit from broad flexibility to test the waters 
both before and after public filing. For example, in the 2015 
adopting release amending Regulation A, the Commission stated: 
``Allowing test-the-waters communications at any time prior to 
qualification of the offering statement, rather than only prior to 
filing of the offering statement with the Commission, may increase 
the likelihood that the issuer will raise the desired amount of 
capital. This option may be useful for smaller issuers, especially 
early-stage issuers, first-time issuers, issuers in lines of 
business characterized by a considerable degree of uncertainty, and 
other issuers with a high degree of information asymmetry.'' See 
Regulation A Adopting Release, at 21882.
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     In the case of issuers that decide after testing the 
waters not to proceed with a registered securities offering, testing 
the waters before a public registration statement filing decreases the 
risk of public disclosure of sensitive or proprietary information about 
the issuer to competitors (to the extent that the communications are 
not subject to Regulation FD).\101\
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    \101\ Several factors may serve to limit this benefit for some 
issuers. First, communications under the proposed rule could be 
subject to Regulation FD. See supra note 28.
    Second, issuers may already request confidential treatment for 
proprietary information they file with registration statements, 
subject to the provisions of 17 CFR 230.406 (``Rule 406'').
    Third, the extension of the option to confidentially submit a 
draft registration statement to non-EGC issuers has reduced the risk 
of proprietary information disclosure to competitors prior to an 
issuer deciding to proceed with the public filing of a registration 
statement for an IPO or a registered Securities Act offering, or 
registration of a class of securities pursuant to Exchange Act 
Section 12(b), within one year after an IPO. Beginning July 10, 
2017, staff extended the option of confidential submission of a 
draft registration statement to most non-EGC issuers. See Draft 
Registration Statement Processing Procedures Expanded, June 29, 
2017, https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded, and Voluntary Submission 
of Draft Registration Statements--FAQs, https://www.sec.gov/corpfin/voluntary-submission-draft-registration-statements-faqs. Separately, 
draft registration statement procedures were expanded to non-EGC 
BDCs in 2018. See Expanded Use of Draft Registration Statement 
Review Procedures for Business Development Companies, ADI 2018-01, 
https://www.sec.gov/investment/adi-2018-01-expanded-use-draft-registration-statement-review-procedures-business.

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[[Page 6725]]

     In the case of issuers that decide after testing the 
waters not to proceed with a registered securities offering, testing 
the waters before the registration statement filing can save such 
issuers some or all of the cost of preparing and publicly filing a 
registration statement.
     Testing the waters, particularly before the registration 
statement filing, can reduce the risk of miscalculating market interest 
in the offering and having to withdraw the offering, thus reducing 
potential reputational costs.
     Testing the waters, particularly before the registration 
statement filing, can help issuers gauge investor demand for purposes 
of determining offering size and other terms, potentially resulting in 
a more efficient offering process and a higher likelihood of selling 
the offered amount more quickly.\102\
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    \102\ It is difficult to assess the extent to which test-the-
waters communications after the initial filing incrementally would 
help issuers gauge the demand of QIBs and IAIs as some of these 
issuers might have obtained similar information about investor 
demand through the bookbuilding process. We expect that issuers that 
find test-the-waters communications to be most beneficial would 
elect to undertake such communications.
---------------------------------------------------------------------------

    According to one academic study of EGC IPOs, the option to test the 
waters ``reduces the cost of IPO withdrawal because it allows issuers 
to disclose information exclusively to investors, but not competitors, 
until the IPO becomes likely to succeed. This would especially benefit 
issuers with high proprietary disclosure costs.'' \103\ The study also 
notes that testing the waters ``provides issuers with more certainty 
regarding the prospects of the IPO before publicly filing with the 
SEC.'' \104\
---------------------------------------------------------------------------

    \103\ See DFG Study, at 122.
    \104\ See DFG Study, at 124.
---------------------------------------------------------------------------

    In addition, for issuers that elect to proceed with a registered 
offering, testing the waters may serve as an element of their marketing 
strategy by allowing them to inform solicited investors about a 
potential future offering. However, the marketing benefit to such 
issuers would be limited because communications are only permitted with 
QIBs and IAIs and investors are not permitted to commit capital at the 
test-the-waters stage.
    Similarly, some fund issuers could use test-the-waters 
communications to gather information about investors' interest in a 
particular investment strategy or fee structure or to market a 
potential future offering. However, as discussed in greater detail in 
Section III.C.5 below, such benefits may be limited for most funds. To 
the extent that the proposed rule facilitates the registered offering 
process and potentially lowers its costs and risks for some issuers, 
the availability of testing the waters might facilitate capital 
formation through registered securities offerings, particularly for 
non-EGC issuers that are ineligible for test-the-waters provisions of 
Section 5(d). In evaluating the potential benefits of expanded test-
the-waters communications under the proposed rule for capital 
formation, we acknowledge that the issuers affected by the proposed 
rule already have the flexibility to solicit the same categories of 
investors in connection with private placements. Nevertheless, even if 
the net level of capital formation is unchanged, due to affected 
issuers switching from private placements to registered offerings, the 
added flexibility under the proposed rule might enable issuers to adopt 
the most efficient and lowest-cost capital raising strategy.
    To the extent that the proposed rule encourages additional issuers 
to conduct a registered securities offering, issuers may benefit from 
greater liquidity associated with registered securities, compared to 
exempt securities, to the extent that greater liquidity makes the 
issuers' securities potentially more attractive to prospective 
investors. Any additional issuers that elect to conduct a registered 
offering in part as a result of the proposed rule also may benefit from 
the greater ease of raising follow-on financing through future 
registered offerings.
2. Potential Costs to Issuers
    Issuers that elect to test the waters under the proposed rule might 
incur costs, including the cost of identifying QIBs and IAIs; holding 
events with QIBs and IAIs to engage in testing the waters; developing 
test-the waters solicitation materials; indirect costs of potential 
disclosure of proprietary information to solicited investors (albeit to 
a limited number of prospective investors); and in some instances, 
potential legal costs associated with liability arising from test-the-
waters communications with prospective investors.\105\ Further, 
communications made pursuant to the proposed rule may be subject to 
Regulation FD. Because the use of test-the-waters communications would 
remain voluntary under the proposed rule, we anticipate that issuers 
would elect to rely on test-the-waters communications only if the 
benefits anticipated by issuers outweigh the expected costs to issuers.
---------------------------------------------------------------------------

    \105\ In addition, similar to Section 5(d), the proposed rule 
would not modify existing rules on solicitation in conjunction with 
private placements. The Commission's 2007 framework for analyzing 
how an issuer can conduct simultaneous registered and private 
offerings would continue to apply. See Revisions of Limited Offering 
Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 
FR 45116 (Aug. 10, 2007)].
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3. Potential Benefits to Investors
    To the extent that the proposed rule encourages additional issuers 
to conduct a registered securities offering, a broader set of investors 
might more efficiently allocate capital among issued securities. These 
efficiency benefits are more likely to accrue to non-accredited 
investors, which are more limited in their ability to invest in 
securities issued in exempt offerings. Further, to the extent that 
additional issuers consider a registered securities offering instead of 
a private placement as a result of the proposed rule, investors that 
would otherwise have invested in unregistered securities of the same 
issuer might benefit from greater liquidity of registered securities 
(because resales of such securities would not be restricted and such 
securities are more likely to have a secondary market). Investors also 
would benefit from the availability of disclosure and market 
information about registered securities (resulting in more 
informationally efficient prices and potentially better informed 
investment decisions). By increasing shareholder value of affected 
issuers through cost savings and improved ability to raise external 
financing, the proposed rule also could benefit existing shareholders 
of affected issuers.
    Test-the-waters communications might offer some prospective 
investors the potential benefit of additional time to evaluate, 
understand, and ask questions about potential investment opportunities 
before the public filing of a registration statement. To the extent 
that such communications might provide solicited QIBs and IAIs with 
valuable early information about potential investment opportunities, 
these communications might enhance the ability of solicited QIBs and 
IAIs to assess the quality of future investment opportunities, and in 
some instances, potentially facilitate better informed future 
investment decisions and efficient allocation of capital. In the 
context of the proposed rule, such potential informational advantages 
would be limited by several factors. First, because extensive 
information about the issuer and the offering must be disclosed in a 
publicly filed registration statement, should an issuer decide to 
proceed with an offering, the

[[Page 6726]]

incremental value of the information conveyed to solicited investors 
through test-the-waters communications might be small. Second, to the 
extent that potential issuers newly eligible for testing the waters 
under the proposed rule would have otherwise provided similar 
information to QIBs and IAIs in the course of seeking private 
financing, such potential informational benefits could be reduced. 
Third, potential informational benefits to solicited investors likely 
would be smaller for issuers in follow-on offerings (to the extent that 
issuers have provided disclosures in an IPO registration statement and 
subsequent Exchange Act reports). Further, communications made pursuant 
to the proposed rule may be subject to Regulation FD. Finally, even if 
solicited investors view the potential offering as an attractive 
investment opportunity on the basis of test-the-waters communications, 
there is no assurance that an issuer will proceed with an offering, and 
no investors can invest in the offering until a registration statement 
has been declared effective.
4. Potential Costs to Investors
    If issuers with a traded class of securities test the waters in 
conjunction with a potential follow-on offering, solicited investors 
might potentially use the resulting information advantage to realize 
trading profits at a cost to investors that were not solicited. 
However, this possibility may be partly mitigated by (1) the 
requirement that Exchange Act reporting companies disclose specified 
information in periodic and current reports and (2) the general 
applicability of Exchange Act Section 10(b) and Rule 10b-5. Further, 
communications made pursuant to the proposed rule may in some 
circumstances be subject to Regulation FD, as discussed in Section 
III.A above.
    Selective solicitation of QIBs and IAIs may result in some 
institutional investors having a relatively greater influence on the 
offering process and terms, which might potentially place investors 
that are not solicited at a relative competitive disadvantage. This 
incremental effect of test-the-waters communications may be less likely 
to the extent that test-the-waters communications do not involve a 
mechanism for a credible commitment of capital. Thus, any expressions 
of interest are likely to be preliminary in nature. Further, similar 
differences in investor influence might emerge in the course of the 
book building process in the absence of test-the-waters communications, 
or in the course of a private placement if the issuer chooses to forgo 
a registered offering.
    The proposed expansion of permissible test-the-waters 
communications also might result in costs to solicited investors, 
including potentially less-informed decisions or less efficient capital 
allocation, if test-the-waters communications contain incomplete or 
misleading information and if solicited investors improperly rely on 
test-the-waters communications, and not on the filed offering 
materials, in their investment decisions.
    We expect that any such potential adverse effects on solicited 
investors might be mitigated by the following factors:
     The issuer would be required to publicly file a 
registration statement once it determines to proceed with a public 
offering, enabling solicited investors to review the filed offering 
materials and to obtain full information about the issuer and the 
offering before investing. This should serve as a crucial deterrent 
against the potential for misleading test-the-waters communications at 
the pre-filing stage because we expect that a QIB or IAI would verify 
the claims made as part of test-the-waters communications against the 
complete set of disclosures in the registration statement, which is 
subject to liability under Section 11 of the Securities Act.
     Test-the-waters communications would be permitted only 
with QIBs and IAIs. Although the level of investor sophistication may 
vary across such investors (for example, it may be relatively higher 
for the larger QIBs and IAIs, which are likely to have more investment 
and due diligence expertise than the relatively smaller QIBs and IAIs), 
QIBs and IAIs generally are expected to have a sophisticated ability to 
process investment information and to review the offering materials, 
once those materials are filed, before making an investment decision.
     Because test-the-waters communications represent an offer 
of securities, although they would not be subject to liability under 
Section 11 of the Securities Act, they would remain subject to general 
anti-fraud provisions under the Securities Act and the Exchange Act and 
to liability under Section 12(a)(2) of the Securities Act.\106\ In 
addition, the associated risk of private securities litigation may 
further reduce incentives to engage in misleading test-the-waters 
communications.
---------------------------------------------------------------------------

    \106\ Some states also may impose blue-sky restrictions on pre-
offering communications related to non-exchange-listed securities 
offerings.
---------------------------------------------------------------------------

     If an issuer proceeds with an offering, written test-the-
waters materials generally may be subject to staff review.\107\
---------------------------------------------------------------------------

    \107\ Based on a review of staff comment letters issued in 
connection with IPO registration statements of EGCs during 2012-2017 
identified through Intelligize data, comment letters commonly 
request issuers to submit to the staff for review any written test-
the-waters communications in reliance on Section 5(d). See also 
supra Section II.A.
---------------------------------------------------------------------------

     Reputational concerns of underwriters and/or issuers that 
may expect to participate in future offerings with the same 
institutional investors on future deals may reduce the incentives to 
engage in misleading test-the-waters communications with these 
investors.
     To the extent that test-the-waters communications are used 
by issuers in follow-on registered offerings, solicited investors can 
access the issuers' past filings of registration statements and 
Exchange Act reports to aid in the interpretation and verification of 
information in test-the-waters communications.
     The proposed rule might be less likely to be relied upon 
by micro-cap firms, which are linked to a higher risk of such fraud, 
because institutions tend to have smaller stakes in such issuers.\108\
---------------------------------------------------------------------------

    \108\ For example, institutional ownership is negatively related 
to firm size among listed stocks. See, e.g., Stefan Nagel, Short 
Sales, Institutional Investors and the Cross-Section of Stock 
Returns, 78 J. Fin. Econ. 277, 277-309 (2005), Table 1 (correlation 
between institutional ownership and logarithm of market 
capitalization is 0.53). Another study finds, among other results, 
lower post-IPO institutional ownership for IPO issuers with lower 
filing prices. See Chitru S. Fernando, Srinivasan Krishnamurthy, & 
Paul A. Spindt, Are Share Price Levels Informative? Evidence from 
the Ownership, Pricing, Turnover, and Performance of IPO Firms, 7 J. 
Fin. Markets 377, 377-403 (2004), Table 2 (filing price has a 
positive effect on institutional ownership). As a caveat, these 
studies focus on listed stocks and do not capture smaller 
institutional owners.
---------------------------------------------------------------------------

    In evaluating any potential adverse effects of the risk of 
incomplete or misleading test-the-waters communications under the 
proposed rule on solicited QIBs and IAIs, it is important to recognize 
that issuers already have the ability to solicit accredited investors 
in connection with private placements, which are associated with 
substantially less disclosure and less extensive investor protections 
and regulatory oversight. Issuers unable to meet their external 
financing needs through registered offerings commonly sell securities 
to IAIs and other accredited investors through private placements. To 
the extent that the expansion of permissible test-the-waters 
communications under the proposed rule induces some issuers to elect a 
registered offering instead of a private placement, the amount of 
disclosure and the level of investor

[[Page 6727]]

protection afforded to the investors in the issuer's securities would 
be expected to increase.
5. Variation in Economic Impact Due to Issuer Characteristics
    The described economic effects of the proposed rule are expected to 
vary as a function of issuer and offering characteristics and 
investors' ability to process information. The incremental benefits of 
the proposed rule are expected to be smaller for large \109\ and well-
established issuers with low information asymmetries and a history of 
public disclosures, issuers of securities with low information 
sensitivity (e.g., straight investment-grade debt), and issuers in 
follow-on offerings with an established track record of capital 
raising. Issuers whose communications with investors may be subject to 
Regulation FD are less likely to benefit from the proposed rule.\110\ 
In addition, issuers with low costs of proprietary disclosure (e.g., 
low R&D intensity and limited reliance on proprietary technology) may 
be less likely to benefit from the proposed rule. In turn, due to 
greater market scrutiny and lower information asymmetries associated 
with such issuers, the potential of such issuers' test-the-waters 
communications to bias investor ability to assess the offering is also 
expected to be small. All else equal, issuers that predominantly market 
their offerings to individual investors or non-accredited institutional 
investors, including many registered investment companies,\111\ might 
realize relatively smaller benefits from the proposed rule, which only 
allow test-the-waters communications with QIBs and IAIs. Further, 
issuers relying upon other rules that permit offering-related 
communications may be less likely to benefit from the proposed 
rule.\112\
---------------------------------------------------------------------------

    \109\ At the same time, it is possible that large private 
issuers have a more complex business structure and may realize a 
greater benefit from test-the-waters communications with QIBs and 
IAIs. See supra note 9.
    \110\ See supra note 27.
    \111\ See infra note 116.
    \112\ See supra Section II.D. For example, WKSIs may elect to 
rely on Rule 163. We estimate that there were approximately 3,786 
WKSIs that filed Securities Act registration statements or Exchange 
Act periodic reports in 2017, based on the analysis of filings of 
automatic shelf registration statements and XBRL data in periodic 
reports during calendar year 2017. See also supra note 53 and 
accompanying text.
---------------------------------------------------------------------------

    In contrast, other types of issuers might realize relatively 
greater benefits from expanded testing the waters under the proposed 
rule. Because proposed Rule 163B mitigates the risk of competitors 
learning potentially valuable proprietary information about the 
issuer's financing needs, business, products, and R&D, it is expected 
to particularly benefit issuers with high costs of proprietary 
disclosure (e.g., issuers in R&D-intensive industries, such as life 
sciences and technology). In addition, issuers not subject to 
Regulation FD are more likely to benefit from the proposed rule.\113\ 
As described above, test-the-waters communications offer a low-risk, 
low-cost way of obtaining information about investor interest in a 
potential registered offering and evaluating whether such an offering 
could be successful. Thus, the flexibility to test the waters under the 
proposed rule is expected to be most valuable for issuers that have 
greater uncertainty about the interest of prospective investors in the 
offering, investor valuation of the issuer's securities, and investor 
concerns and questions about the issuer's business or the planned 
offering, in particular, IPO issuers, small and development-stage 
issuers with limited operating history and high information 
asymmetries, and issuers of securities with high information 
sensitivity (e.g., equity, convertible debt, speculative-grade straight 
debt) and securities with difficult to value, complex payoffs (e.g., 
structured finance products and other innovative financial 
instruments). At the same time, due to lower market scrutiny applied to 
such issuers, higher information asymmetries or greater complexity of 
valuing such securities, the potential of test-the-waters 
communications to bias investor ability to assess information about the 
offering might be relatively higher.\114\ All else equal, issuers that 
predominantly market their offerings to institutional investors are 
expected to realize relatively greater benefits from the expansion of 
test-the-waters communications with QIBs and IAIs.\115\
---------------------------------------------------------------------------

    \113\ See supra note 28.
    \114\ In the 1995 Proposal, the Commission excluded blank check 
and penny stock issuers ``because of the substantial abuses that 
have arisen in such offerings.'' See 1995 Proposing Release. 
However, the 1995 Proposal did not impose restrictions on investors 
to whom test-the-waters communications may be directed. In contrast, 
the proposed rule is limited to QIBs and IAIs, which are expected to 
have a high level of sophistication in processing investment 
information.
    \115\ However, certain characteristics of such issuers (size, 
exchange listing approval, more established track record, low 
information asymmetry) that attract institutional investors may 
reduce the value of testing the waters.
---------------------------------------------------------------------------

    The proposed rule would be available to a number of issuers that 
are not currently eligible to engage in test-the-waters communications 
under section 5(d) of the Securities Act, including registered 
investment companies, non-EGC BDCs, and ABS issuers. The extent of 
reliance of such issuers on test-the-waters communications under the 
proposed rule is difficult to predict. Generally, as discussed above, 
testing the waters might be relatively more valuable for issuers with a 
largely institutional investor base, issuers with high information 
asymmetries, and issuers of information-sensitive securities and 
securities with complex payoffs. To the extent that funds on average 
have a high share of retail rather than institutional ownership, those 
benefits would likely be limited for funds.\116\ Further, as discussed 
in Section II.E above, with respect to registered investment companies, 
a fund typically would register as an investment company and conduct an 
exempt or registered offering within a relatively short period of time 
after it is organized. If a fund is contemplating a registered offering 
at the time of its organization, we recognize it is common practice to 
simultaneously file a registration statement under both the Investment 
Company Act and the Securities Act to take advantage of certain 
efficiencies. To the extent that investment companies required to 
register under the Investment Company Act continue this practice of 
simultaneously filing registration statements under the Securities Act 
and the Investment Company Act, such funds would be less likely to 
benefit from the option to undertake test-the-waters communications 
prior to a public registration filing.\117\ Since a BDC is not required 
to register under the Investment Company Act, it may to some extent be 
more likely to benefit from the proposed rule with respect to pre-
filing communications.
---------------------------------------------------------------------------

    \116\ The vast majority (89%) of mutual fund shares are 
estimated to be held through retail accounts. The mean institutional 
holding is estimated to be approximately 45% for exchange-traded 
funds and 21% for registered closed-end funds. See Covered 
Investment Fund Research Reports, Release No. 33-10580 (Nov. 30, 
2018) [83 FR 64180, 64199 (Dec. 13, 2018)]. Therefore, among 
registered investment companies, mutual funds may be least likely to 
rely on the proposed rule because they have the highest share of 
retail ownership. BDCs, which are closed-end funds exempt from 
registration under the Investment Company Act, have an estimated 
mean institutional holding of approximately 30%, so the benefits of 
the proposed rule may be similarly limited for some BDCs. See id.
    \117\ While a registered investment company could engage in 
test-the-waters communications for a limited period of time after 
making a notice filing to become a registered investment company and 
before filing an Investment Company Act registration statement 
(generally three months), the benefits of such communications may be 
diminished since the registered investment company is obligated to 
file an Investment Company Act registration statement regardless of 
whether it conducts an exempt or registered offering. See 17 CFR 
270.8b-5.
---------------------------------------------------------------------------

    Some funds that preliminarily engage in exempt offerings, including 
certain

[[Page 6728]]

registered closed-end funds and BDCs, could rely on the proposed rule 
to engage in pre-filing communications if they are considering a 
subsequent registered offering. In addition, funds could realize 
benefits from relying on proposed Rule 163B for post-filing 
communications. The proposed rule would allow funds to communicate with 
QIBs and IAIs about a contemplated offering without complying with the 
requirements of Section 24(b) of the Investment Company Act or Rules 
482 or 34b-1, including the associated filing, disclosure, and 
legending requirements, which could result in potentially lower costs 
and greater flexibility for funds seeking to engage in post-filing 
communications with QIBs and IAIs.
6. Variation in Economic Impact Due to Investor Characteristics
    The composition of QIBs and IAIs solicited in conjunction with an 
issuer's planned offering also might affect the economic impact of the 
proposed rule. Testing the waters with QIBs and IAIs that have more 
investment and due diligence expertise might yield more valuable 
information to issuers, and such investors might be less susceptible to 
biased information if any is presented while testing the waters. In 
turn, the presence of QIBs and IAIs with relatively less investment and 
due diligence expertise might decrease the value of information 
obtained from investors through test-the-waters communications and 
might increase the risk of test-the waters communications biasing the 
ability of solicited investors to adequately assess the offering.
    To the extent that certain categories of issuers, including funds, 
may be less likely to rely on the proposed rule, those QIBs and IAIs 
that mainly invest in the securities of such issuers may be less 
affected by the proposed rule.
    As a general consideration, the provisions of proposed Rule 163B 
mostly follow the provisions of the existing Section 5(d) 
accommodation. Such harmonization of permissible test-the-waters 
communications across all issuers is expected to minimize confusion 
among potential investors regarding permissible solicitation of 
investor interest before registered offerings, irrespective of the 
issuer's EGC status.
    If adopted, the rule would require that the solicited investor is, 
or that the issuer reasonably believes the investor to be, a QIB or 
IAI. The reasonable belief provision is expected to reduce the risk for 
issuers of inadvertently violating the conditions of testing the waters 
while maintaining a low likelihood that less sophisticated investors 
are solicited. Proposed Rule 163B does not specify steps that an issuer 
could or must take to establish a reasonable belief regarding investor 
QIB or IAI status or otherwise require the issuer to verify investor 
status, as in Rule 506(c) of Regulation D. This is expected to benefit 
issuers by allowing issuers the flexibility to use methods that are 
cost-effective but appropriate in light of the facts and circumstances 
of each contemplated offering and each potential investor. To the 
extent that the reasonable belief provision as proposed results in some 
investors that are not QIBs or IAIs being solicited, less sophisticated 
investors may be solicited, which may result in less informed 
investment decisions by some of those investors. These effects are 
expected to be partly mitigated by the factors discussed in Section 
III.C.4 above.

D. Reasonable Alternatives

    We evaluate reasonable alternatives to the proposed rule and their 
anticipated economic effects below. The proposed rule would provide the 
option to engage in test-the-waters communications to all issuers. The 
conditions of proposed Rule 163B would be generally similar to the 
requirements presently applicable to EGC issuers under Section 5(d). As 
an alternative, we could apply different requirements to test-the-
waters communications under proposed Rule 163B. Compared to the 
proposed rule, applying less extensive (more extensive) requirements to 
test-the-waters communications under the proposed rule would increase 
(decrease) the benefits related to the level, efficiency, and cost of 
capital raising for issuers that would have sought to test the waters 
under the proposed rule. Further, compared to the proposed rule, 
applying more extensive requirements to test-the-waters communications 
under proposed Rule 163B could place non-EGC issuers at a relative 
competitive disadvantage to EGC issuers, which would remain eligible to 
test the waters under Section 5(d). The effects specific to individual 
reasonable alternatives are discussed in greater detail below.
    If adopted, the rule would permit all issuers to test the waters. 
As an alternative, the proposed rule could exclude certain categories 
of issuers,\118\ such as blank check issuers,\119\ penny stock 
issuers,\120\ ABS issuers,\121\ or all or some registered investment 
companies.\122\ If some solicited investors make less informed 
decisions as a result of test-the-waters communications by these 
categories of issuers, the alternative of excluding these categories of 
issuers might potentially result in more efficient investor decisions 
compared to the proposed rule. However, because solicited investors can 
review the registration statement in addition to any test-the-waters 
communications prior to investing and because QIBs and IAIs generally 
have a high level of sophistication in processing information, as well 
as in light of the other considerations discussed in Section III.C.4 
above, this concern is likely to have a minor impact, if any. To the 
extent that these categories of issuers would have elected to test the 
waters under the proposed rule, this alternative would not allow such 
issuers to realize the benefits of the proposed rule (e.g., potentially 
more efficient and lower cost of capital raising), particularly non-EGC 
issuers ineligible under Section 5(d). To the extent that some of these 
issuers may be less likely to rely on proposed Rule 163B as discussed 
in Section III.C.5 above, the effects of excluding them from proposed 
Rule 163B would be more limited.
---------------------------------------------------------------------------

    \118\ In the 1995 Proposal, the Commission excluded registered 
investment companies, ABS issuers, partnerships, limited liability 
companies and other direct participation investment programs because 
they might be ``unsuited to a `test the waters' concept, given the 
complex and contractual nature of the issuer.'' Further, blank check 
and penny stock issuers were excluded ``because of the substantial 
abuses that have arisen in such offerings.'' However, the 1995 
Proposal would have allowed testing the waters with all investors, 
not just QIBs or IAIs. See 1995 Proposing Release. Title I of the 
JOBS Act, enacted in 2012, did not limit the availability of Section 
5(d) to EGCs on the basis of blank check or penny stock issuer 
status.
    \119\ Approximately 213 issuers that had filed a report on Form 
10-K, 10-Q, 20-F, or 40-F, or a registration statement on Form S-1, 
S-3, S-4, S-11, F-1, F-3, F-4, or F-10, or amendment to it, during 
calendar year 2017, were estimated to be blank check issuers based 
on Ives Group's Audit Analytics and OTC Markets data as of the end 
of 2017 and XBRL data in filings made during calendar year 2017. 
Based on Ives Group's Audit Analytics data as of the end of 2017, 
among those, approximately 80% were EGCs. Blank check issuer status 
was determined based on having SIC code 6770.
    \120\ Approximately 1,418 issuers that had filed a report on 
Form 10-K, 10-Q, 20-F, or 40-F, or a registration statement on Form 
S-1, S-3, S-4, S-11, F-1, F-3, F-4, or F-10, or amendment to it, 
during calendar year 2017 had at least one class of shares trading 
on the OTC Market at a closing price below $5 based on OTC Markets 
data as of the end of 2017. Based on Ives Group's Audit Analytics 
data as of the end of 2017, among those, approximately 38% were 
EGCs.
    \121\ See supra note 85.
    \122\ See supra note 86 and supra Section II.E.
---------------------------------------------------------------------------

    Similar to Section 5(d), the proposed rule would permit 
solicitation of investor interest both before and after the filing of a 
registration statement. As an alternative, the proposed rule could 
permit issuers to test the waters only

[[Page 6729]]

before or only after the public filing of the registration statement. 
Compared to the proposed rule, this alternative would afford less 
flexibility to affected issuers, and fewer potential benefits for the 
level, efficiency, and cost of capital raising for affected issuers, 
particularly non-EGC issuers ineligible under Section 5(d).\123\
---------------------------------------------------------------------------

    \123\ See also supra note 100 and accompanying text.
---------------------------------------------------------------------------

    Similar to Section 5(d), the proposed rule would not require 
issuers to publicly file test-the-waters communications, nor would it 
require the use of legends. As an alternative, the proposed rule could 
require issuers to include certain legends or to file test-the-waters 
communications with the registration statement. Compared to the 
proposed rule, the alternative of requiring legends on test-the-waters 
communications under the proposed rule could impose small incremental 
costs on issuers. However, given the investment and due diligence 
expertise of QIBs and IAIs, such an alternative likely would not result 
in significant additional benefits compared to the proposed rule. 
Compared to the proposed rule, the alternative of requiring the filing 
of test-the-waters materials could impose additional costs on issuers 
that elect to test the waters under proposed Rule 163B (including the 
direct cost of filing additional exhibits and, in instances where test-
the-waters materials contain proprietary information, the disclosure of 
which could cause competitive harm, potential costs of requesting 
confidential treatment for that information pursuant to Securities Act 
Rule 406, or alternatively, the risk of disclosure of proprietary 
information to competitors in instances where confidential treatment of 
test-the-waters communications is not requested, or requested but not 
granted). This alternative also could decrease the benefits for the 
level, efficiency, and cost of capital raising for affected issuers, 
particularly non-EGC issuers ineligible under Section 5(d). Compared to 
the proposed rule, by subjecting test-the-waters communications to 
Section 11 liability applicable to registration statements, this 
alternative could improve the accuracy of information provided as part 
of test-the-waters communications. However, this benefit is expected to 
be limited by the factors discussed in Section III.C.4 above, including 
the ability of investors to review the information in the registration 
statement before investing; the general sophistication of QIBs and IAIs 
in processing investment information; and the applicability of Section 
12(a)(2) liability and general anti-fraud provisions to test-the-waters 
communications. Compared to the proposed rule, filing test-the-waters 
materials with the registration statement under this alternative could 
offer informational benefits to investors that have not been solicited. 
However, such benefits, compared to the proposed rule, are likely 
minimal because issuers already are required to disclose extensive 
information in a registration statement and because issuers would 
retain the option to request confidential treatment for proprietary 
information in such exhibits, subject to the provisions of Rule 406, 
under this alternative. Further, in certain circumstances, 
communications under the proposed rule may be subject to Regulation FD, 
as discussed in Section III.A above.
    Similar to Section 5(d), if adopted, the rule would permit issuers 
to test the waters only with QIBs and IAIs. As an alternative, the 
proposed rule could permit issuers to test the waters with all 
investors.\124\ This alternative might benefit issuers, particularly 
issuers whose offerings attract investors that are neither QIBs nor 
IAIs, by providing additional flexibility and enabling issuers to 
reduce the costs of a registered offering. This alternative could 
therefore facilitate capital formation efforts of such issuers. At the 
same time, by exposing individual and small institutional investors to 
pre-offering information that is not required to be publicly filed and 
is not subject to Section 11 liability, this alternative might decrease 
investor protection to the extent that some of the solicited individual 
and small institutional investors might be susceptible to misleading 
test-the-waters communications. This concern is expected to be partly 
mitigated by the ability of all investors to review the filed 
registration statement, in addition to any test-the-waters 
communications, prior to investing, as well as other factors discussed 
in Section III.C.4 above. However, to the extent that individual and 
small institutional investors are less sophisticated than QIBs and IAIs 
and may fail to review the information in the registration statement, 
this alternative may result in less informed investment decisions by 
such investors.
---------------------------------------------------------------------------

    \124\ Rule 164 under the Securities Act permits issuers to 
engage in communications with any investor, including an investor 
that is not a QIB or IAI, subject to a requirement to file such 
materials. Regulation A permits issuers to test the waters with all 
investors. However, Regulation A requires test-the-waters 
communications to be publicly filed and to include certain required 
legends and disclaimers. Regulation A also imposes offering limits; 
imposes investment limits for non-accredited investors; and does not 
preempt state review of offering materials for Tier 1 offerings.
---------------------------------------------------------------------------

    Similar to Section 5(d), the rule, if adopted, would not restrict 
issuers from relying on other communications provisions, such as Rules 
163 or 255 under the Securities Act (depending on the nature and timing 
of the communication and the issuer's ability to meet the eligibility 
and other rule requirements). Those rules contain investor safeguards 
specific to the circumstances in which such communications are 
permitted. As an alternative, we could have restricted issuers relying 
on the proposed rule from engaging in other communications under the 
existing rules. Compared to the proposed rule, this alternative would 
restrict the ability of issuers to tailor their solicitation strategy 
to their needs, which might result in decreased capital formation and a 
less efficient or costlier capital raising process for some issuers, 
without a corresponding benefit to investors. For example, issuers 
might have to choose between incurring costs of early public disclosure 
of a contemplated offering and forgoing the option of subsequent 
offering-related communications with a broader range of investors. The 
extent to which such an alternative reduces the flexibility afforded to 
issuers would depend on whether in practice affected issuers would have 
elected to combine multiple types of communications.
    The proposed rule does not limit the scope of the content that may 
be a part of test-the-waters communications. As an alternative, we 
could limit the scope of permissible test-the-waters communications to 
certain types of information about the issuer or offering. For 
instance, we could limit the scope of communications in a manner 
similar to Securities Act Rules 17 CFR 230.134 or Rule 482 with respect 
to advertising and sales literature, for all or some of the issuers 
eligible to rely on the proposed rule. For instance, we could limit how 
open-end funds, or all registered investment companies, present 
performance information in test-the-waters communications. Limiting the 
scope of test-the-waters communications may strengthen investor 
protection compared to the proposed rule, by lowering the potential for 
incomplete or misleading information to be included in such materials. 
However, these benefits to investors may be small given the mitigating 
factors analyzed in Section III.C.4. Such restrictions also may reduce 
the utility of test-the-waters communications to issuers and the

[[Page 6730]]

associated benefits for capital formation, compared to the proposed 
rule.
    Proposed Rule 163B contains a reasonable belief provision but does 
not require issuers to take specified steps to determine that the 
solicited investor is a QIB or IAI or specify steps that an issuer 
could or must take to establish a reasonable belief. As an alternative, 
we could require issuers to determine that the investor is a QIB or IAI 
or specify steps that an issuer could or must take to establish a 
reasonable belief. Compared to the proposed rule, these alternatives 
might result in a lower risk of solicitation of investors that are 
neither QIBs nor IAIs. However, they also might significantly increase 
costs for issuers electing to rely on the proposed rule and as a result 
decrease the use of test-the-waters communications and the benefits for 
the level, efficiency, and cost of capital raising, compared to the 
proposed rule.

E. Request for Comment

    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed rule and 
alternatives to it, and whether the proposed rule, if adopted, would 
promote efficiency, competition, and capital formation or have an 
impact on investor protection. Commenters are requested to provide 
empirical data, estimation methodologies, and other factual support for 
their views, in particular, on the estimates of costs and benefits for 
the affected parties.
    1. Would the ability to undertake test-the-waters communications 
under proposed Rule 163B facilitate capital formation? If so, how? 
Would the proposed rule result in additional capital formation, or 
would issuers switch between registered and exempt offerings?
    2. Which categories of issuers would realize the greatest benefits 
from proposed Rule 163B? Would issuers in follow-on offerings realize 
benefits from proposed Rule 163B? What factors would affect the ability 
of issuers to realize benefits from the proposed rule? For instance, 
what effect would the application of Regulation FD have on the use of 
the proposed rule?
    3. Would registered investment companies realize benefits from 
being able to engage in test-the-waters communications? If so, which 
categories of registered investment companies would realize the 
greatest benefits? What factors would affect the ability of registered 
investment companies to realize benefits from the proposed rule?
    4. Would ABS issuers realize benefits from being able to engage in 
test-the-waters communications?
    5. Would proposed Rule 163B benefit investors?
    6. Would proposed Rule 163B have adverse effects on investors? If 
so, in which circumstances would such adverse effects be most likely?
    7. What steps could we take to mitigate potential adverse effects 
on investors? How would such changes affect the likelihood that issuers 
would rely on the proposed rule and the costs and benefits of the 
proposed rule?
    8. What are the benefits and costs of the reasonable belief 
approach in proposed Rule 163B? What are the benefits and costs of an 
alternative approach requiring an issuer to take specified steps to 
determine an investor's status?
    9. Would proposed Rule 163B have effects on competition among 
issuers? Would proposed Rule 163B have effects on competition among 
investors?
    10. What other economic effects would proposed Rule 163B have?

IV. Paperwork Reduction Act

    We do not believe that the proposed rule would impose any new 
``collection of information'' requirement as defined by the Paperwork 
Reduction Act of 1995 (``PRA''),\125\ nor create any new filing, 
reporting, recordkeeping, or disclosure requirements. Accordingly, we 
are not submitting the proposed rule to the Office of Management and 
Budget for review under the PRA.\126\ We request comment on our 
assertion that the proposed rule would not create any new, or revise 
any existing, collection of information pursuant to the Paperwork 
Reduction Act.
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    \125\ 44 U.S.C. 3501 et seq.
    \126\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

V. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\127\ we solicit data to determine whether the 
proposed rule constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results or is likely to 
result in:
---------------------------------------------------------------------------

    \127\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    The Commission requests comment on the potential annual effect on 
the U.S. economy; any potential increase in costs or prices for 
consumers or individual industries; and any potential effect on 
competition, investment, or innovation. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.

VI. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \128\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedure Act, to consider the impact of those rules on 
small entities. The Commission has prepared this Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with Section 603 of the 
RFA.\129\ This IRFA relates to proposed Rule 163B and proposed 
amendments to Rule 405 of the Securities Act.
---------------------------------------------------------------------------

    \128\ 5 U.S.C. 601 et seq.
    \129\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Proposed Action

    The primary objective of the proposed rule is to enable all issuers 
to engage in solicitations of interest prior to a registered public 
offering to determine potential investors' interest in an offering 
before or after the filing of a registration statement, provided that 
the potential investors are QIBs or IAIs. Pre-filing communications 
under our rules are currently limited to specific types of issuers and 
offerings.\130\ By liberalizing pre-filing and post-filing 
communications for all issuers, we are also providing them with a cost-
effective means for gauging market interest prior to incurring the full 
costs of a registered offering. The reasons for, and objectives of, the 
proposed rule are discussed in more detail in Sections I and II above.
---------------------------------------------------------------------------

    \130\ See Securities Act Section 5(d), which is only available 
to EGCs, Rule 163, which is available only to WKSIs, and Rule 255, 
which is available only to issuers conducting exempt offerings 
pursuant to Regulation A.
---------------------------------------------------------------------------

B. Legal Basis

    We are proposing the amendments pursuant to Sections 7, 10, 19(a), 
and 28 of the Securities Act of 1933, as amended, and Sections 6, 24, 
and 38 of the Investment Company Act of 1940, as amended.

C. Small Entities Subject to the Proposed Rule

    The proposed rule would affect issuers that are small entities. The 
RFA defines ``small entity'' to mean ``small business,'' ``small 
organization,'' or ``small governmental jurisdiction.'' \131\

[[Page 6731]]

For purposes of the RFA, under 17 CFR 230.157 an issuer, other than an 
investment company, is a ``small business'' or ``small organization'' 
if it had total assets of $5 million or less on the last day of its 
most recent fiscal year and is engaged or proposing to engage in an 
offering of securities not exceeding $5 million. Under 17 CFR 240.0-
10(a), an investment company, including a business development company, 
is considered to be a small entity if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.
---------------------------------------------------------------------------

    \131\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

    The proposed rule would permit all issuers, including small 
entities, to engage in test-the-waters communications. We estimate that 
there are currently 1,163 entities, other than investment companies, 
that would be eligible to rely on the proposed rule that may be 
considered small entities.\132\ In addition, we estimate that, as of 
June 2018, there were 116 registered investment companies and BDCs that 
would be eligible to rely on the proposed rule that may be considered 
small entities.\133\
---------------------------------------------------------------------------

    \132\ This estimate is based on staff analysis of XBRL data 
submitted by filers, other than co-registrants, with EDGAR filings 
of Forms 10-K, 20-F, and 40-F and amendments filed during the 
calendar year 2017.
    \133\ This estimate is derived from an analysis of data obtained 
from Morningstar Direct as well as data filed with the Commission 
(Forms N-Q and N-CSR) for the second quarter of 2018.
---------------------------------------------------------------------------

    Small entities meeting the definition of EGC are currently eligible 
to engage in test-the-waters communications pursuant to Section 5(d) of 
the Securities Act. These small entities and other small entities that 
do not meet the definition of EGC would be eligible to rely on the 
proposed rule if it is adopted. Because reliance on the proposed rule 
would be voluntary, we cannot accurately estimate the number of small 
entities that would choose to test the waters, though we anticipate 
that the small entities most likely to engage in these communications 
would be those that expect the benefits of this strategy to outweigh 
the costs.

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The purpose of the proposed rule is to allow all issuers, not 
solely EGCs, to engage in communications with certain potential 
investors to determine their interest in an offering before or after 
the filing of a Securities Act registration statement. Under the 
proposed rule, the use of test-the-waters communications would be 
voluntary and any communications that comply with the proposed rule 
would not need to include a legend or be filed with the Commission, 
provided that the communications do not trigger a disclosure obligation 
pursuant to any other rules.
    Given the voluntary nature of the test-the-waters communications 
and that the proposed rule would not impose a filing requirement, we do 
not expect the proposed rule to significantly impact existing 
reporting, recordkeeping and other compliance burdens. Small entities 
choosing to avail themselves of the proposed rule may seek the advice 
of legal or accounting professionals in connection with making test-
the-waters communications. We discuss the economic impact, including 
the estimated costs and benefits, of the proposed rule to all issuers, 
including small entities, in Section III above.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    For the reasons discussed above, we believe that the proposed rule 
would partially overlap with Securities Act Section 5(d) and Rule 163. 
We do not believe the proposed rule would otherwise duplicate, overlap 
or conflict with federal rules.

F. Significant Alternatives

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. In connection with the proposed rule, we considered 
the following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    We believe that different compliance or reporting requirements for 
small entities are not necessary because, while the proposed rule would 
broaden the number of issuers eligible to engage in communications 
before and after filing a registration statement, including the number 
of small entity issuers, it would not establish any new reporting, 
recordkeeping or compliance requirements for small entities. We do not 
believe that the proposed rule would impose any significant new 
compliance obligations. Accordingly, we do not believe it is necessary 
to exempt small entities from all or part of the proposed rule.
    Finally, with respect to using performance rather than design 
standards, the proposed rule generally contains elements similar to 
performance standards, which we believe is appropriate because issuers 
would have the flexibility to tailor their communications when 
assessing market interest in their securities offerings.

G. Request for Comment

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding:
     The number of small entities that may be affected by the 
proposed rule;
     The existence or nature of the potential impact of the 
proposed rule on small entity issuers discussed in the analysis; and
     How to quantify the impact of the proposed rule.
    Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. Comments 
will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rule is adopted, and will be 
placed in the same public file as comments on the proposed rule itself.

VII. Statutory Authority

    We are adopting the rule amendments contained in this document 
under the authority set forth in Sections 7, 10, 19(a), and 28 of the 
Securities Act of 1933, as amended, and Sections 6, 24, and 38 of the 
Investment Company Act of 1940, as amended.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

    In accordance with the foregoing, we are proposing to amend title 
17, chapter II of the Code of Federal Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read in part as 
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
2. Add Sec.  230.163B to read as follows:

[[Page 6732]]

Sec.  230.163B  Exemption from section 5(b)(1) and section 5(c) of the 
Act for certain communications to qualified institutional buyers or 
institutional accredited investors

    (a)(1) Attempted compliance with this rule does not act as an 
exclusive election and the issuer also may claim the availability of 
any other applicable exemption or exclusion. Reliance on this rule does 
not affect the availability of any other exemption or exclusion from 
the requirements of section 5 of the Act (15 U.S.C. 77e).
    (2) This rule is not available for any communication that, although 
in technical compliance with this rule, is part of a plan or scheme to 
evade the requirements of section 5 of the Act.
    (b)(1) An issuer, or any person authorized to act on behalf of an 
issuer, may engage in oral or written communications with potential 
investors that are, or that it reasonably believes are, qualified 
institutional buyers, as defined in Sec.  230.144A, or institutions 
that are accredited investors, as defined in Sec. Sec.  230.501(a)(1), 
(a)(2), (a)(3), (a)(7), or (a)(8), or any successor thereto, to 
determine whether such investors might have an interest in a 
contemplated registered securities offering, either prior to or 
following the date of filing of a registration statement with respect 
to such securities with the Commission. Communications under this rule 
shall be exempt from section 5(b)(1) (15 U.S.C. 77e(b)(1)) and section 
5(c) of the Act (15 U.S.C. 77e(c)).
    (2) Any oral or written communication by an issuer, or any person 
authorized to act on behalf of an issuer, made in reliance on this rule 
will be deemed an ``offer'' as defined in section 2(a)(3) of the Act 
(15 U.S.C.77b(a)(3)).
    (3) Any oral or written communication by an issuer, or any person 
authorized to act on behalf of an issuer, made in reliance on this rule 
is not required to be filed pursuant to Sec.  230.424(a) or Sec.  
230.497(a) of Regulation C under the Act or section 24(b) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-24(b)) and the rules and 
regulations thereunder.
0
3. In Sec.  230.405 amend the definition of ``Free writing prospectus'' 
by revising paragraphs (2) and (3) and adding paragraph (4) to read as 
follows:


Sec.  230.405  Definitions of terms.

* * * * *
    Free writing prospectus.
* * * * *
    (2) A written communication used in reliance on Rule 167 and Rule 
426 (Sec.  230.167 and Sec.  230.426);
    (3) A written communication that constitutes an offer to sell or 
solicitation of an offer to buy such securities that falls within the 
exception from the definition of prospectus in clause (a) of section 
2(a)(10) of the Act; or
    (4) A written communication used in reliance on Rule 163B.
* * * * *

    By the Commission.

    Dated: February 19, 2019.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-03098 Filed 2-27-19; 8:45 am]
 BILLING CODE 8011-01-P


