[Federal Register Volume 84, Number 193 (Friday, October 4, 2019)]
[Rules and Regulations]
[Pages 53011-53036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21304]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-10699, File No. S7-01-19]
RIN 3235-AM23


Solicitations of Interest Prior to a Registered Public Offering

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting a new communications rule under the Securities 
Act of 1933 that permits issuers to engage in oral or written 
communications with certain potential 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.

DATES: Effective December 3, 2019.

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.

SUPPLEMENTARY INFORMATION: The Commission is adopting 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. Discussion of the Amendments
    A. Exemption Allowing Test-the-Waters Communications
    1. Proposed Amendments
    2. Comments on the Proposed Amendments Generally
    3. Final Amendments
    B. Scope of Eligible Issuers
    C. Investor Status
    1. Limiting Communications to QIBs and IAIs
    2. Reasonable Belief Standard
    D. Non-Exclusivity
    E. Considerations for Use by Investment Companies
    1. Use of Rule 163B in the Fund Context
    2. Rule 163B Filing, Legending, and Content Requirements in the 
Fund Context
III. Other Matters
IV. Economic Analysis
    A. Introduction and Broad Economic Considerations

[[Page 53012]]

    B. Baseline and Affected Parties
    1. Baseline
    2. Affected Parties
    C. Anticipated Economic Effects
    1. Potential Benefits to Issuers and Intermediaries
    2. Potential Costs to Issuers and Intermediaries
    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
    V. Paperwork Reduction Act
VI. Final Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Amendments
    D. Reporting, Recordkeeping and Compliance Requirements
    E. Agency Action to Minimize Effect on Small Entities
VII. Statutory Authority

I. Introduction

    The Commission proposed Rule 163B \1\ under the Securities Act to 
permit issuers to engage in oral or written communications with 
potential investors that are, or are reasonably believed to be, 
qualified institutional buyers (``QIBs''), as that term is defined in 
paragraph (a) of 17 CFR 230.144A (``Rule 144A''), or institutional 
accredited investors (``IAIs'').\2\ The proposed rule would allow these 
communications, either prior to or following the filing of a 
registration statement, to determine whether such potential investors 
might have an interest in a contemplated registered securities 
offering.\3\ The proposed rule would extend the accommodations 
currently available to emerging growth companies (``EGCs'') \4\ under 
Securities Act Section 5(d) \5\ to all issuers, including fund issuers.
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    \1\ See Solicitations of Interest Prior to a Registered Public 
Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28, 
2019)] (``Proposing Release'').
    \2\ 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.
    \3\ 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.
    \4\ 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 Securities 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'').
    \5\ 15 U.S.C. 77e(d).
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    We received approximately 20 comment letters in response to the 
Proposing Release.\6\ We have reviewed and considered the comments that 
we received on the Proposing Release. Commenters broadly supported the 
proposal to allow all issuers to test the waters with QIBs and IAIs 
before and after filing a registration statement to gauge interest in a 
contemplated registered offering. After taking into consideration the 
public comments, we are adopting the amendments largely as proposed. 
For the reasons set forth below, in certain cases we are adopting 
modifications to the proposal. The changes we are adopting are designed 
to address aspects of the proposal, such as the proposed anti-evasion 
provision, that could raise uncertainty for issuers seeking to rely on 
the rule. Below we discuss, in turn, the general exemption for test-
the-waters communications; the scope of issuers eligible to rely on the 
rule; the types of investors issuers may communicate with under the 
rule; non-exclusivity of the rule; and considerations for investment 
companies' use of the rule.
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    \6\ See letters from: S. Lara Ameri (``S. Ameri''); Clint 
Anderson (``C. Anderson''); American Securities Association 
(``ASA''); Better Markets (``Better Markets''); Center for Capital 
Markets Competitiveness (``CCMC''); Bayley Clark (``B. Clark''); 
Cleary Gottlieb Steen & Hamilton LLP (``Cleary''); Cravath, Swaine & 
Moore LLP (``Cravath''); The Credit Roundtable (``CRT''); Davis Polk 
& Wardwell LLP (``Davis Polk''); Dechert LLP (``Dechert''); 
Federated Investors, Inc. (``Federated''); Hamilton & Associates Law 
Group, P.A. (``Hamilton''); Investment Company Institute (``ICI''); 
Nasdaq, Inc. (``Nasdaq''); Raymond Kenneth Petry (``R. Petry''); 
Austin J. Rahskopf (``A. Rahskopf''); Securities Industry and 
Financial Markets Association (``SIFMA''); Monica Stuchlik (``M. 
Stuchlik''); and Sullivan & Cromwell LLP (``Sullivan''). Comment 
letters related to the Proposing Release are available at https://www.sec.gov/comments/s7-01-19/s70119.htm.
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II. Discussion of the Amendments

A. Exemption Allowing Test-the-Waters Communications

1. Proposed Amendments
    Proposed Rule 163B would permit any issuer or person authorized to 
act on behalf of an issuer,\7\ 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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    \7\ Under the proposed rule, an issuer or a person authorized to 
act on its behalf may rely on the rule. In this release, for ease of 
discussion, we sometimes refer only to an issuer's reliance on the 
rule, though these statements apply equally to an issuer or any 
person authorized and acting on its behalf.
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    As discussed in the Proposing Release, Section 5(c) prohibits any 
written or oral offers prior to the filing of a registration 
statement.\8\ 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.\9\ As proposed, Rule 163B communications would be exempt from 
Section 5(b)(1) and Section 5(c) \10\ but, as described below, would be 
subject to Section 12(a)(2) liability in addition to the anti-fraud 
provisions of the federal securities laws.\11\
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    \8\ See Section II.A of the Proposing Release.
    \9\ 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 would not 
affect these requirements.
    \10\ Section 5(b)(1) does not include a limitation on oral 
offers after the filing of a registration statement, and therefore, 
Rule 163B does not concern such offers.
    \11\ 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 
under which they were made, not misleading.
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    Further, as proposed, Rule 163B communications would not need to be 
filed with the Commission, including pursuant to 17 CFR 230.424(a) 
(``Rule 424(a)'') or 17 CFR 230.497(a) (``Rule 497(a)'') of Regulation 
C \12\ under the Securities Act, or pursuant to Section 24(b) of the 
Investment Company Act of 1940 \13\ (the ``Investment Company Act'') 
and the rules and regulations thereunder.\14\ Nor would such 
communications be required to include any specified legends. 
Additionally, the Commission proposed to amend Rule 405 to clarify that 
a written communication used in reliance on Rule

[[Page 53013]]

163B would not constitute a free writing prospectus.
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    \12\ 17 CFR 230.401 through 230.498.
    \13\ 15 U.S.C. 80a-24.
    \14\ See proposed Rule 163B(b)(3).
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    The Commission also clarified in the Proposing Release \15\ that 
Rule 163B communications, while exempt from Section 5(b)(1) and Section 
5(c) as described above, would be considered ``offers'' as defined in 
Section 2(a)(3) of the Securities Act \16\ and would therefore be 
subject to Section 12(a)(2) liability in addition to the anti-fraud 
provisions of the federal securities laws. Additionally, the Commission 
stated that information provided in a test-the-waters communication 
under the proposed rule must not conflict with material information in 
the related registration statement. It also noted that, 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 
any test-the-waters communication used in connection with an 
offering.\17\
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    \15\ See Section II.A of the Proposing Release.
    \16\ 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).
    \17\ See 17 CFR 230.418 under the Securities Act.
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    Finally, the Commission cautioned that issuers subject to 
Regulation FD 18 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.\19\ Regulation FD requires public disclosure of any 
material nonpublic information that has been selectively disclosed to 
certain securities market professionals or shareholders \20\ 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.\21\ 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.
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    \18\ See 17 CFR 243.100 et seq. under the Securities Act.
    \19\ See Section II.A of the Proposing Release.
    \20\ 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.
    \21\ See 17 CFR 243.101(b) of Regulation FD. Regulation FD 
applies to closed-end 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.
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2. Comments on the Proposed Amendments Generally
    Commenters broadly supported the proposed exemption for test-the-
waters communications.\22\ Commenters generally concurred that the 
proposed exemption would allow issuers adequate flexibility to gauge 
market interest,\23\ tailor the size and other terms of the 
offering,\24\ reduce the costs of going public \25\ as well as the risk 
of disclosing sensitive financial and competitive information when 
choosing not to proceed with an IPO,\26\ and ``level the playing 
field'' among issuers.\27\ Some commenters asserted that proposed Rule 
163B may motivate more companies to conduct registered offerings.\28\ 
One commenter, however, questioned whether and how the proposed 
exemption would increase the number of public offerings.\29\
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    \22\ See letters from S. Ameri, C. Anderson, ASA, CCMC, B. 
Clark, Cleary, Cravath, CRT, Davis Polk, Dechert, Federated, 
Hamilton, ICI, Nasdaq, R. Petry, A. Rahskopf, SIFMA, M. Stuchlik, 
and Sullivan. Comments on the scope of eligible issuers that could 
rely on the proposed rule, the types of investors that issuers could 
communicate with under the proposed rule, the proposed non-
exclusivity provision, and investment company-specific 
considerations are discussed in separate sections below.
    \23\ See letters from CCMC, Cravath, Davis Polk, Hamilton, ICI, 
Nasdaq, and Sullivan.
    \24\ See letters from CCMC, Cravath, ICI, and Nasdaq.
    \25\ See letters from CCMC, Cleary, Cravath, Davis Polk, ICI, 
Nasdaq, M. Stuchlik, and Sullivan.
    \26\ See letters from CCMC, Cravath, and Nasdaq.
    \27\ See letters from CCMC, Cravath, CRT, Davis Polk, ICI, 
Nasdaq, M. Stuchlik, and Sullivan. But see letters from ICI and 
Federated (stating that the proposed rule was unlikely to benefit 
certain fund issuers); infra Section II.E.
    \28\ See letters from S. Ameri, CCMC, Cleary, Cravath, Hamilton, 
and Sullivan.
    \29\ See letter from Better Markets. This commenter also 
questioned whether the Commission has the requisite authority to 
expand by rule the exemption available to EGCs under Section 5(d) to 
all issuers. See infra Section II.A.3.
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    Commenters also broadly supported the view that the proposal does 
not raise significant investor protection concerns.\30\ Several 
commenters noted that investor protection concerns are mitigated by: 
(1) The limitation on offerees to QIBs and IAIs; \31\ (2) the 
application of the anti-fraud provisions of the federal securities 
laws, as well as potential liability under Section 12(a)(2) of the 
Securities Act, to proposed Rule 163B communications; \32\ (3) the need 
for test-the-waters communications generally to be consistent with the 
disclosure in any filed registration statement; \33\ (4) the 
application of Regulation FD to communications made by issuers subject 
to those rules; \34\ and (5) the fact that, where an issuer proceeds 
with a registered offering, offerees will be able to compare the 
information in the test-the-waters materials against the information in 
the registration statement and purchasers will ultimately receive a 
prospectus subject to Section 11 and Section 12(a)(2) liability.\35\ 
One commenter expressed concerns that the proposed reasonable belief 
standard regarding investor status would create the risk of 
solicitations to retail and other investors lacking sophistication by 
permitting issuers to rely on a ``check-the-box'' or other self-
certification method of determining investor status, as discussed in 
more detail in Section II.C below.\36\
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    \30\ See letters from ASA, CCMC, Cravath, Hamilton, and Nasdaq.
    \31\ See letters from CCMC, Cravath, Davis Polk, Hamilton, ICI, 
Nasdaq, A. Rahskopf, SIFMA, and Sullivan.
    \32\ See letters from CCMC, Cravath, Davis Polk, and ICI.
    \33\ See letters from ASA, CCMC, Cravath, ICI, SIFMA, and 
Sullivan.
    \34\ See letters from ASA and Davis Polk.
    \35\ See, e.g., letters from Cravath, Davis Polk, and SIFMA.
    \36\ See letter from Better Markets.
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    Most commenters indicated that Rule 163B should not require issuers 
to file test-the-waters communications or include legends or 
disclaimers.\37\ Commenters noted, among other reasons, that: (1) Such 
a requirement would be inconsistent with test-the-waters communications 
under Section 5(d) \38\ and other rules; \39\ (2) Section 12(a)(2) and 
Section 10(b) liability would provide adequate safeguards for QIBs and 
IAIs; \40\ and (3) the staff could continue its practice of reviewing 
written test-the-waters materials used in connection with a registered 
offering.\41\ On the other hand, one commenter asserted that the 
Commission should require issuers to file test-the-waters materials in 
those instances when an issuer files a related registration statement 
since filing of these already-prepared and disseminated communications 
would add no additional burden on the issuers, would provide the 
Commission with information to monitor the market, and would allow 
investors to compare the

[[Page 53014]]

claims in those communications with the prospectus and with the 
performance of the securities themselves.\42\
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    \37\ See letters from CCMC, Cleary, Cravath, Davis Polk, 
Federated, ICI, SIFMA, and Sullivan. See also infra Section II.E 
(discussing comments on investment company-specific considerations 
regarding filing, legending, and content requirements in test-the-
waters communications).
    \38\ See, e.g., letter from Davis Polk.
    \39\ See letter from Sullivan (suggesting this approach is 
consistent with Rule 144A and Regulation D, which do not require 
filing of offering materials).
    \40\ See letter from Cravath.
    \41\ See letters from CCMC, SIFMA, and Sullivan.
    \42\ See letter from Better Markets.
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    One commenter recommended that the Commission also exclude Section 
5(d) written communications from the definition of ``free writing 
prospectus'' in Rule 405 and from the prospectus filing requirement in 
Rule 424(b) to avoid implying that communications under Section 5(d) 
and proposed Rule 163B would be treated differently.\43\ Another 
commenter recommended that a clear, brief disclaimer should accompany 
any forward-looking information in the context of an offering of 
corporate credit securities, but noted that written material provided 
during market soundings that is broadly available should not be subject 
to additional filing requirements.\44\
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    \43\ See letter from Cleary (noting that an amendment to Rule 
405 ``is arguably unnecessary, since an issuer relying on new Rule 
163B would not rely on Rule 164 and consequently would not be 
subject to Rule 433, but it is a helpful clarification'').
    \44\ See letter from CRT.
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    Of the commenters that expressed a view on whether the 
communications under the rule would be ``offers'' as defined in 
Securities Act Section 2(a)(3) subject to Section 12(a)(2) 
liability,\45\ only one commenter argued that test-the-waters 
communications should not be treated as ``offers'' subject to Section 
12(a)(2) liability based on the preliminary nature of test-the-waters 
communications, the sophistication of their recipients, the 
applicability of the general anti-fraud provisions, and the 
availability of a final disclosure document.\46\
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    \45\ See letters from Cravath, Davis Polk, and SIFMA.
    \46\ See letter from SIFMA.
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    Commenters generally agreed that Regulation FD should continue to 
apply to material statements made in a Rule 163B communication, unless 
an existing exception from that rule applies, and that a separate 
exception to Regulation FD for proposed Rule 163B communications is not 
necessary.\47\ One commenter stated that Regulation FD currently 
provides sufficient flexibility to allow issuers to engage in 
meaningful communications with investors, while still providing the 
appropriate protections against selective disclosures.\48\ Another 
commenter expressed the view that ``test-the-waters flexibility or 
specifically market soundings prior to a new credit issue should have 
reasonable exceptions to Regulation FD for some communications such as 
open ended dialogues on investor and issuer needs and wants.'' \49\
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    \47\ See, e.g., letters from Cravath, Davis Polk, and SIFMA.
    \48\ See letter from SIFMA.
    \49\ See letter from CRT.
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    Three commenters \50\ took exception to the statement in the 
Proposing Release that ``information provided in a test-the-waters 
communication under the proposed rule must not conflict with material 
information in the related registration statement.'' \51\ One commenter 
recommended that the Commission specify that the statement is guidance 
and not a condition for the availability of the exemption.\52\ Another 
commenter asserted that, because test-the-waters communications may be 
used before a registration statement is filed, requiring consistency 
between those communications and a yet-to-be-filed registration 
statement could be problematic.\53\ Failure to comply, this commenter 
noted, would trigger a violation of Section 5 with its attendant 
consequences, which could have a chilling effect on the use of these 
communications. The commenter also noted that Section 5(d) has no such 
proviso.\54\ Yet another commenter noted that, while it generally 
agreed that communications made after a registration statement has been 
filed should be consistent with material information in the 
registration statement, the expectation that communications made before 
the filing of a registration statement should also be consistent could 
create compliance difficulties.\55\ This commenter observed that an 
issuer could change its messaging in response to investor feedback, 
which could result in a situation where the information provided while 
testing the waters conflicts with material information in the related 
registration statement.\56\
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    \50\ See letters from CCMC, Cleary, and SIFMA.
    \51\ See Section II.A of the Proposing Release.
    \52\ See letter from Cleary.
    \53\ See letter from SIFMA.
    \54\ Id.
    \55\ See letter from CCMC.
    \56\ Id.
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    Three commenters recommended eliminating the ``anti-evasion'' 
language from paragraph (a)(2) of the proposed rule.\57\ Two of these 
commenters asserted that it is unclear how anti-evasion language could 
apply to test-the-waters communications since it is unclear how 
permissible communications could be part of a scheme to evade Section 5 
of the Securities Act, and that including such language could give rise 
to confusion or uncertainty, and thereby limit the utility of the 
proposed rule.\58\ One of these commenters asserted that such language 
is not necessary since it is ``typically included in exemptions that 
are intended to serve as safe harbors from the registration or gun-
jumping provisions of Section 5.'' \59\
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    \57\ See letters from Cravath, SIFMA, and Sullivan. Proposed 
Rule 163B(a)(2) read: ``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.''
    \58\ See letters from Cravath and Sullivan.
    \59\ See letter from SIFMA. The SIFMA letter provides examples 
of the types of rules with anti-evasion language, which include the 
private placement provision of Regulation D, the resale provisions 
of Rules 144, 144A and 145(d), the communication provisions in Rules 
168 and 169, and the offshore offering provisions in Regulation S.
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    Two commenters expressed concern regarding the effect of the 
proposed rule on private placements following test-the-waters 
communications.\60\ One commenter disagreed that the integration 
guidance referenced in the Proposing Release \61\ should continue to 
apply in the context of testing the waters under either Section 5(d) or 
proposed Rule 163B.\62\ Another commenter stated that the Commission 
should clarify through interpretive guidance or amendment to Rule 155 
that issuers may immediately conduct a private placement or Regulation 
A offering after abandoning the proposed public offering to which the 
Rule 163B communications relate because, in the commenter's view, the 
act of testing the waters could be viewed as a general solicitation 
that disqualifies the issuer from immediately completing a subsequent 
private placement.\63\
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    \60\ See letters from CCMC and Cleary.
    \61\ See Proposing Release at note 105 (stating that ``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 also Revisions of Limited Offering Exemptions in 
Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 
10, 2007)] (the ``2007 Integration Guidance'').
    \62\ See letter from Cleary (asserting that ``[just] as 
[sophisticated] institutional investors have been judged to be able 
to fend for themselves in handling the potential for market 
conditioning otherwise prohibited by Section 5, so too should they 
be able to evaluate a possible private placement even if that is the 
first time the prospective investor was solicited by this issuer or 
its agents'' and suggesting that the Commission take the position 
that ``conducting test-the-waters communications in reliance on Rule 
163B or Section 5(d) would not itself constitute general 
solicitation, whether or not there is a substantive, pre-existing 
relationship with the prospective investor'').
    \63\ See letter from CCMC.
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3. Final Amendments
    We are adopting the exemption and related amendments as proposed, 
except as noted below with respect to removing

[[Page 53015]]

the anti-evasion language in proposed Rule 163B(a)(2) and revising the 
definition of ``free writing prospectus'' in Rule 405.
    As a preliminary matter, the Commission has the requisite authority 
to extend the accommodations currently available under Section 5(d) to 
all issuers.\64\ Section 28 of the Securities Act gives the Commission 
broad authority to ``conditionally or unconditionally exempt any person 
. . . or any class or classes of persons . . . from any provision or 
provisions of'' the Securities Act and rules or regulations issued 
thereunder ``to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.'' \65\ Rule 163B will exempt from certain 
requirements the class of persons who are issuers contemplating a 
registered securities offering and who meet the conditions set forth in 
the rule. As explained here and in the Proposing Release, we believe 
that the final rule furthers the public interest and includes 
appropriate investor protections.
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    \64\ See letter from Better Markets (expressing concern that the 
Commission lacks the authority to extend the accommodations 
currently available under Section 5(d) to all issuers).
    \65\ 15 U.S.C. 77z-3.
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    Nothing in the Jumpstart Our Business Startups Act (the ``JOBS 
Act'') \66\ indicates that Congress sought to limit the Commission's 
ability to extend the accommodations currently available to EGCs to 
other issuers, nor does Section 28 include any such limitation. The 
final rule's use of exemptive authority is thus consistent with the 
plain language of Section 28.
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    \66\ Public Law 112-106, 126 Stat. 306 (2012).
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    We agree with commenters that the final rule generally will allow 
issuers to consult effectively with investors as they evaluate market 
interest in a contemplated registered securities offering before 
incurring the costs associated with such an offering, while maintaining 
adequate investor protections.\67\ As commenters noted, several aspects 
of the rule will mitigate investor protection concerns, notably:
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    \67\ We recognize that Rule 163B may be less beneficial to 
certain fund issuers. See infra Section II.E.
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     The limitation of Rule 163B communications to investors 
that are financially sophisticated, and, as one commenter said, ``are 
unlikely to ignore the statutory prospectus and rely exclusively on 
information provided to them during the [test-the-waters] process''; 
\68\
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    \68\ See letter from Davis Polk.
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     The application of the anti-fraud provisions of the 
federal securities laws and exposure to Section 12(a)(2) liability; 
\69\
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    \69\ Liability under Section 12(a)(2) will attach to test-the-
waters oral and written communications under the rule both before 
and after a registration statement has been filed. Communications 
under the final rule will 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.
---------------------------------------------------------------------------

     The continued application of Regulation FD to certain 
issuers; and
     The fact that, should the issuer move forward with the 
offering, all investors would ultimately receive a Section 10(a) 
prospectus subject to Section 11 and Section 12(a)(2) liability.\70\
---------------------------------------------------------------------------

    \70\ For the reasons set forth in this paragraph and as 
discussed in more detail throughout this release, we find that the 
final rule is necessary or appropriate in the public interest and is 
consistent with the protection of investors. See 15 U.S.C. 77z-3.
---------------------------------------------------------------------------

    However, we are not adopting proposed Rule 163B(a)(2), which stated 
that the rule would be unavailable 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. We are persuaded by the 
commenters who expressed concerns that such language may raise 
uncertainty and would risk limiting the utility of the rule.\71\ 
Communications made under the rule will be deemed offers under Section 
2(a)(10) and will still be subject to the anti-fraud and other 
applicable provisions of the federal securities laws, and an issuer 
that proceeds with the contemplated public offering after testing-the-
waters will be required to file a registration statement. We therefore 
believe eliminating the anti-evasion language will avoid any confusion 
or chilling effect such language may introduce without introducing 
significant risk to investors.
---------------------------------------------------------------------------

    \71\ See, e.g., letters from Cravath and SIFMA.
---------------------------------------------------------------------------

    As noted above, one commenter recommended that we exclude both 
Section 5(d) and Rule 163B written communications from the definition 
of ``free writing prospectus'' in Rule 405 and from the prospectus 
filing requirement in Rule 424(b) to avoid any confusion that the 
communications should be treated differently.\72\ The Commission 
historically has not treated Section 5(d) communications as free 
writing prospectuses that are required to be filed. To the extent the 
proposed amendment creates any implication that they would be treated 
differently than Rule 163B communications for this purpose, we are 
amending Rule 405 to clarify this point, consistent with existing 
practice.
---------------------------------------------------------------------------

    \72\ See letter from Cleary.
---------------------------------------------------------------------------

    We are not requiring, as suggested by one commenter, that test-the-
waters communications be filed.\73\ While ``the investing public, 
analysts and entities that serve investors, journalists, and other 
interested parties'' may gain some ``benefits and insights . . . from 
seeing and evaluating these [test-the-waters] communication 
materials,'' \74\ as this commenter asserted, we believe those benefits 
are likely to be limited \75\ and are concerned that imposing a filing 
requirement, which would be inconsistent with the requirement under 
Section 5(d) for EGCs, may have a chilling effect on the usefulness of 
the rule. In addition, as noted by one commenter, ``much of the 
interaction in [test-the-waters] meetings is oral in nature . . . so a 
filing requirement would not cover what is often the most substantive 
component of the meeting.'' \76\ Accordingly, consistent with the 
proposal, we are not adopting a filing requirement.\77\ We note that 
Commission staff in the Division of Corporation Finance anticipates 
requesting, in connection with its review of a registration statement, 
that any test-the-waters communication used in connection with the 
offering be furnished to the staff for review, as is currently its 
practice when reviewing offerings conducted by EGCs.\78\
---------------------------------------------------------------------------

    \73\ See letter from Better Markets.
    \74\ Id.
    \75\ See Section IV.D below for further discussion of the 
limited benefits of filing test-the-waters materials.
    \76\ See letter from Davis Polk. See also Section IV.D below for 
further discussion of the potential costs that a filing requirement 
could have on issuers that elect to test the waters under Rule 163B.
    \77\ See Rule 163B(b)(3).
    \78\ See 17 CFR 230.418 under the Securities Act.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission observed that information 
in a Rule 163B communication must not conflict with material 
information in the related registration statement.\79\ This statement 
was intended to remind issuers that, although such communications would 
be exempt from Section 5 of the Securities Act, issuers nevertheless 
must take care to ensure that they are made in compliance with other 
provisions of the federal securities laws.\80\ We acknowledge the 
concerns expressed by certain commenters regarding the possibility that 
circumstances or messaging may change between the time the pre-filing 
Rule 163B communications are made and the

[[Page 53016]]

time of filing, causing the information in the test-the-waters 
materials to differ from information in the related registration 
statement.\81\ At the same time, it is important to keep in mind that 
statements made in the test-the-waters materials and in the related 
registration statement, if filed, must not contain material 
misstatements or omissions at the time the statements are made.
---------------------------------------------------------------------------

    \79\ See Section II.A of the Proposing Release.
    \80\ Because Rule 163B communications are subject to Section 
12(a)(2) and the anti-fraud provisions of the federal securities 
laws, there may be liability concerns if a Rule 163B communication 
materially conflicts with the information in a registration 
statement.
    \81\ See letters from SIFMA and CCMC.
---------------------------------------------------------------------------

    Based on Commission staff's experience in reviewing test-the-waters 
materials used by EGCs and provided at the Commission staff's request 
in connection with a registered offering, material information 
regarding financial condition and performance, business operations and 
strategy, information about management, and other operational 
information is generally consistent with information presented in the 
filed registration statement.\82\ Even if an issuer changes its capital 
raising strategy or modifies offering terms based on investor input 
during the pre-filing test-the-waters phase, or where an issuer changes 
its ``messaging due to investor demand,'' \83\ material information 
about the issuer itself usually remains consistent, other than updates 
to reflect continuing operations and material changes that may develop 
during the time between the communication and filing. As noted above, 
information in the Rule 163B communication should not contain material 
misstatements or omissions at the time the communication is made and we 
note that it is especially important to be mindful of this obligation 
when discussing material information about the issuer itself. 
Nevertheless, we recognize that between the time of the Rule 163B 
communication and the time a registration statement is filed, 
disclosures may be changed in order to reflect a change in 
circumstances or offering terms. We also clarify, as one commenter 
suggested, that this statement is intended to provide guidance to 
issuers on their obligations under the federal securities laws and is 
not a condition to the availability of Rule 163B.
---------------------------------------------------------------------------

    \82\ As one commenter noted, ``We have also seen market 
participants developing robust policies and procedures for test-the-
waters communications in order to ensure that information 
communicated in test-the-waters materials does not conflict with the 
information ultimately presented in the registration statement.'' 
See letter from Sullivan. See also supra note 17 and accompanying 
text (discussing the ability of the Commission or its staff to 
request that an issuer furnish the staff any test-the-waters 
communication used in connection with an offering).
    \83\ See letter from CCMC.
---------------------------------------------------------------------------

    As noted above, one commenter asserted that the preliminary nature 
of Rule 163B communications, the liability that can attach to such 
communications, and the nature of the potential investors to whom the 
communications would be directed do not support the communications 
being deemed ``offers'' under Securities Act Section 2(a)(3).\84\ As 
stated in the Proposing Release, the term ``offer'' has been 
interpreted broadly,\85\ and would encompass communications that are 
intended to gauge interest in a contemplated registered offering.\86\ 
In general, the factors described by the commenter are not germane in 
determining whether a particular communication would be deemed an 
``offer'' as defined in Section 2(a)(3). As noted by another commenter, 
``since one of the primary goals of using test-the-waters 
communications is to provide prospective investors additional time to 
evaluate, understand, and ask questions about potential investment 
opportunities, the conclusion that they should be deemed `offers' is, 
in our view, inescapable.'' \87\ We agree, and are adopting Rule 
163B(b)(2) as proposed, which states that communications under the rule 
constitute offers as defined in Section 2(a)(3), and are thereby 
subject to Section 12(a)(2) liability.
---------------------------------------------------------------------------

    \84\ See letter from SIFMA.
    \85\ See Proposing Release at note 23.
    \86\ The Commission has explained that ``the publication of 
information and publicity efforts, made in advance of a proposed 
financing which have the effect of conditioning the public mind or 
arousing public interest in the issuer or in its securities 
constitutes an offer . . . .'' Guidelines for the Release of 
Information by Issuers Whose Securities are in Registration, Release 
No. 33-5180 (Aug. 16, 1971) [36 FR 16506 (Aug. 21, 1971)].
    \87\ See letter from Cravath.
---------------------------------------------------------------------------

    As noted above, one commenter expressed concern that a test-the-
waters communication could be viewed as a general solicitation that 
could disqualify an issuer from immediately completing a private 
placement in lieu of a registered offering,\88\ and another commenter 
suggested that the Commission should take the position that a test-the-
waters communication made in reliance on Rule 163B would not itself 
constitute a general solicitation.\89\
---------------------------------------------------------------------------

    \88\ See letter from CCMC.
    \89\ See letter from Cleary.
---------------------------------------------------------------------------

    In our view, whether a test-the-waters communication would 
constitute a general solicitation depends on the facts and 
circumstances regarding the manner in which the communication is 
conducted.\90\ If an issuer chooses to engage in test-the-waters 
communications under Rule 163B concurrently with communications related 
to a private offering, it can conduct such communications in a manner 
that preserves the availability of both Rule 163B and any offering 
exemption upon which it might otherwise rely.
---------------------------------------------------------------------------

    \90\ As stated in the Proposing Release, the Commission's 2007 
framework for analyzing how an issuer can conduct simultaneous 
registered and private offerings continues to apply. See Proposing 
Release at note 105. This guidance can be applied to address 
circumstances that may arise with respect to pre-filing test-the-
waters communications and concurrent or immediately subsequent 
private offerings.
---------------------------------------------------------------------------

    Where an issuer wishes to pursue a private placement in lieu of a 
registered offering immediately after engaging in test-the-waters 
communications, the issuer should consider whether the test-the-waters 
communication was conducted in such a way as to constitute a general 
solicitation. If the communication constitutes a general solicitation, 
the issuer should consider whether the private offering exemption upon 
which the issuer is relying allows for general solicitation and, if it 
does not, whether the investors in the private placement were solicited 
by means of such a test-the-waters communication, or through some other 
means that would otherwise not foreclose the availability of the 
exemption.
    Another commenter raised a concern about the implications of a QIB 
or IAI passing test-the-waters information on to nonqualified parties 
in violation of a confidentiality agreement or otherwise in a manner 
inconsistent with the reasonable steps undertaken by the issuer to 
prevent such redistribution.\91\ In our view, where an issuer has taken 
reasonable steps to prevent test-the-waters communications from being 
shared with non-QIBs and non-IAIs and such information is nonetheless 
shared, such circumstances, in themselves, would not give rise to 
Section 5 liability for the issuer or the need for any cooling-off 
period.
---------------------------------------------------------------------------

    \91\ See letter from CCMC.
---------------------------------------------------------------------------

B. Scope of Eligible Issuers

    Under the proposed rule, any issuer, or person authorized to act on 
behalf of the issuer, would be able to engage in exempt oral or written 
communications with potential investors that are, or that the issuer or 
persons authorized to act on behalf of the issuer reasonably believes 
are, QIBs or IAIs. All issuers--including non-reporting issuers, EGCs, 
non-EGCs, well-known seasoned issuers (``WKSIs''), and investment 
companies (including registered investment

[[Page 53017]]

companies and business development companies (``BDCs''))--would be 
eligible to rely on the rule.\92\ In the Proposing Release, the 
Commission expressed its belief that, in light of its 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 accommodation to all issuers.\93\
---------------------------------------------------------------------------

    \92\ See infra Section II.E (discussing considerations for 
investment companies' use of Rule 163B).
    \93\ See Section I of the Proposing Release.
---------------------------------------------------------------------------

    All but one of the commenters that expressed a view on eligibility 
supported extending the test-the-waters accommodation currently 
available to EGCs to all issuers, as proposed.\94\ Commenters observed 
that the size or reporting status of an issuer is not generally 
correlated with its desire to gauge investor interest prior to a 
registered public offering \95\ and that QIBs and IAIs have the 
sophistication to evaluate investment opportunities regardless of the 
type of issuer.\96\ One commenter stated that permitting all issuers to 
test the waters would harmonize U.S. practice with that of other 
jurisdictions that permit similar kinds of communications.\97\ Another 
commenter stated that the proposed rule would facilitate initial public 
offerings as well as secondary offerings by companies that have already 
gone public, particularly those companies that do not qualify as either 
EGCs or WKSIs.\98\ This commenter also observed that, unlike the 
current accommodation for WKSIs under Rule 163, which does not extend 
to WKSIs' underwriters, the proposed rule would enable underwriters to 
participate in test-the-waters communications.\99\ Some commenters 
expressly supported allowing fund issuers to rely on the proposed rule 
(and no commenters stated that the rule's scope should not include fund 
issuers), but some stated that fund issuers may be less likely to 
benefit from the rule, as proposed.\100\
---------------------------------------------------------------------------

    \94\ See letters from CCMC, B. Clark, Cravath, ICI, Nasdaq, and 
Sullivan. As discussed above, Better Markets questioned the 
Commission's authority to extend the accommodation to all issuers. 
Such authority exists in our view, see supra Section II.A.3, and we 
agree with the other commenters that the accommodation should be 
extended to all issuers.
    \95\ See letter from Sullivan.
    \96\ See letter from Cravath.
    \97\ See letter from CCMC.
    \98\ See letter from Nasdaq.
    \99\ See id.
    \100\ See infra Section II.E.
---------------------------------------------------------------------------

    Accordingly, and for the reasons set forth in this release and in 
the Proposing Release, we are adopting Rule 163B as proposed with 
respect to eligibility.

C. Investor Status

    As proposed, Rule 163B 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 or IAIs. A QIB 
generally 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.\101\ An IAI is any institutional investor that is also an 
accredited investor, as defined in paragraph (a) of Rule 501 of 
Regulation D.\102\ 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 did not 
propose 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.\103\ As noted in the Proposing 
Release, the limitation of the exemption to these institutional 
investors, consistent with Section 5(d), 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 provided by the Securities Act's registration process as 
other types of investors.\104\
---------------------------------------------------------------------------

    \101\ 17 CFR 230.144A(a)(1)(i). Banks and other specified 
financial institutions must also have a net worth of at least $25 
million. 17 CFR 230.144A(a)(1)(vi). Unlike other institutions, 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. 17 CFR 230.144A(a)(1)(ii).
    \102\ 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).
    \103\ 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.
    \104\ See Section II.C of the Proposing Release.
---------------------------------------------------------------------------

    We received several comments on two issues raised in the Proposing 
Release with respect to investor status: (1) Whether the proposed 
exemption should limit communications to QIBs and IAIs; and (2) whether 
issuers should be required to establish a reasonable belief that the 
potential investors involved in a Rule 163B communication are QIBs and 
IAIs and, if so, whether existing guidance and practice is sufficient 
to enable issuers to establish such reasonable belief or whether the 
rule should include a non-exclusive list of methods that could be used 
to establish such reasonable belief.
1. Limiting Communications to QIBs and IAIs
    Commenters generally agreed with the proposed rule's requirement 
that solicitations of interest be limited to QIBs and IAIs.\105\ 
Several commenters recommended, however, that the Commission consider 
expanding the class of eligible investors.\106\
---------------------------------------------------------------------------

    \105\ See, e.g., letters from Better Markets, CCMC, Cravath, 
Nasdaq, SIFMA, and Sullivan.
    \106\ See letters from L. Ameri, C. Anderson, Federated, and 
ICI.
---------------------------------------------------------------------------

    One commenter suggested that the Commission consider expanding the 
applicability of test-the-waters communications to individual 
accredited investors.\107\ Another commenter recommended, as a way to 
facilitate global offerings made on a registered basis, expanding the 
class of eligible investors to include parties that are not ``U.S. 
Persons'' (as defined in Rule 902(k)) who may purchase outside of the 
U.S. in a non-U.S. tranche of a registered offering.\108\ This 
commenter also recommended, in the case of an offshore tranche offered 
and sold under Regulation S in tandem with a domestic registered 
offering, that the Commission confirm that communications made under 
Rule 163B would not be deemed ``Directed Selling Efforts'' under 17 CFR 
230.902(c) (``Rule 902(c)'') for purposes of Regulation S.\109\
---------------------------------------------------------------------------

    \107\ See letter from SIFMA (suggesting that the Commission 
address this possible expansion in a separate rulemaking given that 
the definition of accredited investors is presently under Commission 
review).
    \108\ See letter from CCMC.
    \109\ Id.
---------------------------------------------------------------------------

    Two commenters suggested that the Commission expand Rule 163B to 
permit fund issuers to test the waters

[[Page 53018]]

with any SEC-registered investment adviser, which could help issuers 
gauge the potential viability of a fund offering. These commenters 
suggested that all SEC-registered investment advisers should be 
considered sophisticated enough to receive these communications.\110\
---------------------------------------------------------------------------

    \110\ See letters from Federated and ICI (stating that ``only 
registered investment advisers that in the aggregate own and invest 
on a discretionary basis at least $100 million in securities of 
issuers that are not affiliated with the adviser [under the QIB 
definition] would be eligible to receive test-the-waters 
communications''). One commenter suggested that, for purposes of 
proposed Rule 163B, SEC-registered investment advisers should be 
treated similarly to registered broker-dealers, which qualify as 
IAIs. This commenter also stated that its recommended approach would 
be consistent with FINRA Rule 2210, which classifies all SEC-
registered investment advisers as institutional investors. See 
letter from ICI.
---------------------------------------------------------------------------

    One commenter disagreed with limiting investors eligible to receive 
test-the-waters communications, arguing instead that the rule should be 
expanded to include all accredited investors and, eventually, all 
investors.\111\
---------------------------------------------------------------------------

    \111\ See letter from L. Ameri.
---------------------------------------------------------------------------

    In our view, because the exemption will be available to all 
issuers, we think it is appropriate, as an initial matter, to limit the 
communications, consistent with Section 5(d), to those institutional 
investors that the Commission has long recognized as having the ability 
to fend for themselves. Also, the intent of the exemption is to help 
issuers gauge market interest in a potential offering, and limiting the 
communications to institutional investors will allow issuers to 
accomplish this goal while mitigating any potential adverse effects on 
investors.
    We recognize that, as two commenters noted, some but not all SEC-
registered investment advisers would currently qualify as QIBs or 
IAIs.\112\ We are not, however, expanding the class of eligible 
investors under Rule 163B to include all SEC-registered investment 
advisers at this time. In connection with our ongoing review of the 
definition of ``accredited investor'' under Rule 501(a) of Regulation 
D, we are considering whether a broader range of SEC-registered 
investment advisers should qualify as IAIs, beyond those that currently 
qualify as IAIs under Rule 501(a)(3).\113\ We believe a more holistic 
review of the treatment of SEC-registered investment advisers under 
Rule 501 of Regulation D will help ensure appropriate consistency 
throughout our regulations.
---------------------------------------------------------------------------

    \112\ An SEC-registered investment adviser would generally 
qualify as an IAI if it has total assets in excess of $5 million. 
See Rule 501(a)(3) of Regulation D. An SEC-registered investment 
adviser would generally qualify as a QIB if it owns and invests on a 
discretionary basis at least $100 million in securities of 
unaffiliated issuers. See Rule 144A(a)(1)(i)(I).
    \113\ See Concept Release on Harmonization of Securities 
Offering Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 
30460 (June 26, 2019)].
---------------------------------------------------------------------------

    At this time we believe it is appropriate to limit Rule 163B 
communications to QIBs and IAIs, consistent with communications made 
under Section 5(d), for the reasons set forth in this release and in 
the Proposing Release.\114\
---------------------------------------------------------------------------

    \114\ We do, however, confirm that communications made under 
Rule 163B generally would not be deemed ``Directed Selling Efforts'' 
under Rule 902(c) for purposes of Regulation S. Further, we confirm 
that issuers may engage in communications under Rule 163B to non-U.S 
persons who are also QIBs or IAIs.
---------------------------------------------------------------------------

2. Reasonable Belief Standard
    Commenters broadly supported a ``reasonable belief'' standard for 
proposed Rule 163B, but objected to creating a non-exclusive list of 
methods to establish a reasonable belief.\115\ In expressing this view, 
several commenters noted that, unlike in the context of offerings made 
in reliance on 17 CFR 230.506(c) of Regulation D, all investors who 
would receive ``Rule 163B communications and who in turn proceed to 
make an investment in the issuer will ultimately have the benefit of a 
registration statement.'' \116\ One commenter stated that the standard 
for proposed Rule 163B should ``be no more burdensome for issuers and 
their underwriters than current practice in Rule 144A and Section 
4(a)(2) private placements.'' \117\
---------------------------------------------------------------------------

    \115\ See letters from CCMC, Cleary, Cravath, Davis Polk, 
Hamilton, and SIFMA.
    \116\ See letter from Cravath. See also letters from Hamilton 
and Davis Polk.
    \117\ See letter from Davis Polk.
---------------------------------------------------------------------------

    One commenter opposed the proposed reasonable belief standard, 
arguing that by not requiring issuers--and persons authorized to act on 
their behalf, including underwriters--to validate the status of the 
investor as a QIB or IAI before a solicitation is made, the proposed 
rule would permit solicitations to retail and other unsophisticated 
investors.\118\ This commenter urged that, at a minimum, the Commission 
should establish specific criteria that must be used to evaluate the 
status of the investor and ensure the investor is in fact a QIB or 
IAI.\119\
---------------------------------------------------------------------------

    \118\ See letter from Better Markets.
    \119\ Id.
---------------------------------------------------------------------------

    We are adopting the reasonable belief standard as proposed. 
Accordingly, Rule 163B does not specify the steps that an issuer could 
or must take to establish a reasonable belief regarding investor status 
or require the issuer to verify investor status. As the Commission 
noted in the Proposing Release, 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.\120\
---------------------------------------------------------------------------

    \120\ See Section II.C of the Proposing Release. See also 
Interpretive Release on Regulation D, Release No. 33-6455 (Mar. 3, 
1983) [48 FR 10045 (Mar. 10, 1983)] (explaining, in the context of 
the definition of ``accredited investor,'' ``[w]hat constitutes 
`reasonable' belief will depend on the facts of each particular 
case'').
---------------------------------------------------------------------------

    In addition, we disagree with the commenter's assertion that, 
absent a requirement that issuers take reasonable steps to verify 
investor status, the rule would permit solicitations to non-qualifying 
investors, and that the Commission should therefore ``establish 
specific criteria that an issuer and all those acting on an issuer's 
behalf must use to evaluate the status of the investor to ensure that 
the investor is indeed a QIB or an IAI.'' \121\ While issuers will not 
be required to take specific steps to verify investor status, the rule 
limits solicitations to potential investors that are, or that the 
issuer reasonably believes to be, QIBs or IAIs. The issuer could not, 
for example, form such reasonable belief if it has knowledge that the 
investor is not a QIB or IAI. As noted in the Proposing Release, we 
believe that issuers should continue to rely on the methods that they 
currently use to establish a reasonable belief with respect to an 
investor's status as a QIB or IAI pursuant to Rule 144A and Rule 
501(a).\122\ Furthermore, in response to this commenter's concern 
regarding issuers relying on a ``check-the-box'' or other self-
certification method of determining investor status, we reiterate that 
the steps necessary to establish a reasonable belief as to investor 
status will be dependent on the facts and circumstances of the 
contemplated offering and each potential issuer.
---------------------------------------------------------------------------

    \121\ See letter from Better Markets.
    \122\ See note 103, supra.
---------------------------------------------------------------------------

    For these reasons, we are not adopting specific steps or methods to 
establish a reasonable belief, or requiring issuers to take reasonable 
steps to verify, that the intended recipients of test-the-waters 
communications are QIBs or IAIs. Instead, issuers may continue to rely 
on methods they currently use to establish

[[Page 53019]]

a reasonable belief regarding an investor's status in other 
contexts.\123\
---------------------------------------------------------------------------

    \123\ One commenter recommended that the Commission consider 
specifying that this reasonable belief approach is also sufficient 
under Section 5(d). See letter from Cleary. Given that Rule 163B is 
available to all issuers, an EGC may rely on Rule 163B in addition 
to Section 5(d).
---------------------------------------------------------------------------

D. Non-Exclusivity

    As proposed, Rule 163B explicitly stated that it would be non-
exclusive. In other words, an issuer would be able to rely concurrently 
on other Securities Act communications rules or exemptions when 
determining how, when, and what to communicate related to a 
contemplated securities offering. The Commission cautioned in the 
Proposing Release,\124\ however, that while an issuer contemplating a 
registered securities offering may solicit interest from QIBs and IAIs 
without legending or filing those materials in compliance with Rule 
163B, should it decide to claim the availability of another exemption 
or communication rule with respect to those communications, the issuer 
must also comply with the conditions of any other exemption or rule 
relied upon.
---------------------------------------------------------------------------

    \124\ See Section II.D of the Proposing Release.
---------------------------------------------------------------------------

    All commenters that discussed non-exclusivity of the rule supported 
the rule as proposed, and none opposed the non-exclusivity 
provision.\125\ Accordingly, and for the reasons discussed in the 
Proposing Release, we are adopting the non-exclusivity provision of 
Rule 163B as proposed.
---------------------------------------------------------------------------

    \125\ See, e.g., letters from CCMC, Dechert, Federated, and ICI.
---------------------------------------------------------------------------

E. Considerations for Use by Investment Companies

    Consistent with the proposal, issuers that are, or that are 
considering becoming, registered investment companies or BDCs 
(collectively, ``funds'') would be eligible to engage in test-the-
waters communications under Rule 163B. Commenters generally supported 
allowing all issuers, including fund issuers, to rely on Rule 163B, and 
we continue to believe it is appropriate for funds to have the option 
to engage in these communications to help assess market demand for a 
fund offering.\126\
---------------------------------------------------------------------------

    \126\ See supra note 94 and accompanying text. See also 
Proposing Release at Section II.E (stating that funds and their 
advisers may have an interest in using the proposed rule to, for 
example, assess demand for a particular investment strategy or fee 
structure, and discussing the existing communications framework for 
funds that would otherwise only permit post-filing communications, 
subject to certain filing, legending, and content requirements).
---------------------------------------------------------------------------

1. Use of Rule 163B in the Fund Context
    We received three comment letters that discussed fund-specific 
issues.\127\ Commenters generally agreed with the Commission's 
assessment in the Proposing Release that funds are less likely to use 
Rule 163B than other issuers, due in part to certain considerations 
under the Investment Company Act and associated market practices.\128\ 
One commenter discussed private funds' potential use of proposed Rule 
163B.\129\ This commenter expressed the view that private funds relying 
on Sections 3(c)(1) or 3(c)(7) of the Investment Company Act generally 
offer their securities pursuant to Section 4(a)(2) of the Securities 
Act (which separately provides for an exemption from Section 5), and 
therefore these funds would not have a direct use for proposed Rule 
163B.\130\ We recognize that an issuer that solely conducts offerings 
that qualify for an exemption from Section 5 of the Securities Act 
would not specifically benefit from Rule 163B, since the rule only 
relates to communications about contemplated registered securities 
offerings that Sections 5(c) or 5(b)(1) of the Securities Act would 
otherwise restrict.
---------------------------------------------------------------------------

    \127\ See letters from Dechert, Federated, and ICI.
    \128\ See letters from Federated and ICI. See also Proposing 
Release at notes 54-57 and accompanying text.
    \129\ See letter from Dechert.
    \130\ This commenter also represented that funds often rely on 
Sections 3(c)(1) or 3(c)(7) during their seeding periods before 
conducting a registered offering. See letter from Dechert. As 
discussed in the Proposing Release, and based on staff experience 
and information we have received in other contexts, we continue to 
believe this is not the typical practice. See Proposing Release at 
note 55. Among other considerations that may contribute to the 
common practice of funds registering during their seeding periods, a 
fund generally may only include performance information in its 
prospectus and sales materials for periods subsequent to the 
effective date of its registration statement. See, e.g., infra note 
150. Moreover, if a fund is planning to conduct a registered public 
offering, the Sections 3(c)(1) and 3(c)(7) exemptions generally 
would become unavailable if the fund 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'').
---------------------------------------------------------------------------

    Two commenters requested that we allow funds to rely on Rule 163B 
prior to registering under the Investment Company Act so funds can more 
effectively use the rule to engage in pre-filing communications.\131\ 
These comments were in response to the industry practice discussed in 
the Proposing Release, whereby funds commonly file a single 
registration statement under both the Investment Company Act and the 
Securities Act to take advantage of certain efficiencies.\132\ One of 
these commenters stated that, absent an exemption from Investment 
Company Act registration requirements, most funds would likely continue 
to file a single registration statement under both Acts, and therefore 
would not take advantage of the pre-filing benefits of proposed Rule 
163B.\133\ We recognize that this consideration will likely limit many 
funds' use of Rule 163B.\134\ At this time, however, we decline to 
provide a new exemption under the Investment Company Act to allow a 
fund that would otherwise be required to register under Section 8 of 
the Investment Company Act to avoid this registration requirement while 
it engages in communications under Rule 163B. We are concerned that an 
exemption from registration and from the substantive requirements of 
the Investment Company Act could allow funds potentially to engage in 
activities that are contrary to the substantive requirements of the 
Investment Company Act that protect investors and apply outside of a 
registered fund's offering. For example, such a new exemption could 
allow a fund to engage in certain self-dealing transactions--which the 
Act prohibits for registered funds--that benefit its investment adviser 
or other affiliated persons while the fund is actively considering and 
soliciting interest in a public offering.\135\ Commenters who suggested 
that funds should be permitted to rely on Rule 163B prior to 
registering under the Investment Company Act did not address how such 
an Investment Company Act registration exemption could address concerns 
unique to funds that the Act is meant to address. For instance, 
commenters did not discuss the contours of any conditions associated 
with any such exemption or

[[Page 53020]]

how they would address these concerns. Given the need to consider these 
matters further, we are not adopting an exemption under the Investment 
Company Act at this time.
---------------------------------------------------------------------------

    \131\ See letters from Federated and ICI. See also supra Section 
II.C.1 (discussing these commenters' request that fund issuers be 
permitted to test the waters with any SEC-registered investment 
adviser to help them better gauge interest in a potential registered 
offering).
    \132\ See Proposing Release at notes 56-57 and accompanying 
text.
    \133\ See letter from ICI. To register as an investment company, 
a fund files a relatively brief notification of registration on Form 
N-8A and generally must file a more detailed registration statement 
under the Investment Company Act within three months after filing 
the notification of registration. See Sections 8(a) and 8(b) of the 
Investment Company Act [15 U.S.C. 80a-8(a), 8(b)]; Investment 
Company Act Rule 8b-5 [17 CFR 270.8b-5].
    \134\ See supra note 132.
    \135\ See, e.g., Section 17 and Section 10(f) of the Investment 
Company Act [15 U.S.C. 80a-17 and 15 U.S.C. 80a-10(f)].
---------------------------------------------------------------------------

    We continue to believe that certain funds may be able to rely on 
Rule 163B to engage in pre-filing communications to gauge interest in a 
potential registered offering. For example, because BDCs are not 
required to register under the Investment Company Act, they may be more 
likely to engage in pre-filing communications under Rule 163B when 
contemplating a registered offering close-in-time to the fund's 
inception.\136\ Further, funds that initially conduct exempt 
offerings--including certain registered closed-end funds and BDCs--may 
use Rule 163B to communicate with QIBs and IAIs before filing a 
Securities Act registration statement if they are contemplating a 
subsequent registered offering.\137\ One commenter agreed that the rule 
would provide these funds with greater flexibility in their 
communications.\138\ This commenter also suggested that Rule 163B may 
provide registered closed-end funds and BDCs with more comfort 
regarding discussions about underwriting and offering terms with 
entities involved in the offering process.
---------------------------------------------------------------------------

    \136\ 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 [17 CFR 274.15 
and 274.54]. However, like registered investment companies, many 
BDCs have relatively high levels of retail investor ownership, which 
may reduce the likelihood that these BDCs will rely on Rule 163B to 
test the waters with QIBs and IAIs. See infra note 227.
    \137\ See Proposing Release at note 58 and accompanying text 
(recognizing that registered open-end funds may be less likely to 
use Rule 163B in this way because they typically offer their shares 
to retail investors in registered offerings).
    \138\ See letter from ICI.
---------------------------------------------------------------------------

    In addition to pre-filing communications, Rule 163B will allow a 
fund to engage in test-the-waters communications with QIBs and IAIs 
after filing a Securities Act registration statement while it continues 
to contemplate a registered offering before the registration statement 
becomes effective. As discussed in more detail below, while funds may 
already engage in these types of communications under other Commission 
rules and associated FINRA rules, these communications currently may be 
subject to certain filing, legending, or content requirements that Rule 
163B would not entail.\139\
---------------------------------------------------------------------------

    \139\ See 17 CFR 230.482 (``Rule 482'' under the Securities 
Act); 15 U.S.C. 80a-24(g) (Section 24(g) of the Investment Company 
Act); 17 CFR 270.34b-1 (Investment Company Act Rule 34b-1); FINRA 
Rule 2210.
---------------------------------------------------------------------------

2. Rule 163B Filing, Legending, and Content Requirements in the Fund 
Context
    The Commission did not propose to require any different filing, 
legending, or content requirements for funds' test-the-waters 
communications under proposed Rule 163B, and we are not adopting any 
such requirements for funds.\140\ While commenters supported the 
ability for funds to rely on proposed Rule 163B without the need to 
file test-the-waters communications, one commenter expressed doubt that 
this would result in significant cost savings for funds.\141\ This 
commenter noted that, for example, post-filing communications under 
proposed Rule 163B are very similar to institutional communications 
under FINRA Rule 2210 and stated that these existing communications are 
not required to be filed with FINRA. The commenter expressed doubt that 
funds would rely on Rule 163B for these communications when they 
already use, and are familiar with, institutional communications under 
FINRA rules.\142\ While there may be some minor differences between the 
scope of institutional investors under FINRA Rule 2210 and the QIB and 
IAI entities that funds may communicate with under Rule 163B,\143\ we 
recognize that funds may choose to rely on other available 
communications rules to test the waters instead of Rule 163B.\144\
---------------------------------------------------------------------------

    \140\ See Rule 163B(b)(3); Proposing Release at note 59 and 
accompanying text.
    \141\ See letter from ICI. See also infra Section IV.C.5.
    \142\ In addition to FINRA rules, funds must comply with 
relevant Commission rules with respect to these institutional 
communications. See, e.g., supra note 139.
    \143\ For example, certain investors that qualify as IAIs under 
Rule 501(a) of Regulation D may not necessarily be treated as 
institutional investors under FINRA Rule 2210.
    \144\ See, e.g., supra note 139. See also Rule 163B(a).
---------------------------------------------------------------------------

    One commenter suggested that the Commission require funds to 
include performance information in a standardized manner in their test-
the-waters communications.\145\ This commenter represented that this 
requirement would facilitate comparisons of fund performance and level 
the playing field among funds. This commenter also stated that it would 
not be burdensome for funds to provide standardized performance 
information because they already present their performance in this 
manner. As an alternative, this commenter suggested that we require 
clear and prominent disclosure when a fund's test-the-waters 
communication includes nonstandardized fund performance.
---------------------------------------------------------------------------

    \145\ See letter from ICI. This commenter pointed to performance 
presentation requirements under Rule 482 for registered open-end 
funds and requirements in Form N-2 for registered closed-end funds.
---------------------------------------------------------------------------

    We do not believe a standardized performance requirement, or a 
specific requirement to identify nonstandardized performance, is 
necessary for funds' test-the-waters communications given that: (1) 
Current standardized performance requirements generally would not be 
relevant at the time a fund tests the waters; (2) any performance 
presentation in a test-the-waters communication will be subject to 
anti-fraud provisions; and (3) these communications are limited to QIBs 
and IAIs, which are financially sophisticated investors that we 
believe, in the context of receiving test-the-waters communications, 
would have the bargaining power to request the information they need to 
assess fund performance.\146\ We do not believe the current 
standardized performance requirements for registered funds would 
generally be meaningful for purposes of Rule 163B. These current 
provisions require performance information for certain periods after a 
registered fund has an effective Securities Act registration statement, 
while test-the-waters communications would generally occur before a 
fund has an effective Securities Act registration statement.\147\ 
Further, any performance information included in test-the-waters 
communications will be subject to the anti-fraud provisions and cannot 
be materially misleading.\148\ For example, if a fund provides 
performance information in a Rule 163B communication, additional 
statements regarding its performance--such as explanations, 
qualifications, or

[[Page 53021]]

limitations--may be necessary or appropriate to make the performance 
information not misleading.\149\ A fund also may need to consider 
whether these types of statements would be necessary for any 
performance information in a test-the-waters communication not to 
conflict with material information in the fund's registration 
statement.\150\ The fact that funds would be able to rely on Rule 163B 
only for test-the-waters communications to QIBs and IAIs is also 
important to our consideration of whether to require standardized 
performance in these communications. We believe that, in the context of 
test-the-waters communications, these financially sophisticated 
institutional investors will have sufficient bargaining power to ask 
questions about any performance information the fund presents and to 
request the types of performance information they would find most 
meaningful when considering their interest in a fund's potential 
registered offering.\151\ Thus, we believe it is appropriate--within 
the confines of the anti-fraud provisions--to provide flexibility with 
respect to whether and, if so, how funds provide performance 
information when testing the waters with QIBs and IAIs.
---------------------------------------------------------------------------

    \146\ See infra note 151 and accompanying text.
    \147\ See, e.g., Advertising by Investment Companies, Release 
No. IC-16245 (Feb. 2, 1988) [53 FR 3868, 3876 (Feb. 10, 1988)] 
(excluding pre-effective performance from Rule 482 advertisements 
because funds are likely to be managed differently before they are 
offered to the public). The Commission has not promulgated 
standardized performance requirements for private funds. See, e.g., 
Amendments to Regulation D, Form D and Rule 156, Release No. IC-
30595 (July 10, 2013) [78 FR 44806, 44827 (July 24, 2013)] 
(declining to propose standardized calculation methodologies for 
private fund performance in connection with general solicitations 
under rule 506(c) of Regulation D and noting that methodologies for 
calculating private fund performance can vary for a number of 
reasons, such as the type of fund, assumptions underlying the 
calculations, and investor preferences).
    \148\ See Securities Act Section 17(a); Exchange Act Section 
10(b); Exchange Act Rule 10b-5; 17 CFR 230.156 (``Rule 156'' under 
the Securities Act) (applying to investment company sales 
literature, which includes any communication (whether in writing, by 
radio, or by television) used by any person to offer to sell or 
induce the sale of securities of any investment company).
    \149\ See, e.g., Rule 156(b)(2).
    \150\ See supra Section II.A.3. Applicable registration forms 
generally identify the types of performance information registered 
funds must include, as relevant. This performance information covers 
periods subsequent to the fund having an effective registration 
statement. See, e.g., Item 4(b)(2) of Form N-1A; Instruction 3 to 
Item 4.1 of Form N-2. In certain limited circumstances, the staff 
has stated that it would not recommend enforcement action if a 
registered fund included certain performance information in its 
registration statement relating to other funds or accounts that are 
either materially equivalent, or substantially similar, to the 
registered fund. See, e.g., MassMutual Institutional Funds, SEC 
Staff No-Action Letter (Sept. 28, 1995); Nicholas-Applegate Mutual 
Funds, SEC Staff No-Action Letter (Aug. 6, 1996); Bramwell Growth 
Fund, SEC Staff No-Action Letter (Aug. 7, 1996).
    Funds also may want to consider positions of FINRA and its staff 
regarding performance information that may be included in fund sales 
materials under FINRA Rule 2210. See, e.g., FINRA Rule 2210(d); 
FINRA Interpretive Letter to Edward P. Macdonald, Hartford Funds 
Distributors, LLC (May 12, 2015).
    \151\ For example, as the Commission discussed in the Proposing 
Release, we anticipate that test-the-waters communications may help 
fund 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. See Proposing Release at 
Section II.E. To the extent that a fund relies on Rule 163B for 
these purposes (taking into account certain features of investment 
companies that may make their use of the rule more limited than 
other issuers, see infra Section IV.C.5), we believe that QIB and 
IAI recipients of test-the-waters communications (for example, 
broker-dealers and certain registered investment advisers) as well 
as fund issuers would each have respective incentives to request and 
provide relevant fund performance information.
---------------------------------------------------------------------------

III. Other Matters

    If any of the provisions of these rules, or the application of 
these provisions to any person or circumstance, is held to be invalid, 
such invalidity shall not affect other provisions or application of 
such provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.
    Pursuant to the Congressional Review Act,\152\ the Office of 
Information and Regulatory Affairs has designated these rules a ``major 
rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \152\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. 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) \153\ and Investment 
Company Act Section 2(c) \154\ 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.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 77b(b).
    \154\ 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 
considering raising capital through registered offerings, resulting in 
potential competitive impacts. The inability to test the waters may 
contribute to reduced willingness of non-EGCs to conduct registered 
offerings, compared to EGCs. The Commission proposed Rule 163B to 
expand the permissibility of test-the-waters communications to all 
issuers that are contemplating registered securities offerings, 
regardless of whether such issuers qualify as EGCs. As discussed above, 
after considering public comment, the Commission is adopting the final 
rule generally as proposed.
    Under the final rule, test-the-waters communications will 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 \155\ 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, the final rule will 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).
---------------------------------------------------------------------------

    \155\ 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 many 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.
---------------------------------------------------------------------------

    As the use of test-the-waters communications will remain voluntary, 
we anticipate that the issuers most likely to engage in these 
communications will 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 final rule will be those that 
seek to better assess the demand for, and valuation of, their 
securities, as well as those that seek more information from 
prospective large institutional investors regarding the attractiveness 
of various terms or structural elements of the offering.\156\ 
Commenters generally concurred that the proposed rule would allow 
issuers adequate flexibility to gauge market interest prior to filing a 
registration statement and tailor the size and other terms of the 
offering accordingly, reduce the costs of going public as well as the 
risk of disclosing sensitive financial and competitive information when 
choosing not to proceed with a public offering, and ``level the playing 
field'' among EGC and non-EGC issuers.\157\ We continue to

[[Page 53022]]

believe, after considering these comments, that the benefits of Rule 
163B should enhance the ability of issuers to conduct successful 
registered offerings and potentially lower their cost of capital.
---------------------------------------------------------------------------

    \156\ We also recognize that the benefits of the final rule may 
be more limited for certain issuers in practice, which may make them 
less likely to use the final rule regardless of these factors. See 
supra Section II.E and infra Section IV.C.5.
    \157\ See, e.g., letters from CCMC, Cravath, Davis Polk, Nasdaq, 
M. Stuchlik, and Sullivan.
---------------------------------------------------------------------------

    In addition to the benefits discussed above, by reducing the 
potential costs and risks associated with a registered securities 
offering, the final rule might make registered securities offerings 
more attractive to certain issuers, particularly non-EGC issuers, that 
otherwise might have relied on private placements or not undertaken a 
securities offering.\158\ Because a public offering can be costly and 
time consuming, particularly for first-time issuers, potential issuers 
may be reluctant to proceed along that path if the outcome is 
uncertain.\159\ By mitigating some of the uncertainty, the rule could 
motivate more companies to consider the public offering route.\160\ To 
the extent that this channel results in an increased number of 
registered offerings and reporting companies, the rule may improve 
capital formation and efficiency of allocation of investor capital. 
However, because some of the issuers undertaking registered offerings 
as a result of Rule 163B might have otherwise sought to raise capital 
in the private market or in a registered offering outside the U.S., we 
are unable to quantify the net impact of the final rule on aggregate 
capital formation and efficiency of capital allocation.
---------------------------------------------------------------------------

    \158\ See, e.g., letters from ASA (stating its belief that 
``[the proposed rule] will ultimately help more companies complete a 
successful IPO . . . . When fewer companies go public, long-term 
economic growth is inhibited and Main Street investors have fewer 
opportunities to invest their hard-earned money in growing 
businesses''); CCMC (stating that ``we believe all issuers 
contemplating an IPO, regardless of size, would benefit from the 
ability to test the waters, and expect that it would likewise 
motivate more companies to consider the public offering route''); 
Cravath (stating that ``[b]y gathering information from investors 
before publicly filing a registration statement, issuers should 
increase their likelihood of conducting successful public offerings, 
which in turn we believe should result in a greater number of 
registered offerings in the United States''); Davis Polk (stating 
its belief that the rule ``will greatly ease access to capital''); 
and Sullivan (stating its belief that the rule would ``potentially 
result[] in additional registered offerings in the United States and 
more investment opportunities for U.S. investors, including retail 
investors''). However, one commenter questioned whether and how the 
proposed exemption would increase the number of public offerings. 
See letter from Better Markets (stating that ``[t]he Proposal, in 
this instance, is intended to function as a cost-avoidance mechanism 
for the prospective issuer but how it will increase public offerings 
remains unclear to us'').
    One study found a significant increase in IPO activity, 
particularly among pharmaceutical and biotechnology companies, in 
the two years after the JOBS Act enactment. 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 (``[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''). 
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 (``In 
practice, issuers usually combine [testing the waters] 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. Further, as a general caveat, we recognize 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 182-184.
    \159\ See letter from CCMC.
    \160\ Id. Further, some other issuers that would have attempted 
a public offering without testing the waters might see somewhat 
increased odds of successful completion of the offering as a result 
of testing the waters under the final rule (because they can more 
effectively tailor offering terms to market demand based on the 
information gathered during testing the waters), resulting in an 
incrementally greater number of completed public offerings.
    While it is indeed possible that some issuers may abandon plans 
for a registered offering after inferring in the course of testing 
the waters under the final rule that there is insufficient market 
interest in the offering, in the absence of testing the waters, 
those same issuers might have publicly filed and subsequently 
withdrawn the offering. This could result in the same number of 
completed public offerings but at a higher cost for those issuers 
(due to filing and legal fees, as well as reputational costs and 
potential costs due to the disclosure of proprietary information 
through a public filing).
---------------------------------------------------------------------------

    By providing certain preliminary information about contemplated 
registered offerings at an earlier stage, the final rule also might 
provide solicited investors with marginal informational benefits that 
may help some of those investors to formulate a more informed 
investment strategy. On the other hand, the final rule also might have 
marginal adverse effects on some solicited investors if the test-the-
waters communications contain incomplete or misleading information and 
if solicited investors rely on such communications when making an 
investment decision, rather than on the filed offering materials 
against which they may compare the information in the test-the-waters 
materials. We expect such potential adverse effects on solicited 
investors to be mitigated by several factors. These factors include the 
general applicability of anti-fraud provisions of the federal 
securities laws and liability under Section 12(a)(2) \161\ and the 
limitation of permissible test-the-waters communications under the 
final rule to QIBs and IAIs, which, relative to retail investors, have 
more experience processing investment information, and a more 
sophisticated ability to do so. Commenters generally agreed that the 
proposal did not raise significant investor protection concerns, 
particularly in consideration of the fact that the proposed rule was 
limited to certain institutional investors.\162\
---------------------------------------------------------------------------

    \161\ See supra note 69.
    \162\ See letters from ASA, CCMC, Cravath, Hamilton, and Nasdaq. 
But see letter from Better Markets (expressing concern that the 
proposed reasonable belief standard regarding investor status would 
create an ``anti-investor protection loophole'').
---------------------------------------------------------------------------

    By extending to all issuers the flexibility to test the waters 
currently available only to EGCs, we expect the final rule will benefit 
non-EGC issuers by making them comparable to EGC issuers in this 
respect. This difference in the ability to use test-the-waters 
communications in gauging investor demand for a public offering 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 final 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 comparable 
EGCs.
    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 capital raising strategies for issuers contemplating a 
registered securities offering.\163\
---------------------------------------------------------------------------

    \163\ See 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-CapitalMarkets-FINAL-FINAL.pdf, 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.
---------------------------------------------------------------------------

    While EGC issuers will also be permitted to rely on Rule 163B, non-
EGC issuers are expected to be most

[[Page 53023]]

affected by the final rule because they cannot rely on Section 5(d). 
Potential users of the final rule include, for example, issuers 
contemplating an IPO as well as reporting issuers that are interested 
in conducting follow-on and other registered offerings. We recognize 
that Regulation FD may limit the attractiveness of relying on the final 
rule for some issuers in the second group. In particular, reporting 
issuers that selectively disclose material nonpublic information while 
testing-the-waters with QIBs and IAIs may be required under Regulation 
FD to disclose such information publicly, which may reduce those 
issuers' willingness to rely on Rule 163B. However, some issuers are 
not subject to Regulation FD and those that are may avail themselves of 
one of the exceptions under Regulation FD, such as the exception 
involving confidentiality agreements, thereby mitigating the limiting 
effect that the application of Regulation FD may have on users of Rule 
163B.\164\
---------------------------------------------------------------------------

    \164\ See supra note 21 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.
---------------------------------------------------------------------------

    Where possible, we have attempted to quantify the economic effects 
of the final rule. However, in some cases we are unable to do so. For 
example, confounding factors (other than testing the waters) that 
affect the decision to go public and the cost of capital in registered 
offerings, economic differences between non-EGCs (which are more likely 
to rely on the final rule) and EGCs (which have been eligible to test 
the waters under Section 5(d)), and limitations of historical data on 
test-the-waters communications under Section 5(d) make it difficult to 
quantitatively predict the extent to which issuers will elect to test 
the waters in connection with a contemplated registered securities 
offering under the final rule; the extent to which the option to engage 
in test-the-waters communications will affect the willingness of 
potential issuers newly eligible for testing the waters under the final 
rule to conduct 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 final 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 because of the differences between EGC and non-EGC issuers 
(including non-EGC issuers that are investment companies) and the 
offerings they undertake; \165\ the voluntary nature of reliance on 
Section 5(d) among EGC issuers; \166\ 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 the post-JOBS Act 
period.\167\ Moreover, while the flexibility to not pursue a registered 
offering after gauging investor interest can be valuable to issuers, we 
do not have data on EGC issuers that tested the waters under Section 
5(d) but subsequently chose not to proceed with a registered offering.
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    \165\ See infra notes 182-184 and accompanying text.
    \166\ See infra note 176.
    \167\ 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 final 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 that are likely to be 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. 
Currently, only issuers that qualify for EGC status can rely on the 
Section 5(d) test-the-waters provision in advance of a contemplated 
registered offering. Certain issuers, such as registered investment 
companies and issuers of asset-based securities (``ABS issuers''), are 
ineligible for EGC status.\168\ 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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    \168\ However, BDCs, which are closed-end funds exempt from 
registration under the Investment Company Act, are eligible for EGC 
status.
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    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.\169\ 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.\170\ Using this method, recent industry studies found that in 
2015 and 2016, respectively, 38 percent and 23 percent of EGC IPOs 
referenced testing the waters in comment letter responses.\171\ Based 
on the analysis of comment letter responses, staff has

[[Page 53024]]

estimated that approximately 37 percent of EGC IPOs during 2012-2018 
used the test-the-waters provision.\172\ 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 that, based on an analysis of 
underwriting agreements filed as exhibits to registration statements, 
approximately 71 percent of EGC IPOs authorized underwriters to test 
the waters.\173\ Another academic study found that approximately 68 
percent 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.\174\ Because 
underwriting agreement data does not indicate whether the underwriter 
actually engaged in test-the-waters communications, these estimates are 
considerably higher than the estimates based solely on staff comment 
letters. Conversely, estimates based on staff comment letters 
referencing the actual use of test-the-waters materials may not be 
capturing all instances where testing the waters was conducted. 
Nevertheless, we believe estimates based on staff comment letters 
referencing actual use of test-the-waters materials are more relevant 
for the purposes of this baseline analysis.
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    \169\ 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.
    \170\ Because not all issuers in follow-on offerings receive 
staff comment letters, this estimate applies only to IPOs. We note 
that estimates based on the analysis of issuer responses to staff 
comment letters on IPO registration statements will likely be 
incomplete for purposes of capturing oral test-the-waters 
communications not involving written materials.
    \171\ 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). The studies covered a subset of EGC IPOs.
    \172\ 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 were retrieved from Intelligize and manually classified. 
Missing or ambiguous responses were supplemented with staff analysis 
of cover letters submitted by issuers in response to staff reviews 
of registration statements, where available.
    \173\ See CHM Study, at 820 (Table 6). The statistic is based on 
313 EGC IPOs conducted between April 2012 and April 2015.
    \174\ See DFG Study, at 136 (Table 8). The statistic is based on 
155 EGC IPOs conducted between April 2012 and March 2014.
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    The practice of testing the waters is voluntary. Various commenters 
stated that testing the waters has proven to be a valuable tool for 
EGCs.\175\ Evidence suggests that the provision has been used more 
often by EGCs facing uncertainty about potential investor demand for 
their securities offering, which may find testing the waters to be more 
valuable.\176\ 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.\177\
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    \175\ See, e.g., letter from CCMC (stating that ``[t]he ability 
to test the waters is frequently relied upon by EGCs, and that the 
practice has served to encourage many companies considering an IPO 
to continue along that that [sic] course''); Cleary (stating that 
``[e]xperience with EGC issuers has proven the Section 5(d) 
accommodation to be a valuable tool in securities offerings, 
particularly in the IPO context''); letter from Davis Polk (stating 
that ``[p]re-marketing an offering on a confidential basis to a 
handful of investors prior to making a final decision to launch has 
become a common and useful marketing tool for registered offerings 
for EGCs, and we believe the clear ability to engage in these sorts 
of investor communications is one of the most beneficial innovations 
of the JOBS Act of 2012''); and letter from Nasdaq (stating that 
``Nasdaq frequently hears from our listed companies on issues 
relating to the capital markets, and based on this feedback, we 
believe the current `test the waters' accommodation for EGCs has 
been a resounding success'').
    \176\ 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 171.
    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 (stating, for example, that ``issuers 
that disclose less information are those that are more likely to 
have higher proprietary information costs and characteristics that 
may make them difficult 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.
    \177\ See studies discussed in note 176 supra. See also letter 
from CCMC (stating that ``[a]mong EGCs, use of test-the-waters 
communications during the IPO is not uniform, and varies 
considerably by industry. Industries that most frequently use the 
accommodation are those that desire to explain complex issues about 
their business models to investors. These include life sciences and 
biotechnology, telecommunications, and other technology-intensive 
businesses.'').
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    We are not aware of significant investor protection concerns that 
have arisen to date based on test-the-waters communications by EGCs. We 
lack data to perform a comprehensive retrospective analysis of the 
content of EGC test-the-waters communications for three reasons: (i) 
Such communications are frequently in oral format and thus data on 
their content is not available; (ii) where written test-the-waters 
materials are submitted by the filer in response to a comment from 
staff reviewing the registration statement, upon filer request those 
materials generally are returned to the filer or destroyed after the 
registration statement review is completed; and (iii) we do not have 
data on issuers that engaged in test-the-waters communications but have 
elected not to proceed with a contemplated registered offering after 
testing the waters.
2. Affected Parties
    We anticipate that the final rule will affect issuers, investors, 
and intermediaries.
i. Issuers
    The final rule will affect issuers that are contemplating 
registered securities offerings. While the final rule will be available 
to all issuers, including EGCs, it will particularly affect non-EGC 
issuers that are not allowed to test the waters under Section 5(d). EGC 
issuers will remain eligible to rely on Section 5(d). The final rule 
will directly affect EGC issuers to the extent that such issuers rely 
on the final rule. Issuers that do not rely on the final rule may also 
be indirectly affected to the extent that they compete with issuers 
that rely on the final rule for investor capital or in the product 
market.
    We estimate that there were approximately 1,931 EGCs and 7,551 non-
EGCs that filed Securities Act registration statements or periodic 
reports during 2018,\178\ excluding ABS issuers and registered 
investment companies. We estimate that in 2018 there were approximately 
1,852 ABS issuers \179\ and approximately 12,990 registered investment 
companies,\180\

[[Page 53025]]

which were ineligible for EGC status. 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.\181\
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    \178\ 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 2018, as well as any BDCs 
included in the SEC's July 2018 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 2018 based on Ives Group's Audit Analytics data. We 
include filers of periodic reports because the final rule is 
available to seasoned issuers that have already become reporting 
companies.
    \179\ The estimate is based on the number of unique CIKs with 
ABS-related filings during calendar year 2018 (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.
    \180\ We estimate that there were 9,599 mutual fund series 
(including funds of funds); 1,978 exchange-traded funds (``ETFs''); 
692 registered closed-end funds; five variable annuity separate 
accounts registered as management investment companies on Form N-3; 
670 variable annuity separate accounts registered as UITs on Form N-
4 and Form N-6; and 46 non-insurance UITs registered on Form S-6. 
Taking into account the 4,917 non-insurance UIT series registered on 
Form S-6 yields an estimate of approximately 17,861 registered 
investment company issuers. These estimates are based on data from 
2019 ICI Factbook, Bloomberg, and staff analysis of EDGAR filings. 
These estimates include funds of funds and are not limited to 
registered investment companies that filed annual reports.
    \181\ Based on Ives Group's Audit Analytics data, during the 
period from April 5, 2012 through December 31, 2018, EGC issuers 
accounted for approximately 1,267 out of 1,440, or approximately 
88%, of priced exchange-listed IPOs (excluding deals identified as 
mergers, spin-offs, or fund offerings).
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    The final 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, we recognize that there are differences 
between a typical EGC and 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.\182\ Further, non-EGC 
issuers include older companies that first issued common equity 
pursuant to a Securities Act registration statement before December 8, 
2011,\183\ 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.\184\
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    \182\ For example, one study comparing a subset of exchange-
listed EGC IPOs to exchange-listed non-EGC IPOs 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).
    \183\ 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.
    \184\ See id.
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ii. Investors
    The final rule will affect 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 QIB and IAI investors.
    We lack information necessary to estimate the aggregate number of 
QIBs and IAIs that will be solicited in connection with registered 
offerings under the final 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 final rule because 
disclosure of investor status across all such investors is not 
required, and we lack comprehensive data that, in particular, covers 
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 2018, 6,501 unique 
filers filed Form 13F on behalf of 6,739 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),\185\ 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. In 
addition, 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 will allow us to estimate 
the unique number of investors across all categories of IAIs under Rule 
501.\186\
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    \185\ 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.
    \186\ 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 the final rule, as discussed in Section IV.C below. For 
example, the final 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 will 
benefit existing investors in these issuers. Furthermore, the final 
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 economic effects. 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).\187\
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    \187\ 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. This is 
a triennial survey, and the latest data available as of this time is 
from the 2016 survey. The test-the-waters provision of the final 
rule could be used irrespective of security type, so the overall set 
of potentially indirectly affected investors is likely to be larger.
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iii. Intermediaries
    Similar to Section 5(d), Rule 163B will 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.\188\ Thus, the final rule will potentially 
affect such underwriters or other third parties engaged in a similar 
role.
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    \188\ See supra notes 173-174 and accompanying text.
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    We estimate that there were approximately 975 registered broker-
dealers that reported being underwriters or selling group participants 
for

[[Page 53026]]

corporate securities in 2018.\189\ 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 283 
registered broker-dealers reported being mutual fund underwriters or 
sponsors in 2018 (of which approximately a quarter also reported being 
underwriters for corporate securities).\190\ 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 
1,850 investment advisers to registered investment companies and 
approximately 119 investment advisers to BDCs.\191\ For the reasons 
noted above, we do not have data to predict how many of these fund 
intermediaries will 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 final rule.
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    \189\ This estimate is based on Form BD filings as of December 
2018.
    \190\ See 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.
    \191\ These estimates are based on Form ADV data as of December 
2018, for filings received through March 31, 2019.
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C. Anticipated Economic Effects

    Below we evaluate the anticipated costs and benefits of the final 
rule and the anticipated effects of the final rule on efficiency, 
competition, and capital formation.
1. Potential Benefits to Issuers and Intermediaries
    Expanding the availability of test-the-waters communications could 
facilitate a more efficient and effective process for raising capital 
in a registered offering (involving, potentially, a lower risk of 
withdrawal, a lower cost of capital raising, and/or a higher amount of 
capital raised). Specifically, testing the waters could help issuers to 
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.\192\ Because the use of the final rule is voluntary, issuers 
that expect to derive the greatest benefits are the most likely to rely 
on it.
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    \192\ See, e.g., letter from L. Ameri (stating that testing the 
waters ``allowed EGCs to assess market demand and valuation and 
determine what elements of their business were important to 
investors''); ASA (stating ``this will ultimately help more 
companies complete a successful IPO''); letter from CCMC (stating 
that ``[t]his approach is also endorsed by the Treasury Department, 
which in its own recent report on improving the U.S. financial 
system noted that testing the waters gives companies `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.' ''); letter from Cleary (stating that 
``[e]xperience with EGC issuers has proven the Section 5(d) 
accommodation to be a valuable tool in securities offerings, 
particularly in the IPO context, and that experience does not 
suggest any reason to hesitate in extending the same accommodation 
to other issuers''); letter from Cravath (stating that testing the 
waters will give issuers ``the same cost-effective means currently 
enjoyed by EGCs for evaluating market interest before incurring the 
costs associated with a potential public offering'' and identifying 
the following reasons for companies to engage in testing-the-waters 
communications: ``(1) to better gauge the demand for and valuation 
of their securities; (2) to settle on offering terms and size to 
align with market interest; (3) to reduce the risk of having to 
withdraw a publicly filed registration statement, thus mitigating 
potential reputational damage; (4) to decrease the risk of public 
disclosure of sensitive or proprietary information to competitors if 
the issuer decides not to proceed with a public filing of a 
registration statement due to insufficient investor interest or 
adverse market conditions; and (5) to save some or all of the cost 
of preparing and publicly filing a registration statement in the 
event of disappointing investor feedback.''); letter from Davis Polk 
(stating that the proposed rule ``would allow companies to gauge 
investor interest in a registered offering prior to committing 
significant resources to prepare for one''); letter from Hamilton 
(stating that ``[t]he issuer will be able to form an idea about the 
level of the potential investors' interest, which will help it avoid 
a failed offering''); letter from Nasdaq (stating that ``the 
proposal would benefit issuers by enabling more of them to discuss 
IPO plans privately with potential investors in advance of 
announcing an IPO''); letter from M. Stuchlik (stating that testing 
the waters will ``refine the valuation process for businesses''); 
letter from Sullivan (stating that ``the Proposed Rule would 
significantly improve the capital-raising process for non-EGC 
issuers, allowing them to gauge institutional investor interest 
before a potential registered offering, saving time and costs as 
issuers would be able to focus on offerings that are more likely to 
attract investor demand'').
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    We expect the greatest benefit of testing the waters to be realized 
by issuers that solicit investors before a 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 a public filing may also benefit some 
issuers.\193\ Specifically, the option to test the waters can benefit 
the issuers affected by the final rule in several ways:
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    \193\ In the context of Regulation A, the Commission determined 
that issuers may benefit from broad flexibility to test the waters 
both before and after a 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 
Amendments to Regulation A, Release No. 33-9741 (Mar. 25, 2015) [80 
FR 21805 (Apr. 20, 2015)], 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 premature public disclosure of sensitive or proprietary 
information about the issuer to competitors (to the extent that the 
communications are not subject to Regulation FD).\194\
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    \194\ Several factors may serve to limit this benefit for some 
issuers. First, communications under the final rule could be subject 
to Regulation FD. See supra note 20 and accompanying text.
    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.
---------------------------------------------------------------------------

     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

[[Page 53027]]

market interest in the offering and having to withdraw the offering, 
thus reducing potential reputational costs associated with a failed 
offering.
     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.\195\
---------------------------------------------------------------------------

    \195\ By enabling issuers to better gauge investor demand before 
setting initial offer prices, testing the waters may allow issuers 
to better determine the lowest offer price at which they can raise 
the required amount of capital, thus potentially enabling issuers to 
decrease the risk of a failed offering, raise more capital, and/or 
lower the cost of capital. It is difficult to assess the extent to 
which test-the-waters communications after the initial filing would 
incrementally 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.
---------------------------------------------------------------------------

    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 will especially benefit 
issuers with high proprietary disclosure costs.'' \196\ 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.'' \197\
---------------------------------------------------------------------------

    \196\ See DFG Study, at 122.
    \197\ See id., 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 will be limited because communications are only permitted with 
QIBs and IAIs and because 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 IV.C.5 below, such benefits may be limited for most funds.
    To the extent that the final 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 as a result of additional issuers conducting 
registered securities offerings,\198\ particularly for non-EGC issuers 
that are ineligible for the test-the-waters provision of Section 5(d). 
In evaluating the potential benefits of expanded test-the-waters 
communications under the final rule for capital formation, we 
acknowledge that the issuers affected by the final rule already have 
the flexibility to solicit the same general 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 final rule might enable issuers to adopt the most efficient 
and lowest-cost capital raising strategy. Further, if the final rule 
encourages additional issuers to conduct a registered securities 
offering, issuers may benefit from greater secondary market 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 final rule also may benefit from the greater ease of raising 
follow-on financing through future registered offerings.
---------------------------------------------------------------------------

    \198\ See also supra notes 158-160 and accompanying text.
---------------------------------------------------------------------------

    The final rule requires that the solicited investor is, or that the 
issuer reasonably believes the investor to be, a QIB or IAI. The 
reasonable belief standard is expected to provide issuers with the 
flexibility to use methods that are cost-effective to identify eligible 
investors but appropriate in light of the facts and circumstances of 
each contemplated offering and each potential investor. This approach 
also helps issuers to reduce the risk of a violation of Section 5 due 
to inadvertent solicitation of an investor that is not a QIB or IAI. 
Therefore, we believe this approach will encourage more issuers to rely 
on the final rule, thereby enhancing the aggregate economic benefits of 
the rule. Various commenters expressed support for the reasonable 
belief standard.\199\
---------------------------------------------------------------------------

    \199\ See infra note 217. But see letter from Better Markets 
(opposing the reasonable belief standard).
---------------------------------------------------------------------------

    Underwriters in offerings involving test-the-waters communications 
under Rule 163B may indirectly benefit as a result of the decreased 
risk of conducting a public offering. A track record of successful 
offerings strengthens an underwriter's reputation in the marketplace. 
Conversely, an offering that is initiated but subsequently withdrawn 
due to a lack of market interest may adversely affect an underwriter's 
reputation. To the extent that test-the-waters communications reduce 
the risk of such offerings, underwriters may benefit from a decrease in 
the reputational costs and risks associated with failed offerings.
2. Potential Costs to Issuers and Intermediaries
    Because the use of test-the-waters communications will remain 
voluntary under the final rule, we anticipate that issuers will elect 
to rely on test-the-waters communications only if the benefits 
anticipated by issuers outweigh the expected costs to issuers. Issuers 
that elect to test the waters under the final rule might incur costs, 
including costs of identifying QIBs and IAIs (and, for issuers 
soliciting investors they reasonably believe to be QIBs or IAIs, the 
costs of establishing such reasonable belief \200\); costs associated 
with 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.\201\ 
Further, issuers subject to Regulation FD, may incur costs associated 
with ensuring communications made pursuant to the final rule comply 
with such requirements or an exemption thereof.\202\ We note that 
issuers that proceed with a registered offering without testing the 
waters similarly incur costs of searching and soliciting investors 
(frequently, institutions), either on their own or through an 
intermediary, as well as direct and indirect costs of disclosure of

[[Page 53028]]

information once they publicly file the registration statement.
---------------------------------------------------------------------------

    \200\ As discussed above, with respect to QIBs and IAIs, we 
expect that it would be efficient for issuers, depending on the 
facts and circumstances of an offering, to continue to rely on the 
existing methods of establishing such a reasonable belief that have 
emerged in prevailing market practices associated with Rule 144A and 
Rule 506 offerings, which might mitigate such costs.
    \201\ In addition, similar to Section 5(d), the final rule does 
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 will 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)].
    \202\ The application of Regulation FD to Rule 163B 
communications was generally supported by commenters. See, e.g., 
letters from Cravath, Davis Polk, and SIFMA. But see letter from CRT 
(stating that it ``believes test-the-waters flexibility or 
specifically market soundings prior to a new credit issue should 
have reasonable exceptions to Regulation FD for some communications 
such as open ended dialogues on investor and issuer needs and 
wants'').
---------------------------------------------------------------------------

    As discussed above, the final rule will benefit those non-EGC 
issuers that are comparable to EGC issuers or that face similar 
challenges in gauging investor demand for a public offering and that 
might find test-the-waters communications to be of value.\203\ In turn, 
to the extent that EGCs compete with non-EGCs for investor capital, as 
well as in the product market, the incremental benefits that accrue to 
non-EGCs under the final rule might lead to an adverse competitive 
effect on comparable EGCs.
---------------------------------------------------------------------------

    \203\ See, e.g., letters from Cravath (describing ``proposed 
Rule 163B as a commendable effort to level the playing field for 
EGCs and other issuers contemplating a registered securities 
offering''); Davis Polk (stating that ``[c]urrently, non-EGCs cannot 
take advantage of this expanded [testing-the-waters] process unless 
they have publicly filed a registration statement or already have a 
shelf registration statement on file. We do not see any reason to 
treat non-EGCs differently. . . . Proposed rule 163B will simply 
level the capital-raising playing field for all companies.''); 
Nasdaq (stating that ``[i]n addition to facilitating IPOs, the 
proposal also will facilitate secondary offerings by companies that 
have already gone public. The SEC rules currently allow `well-known 
seasoned issuers' (WKSIs) to engage in `test the waters' 
communications for secondary offerings, subject to certain legending 
and filing requirements. In addition, EGCs retain their ability to 
engage in `test the waters' communications following their IPO, 
provided they continue to qualify as an EGC. However, public 
companies that fall in between these two categories cannot do so and 
are put at an unnecessary disadvantage. Leveling the playing field 
for these companies will enhance their ability to access the public 
markets for secondary offerings and therefore to continue to 
grow.''); Sullivan (stating that ``[a]dopting the Proposed Rule 
would level the playing field by allowing every issuer, whether or 
not it is an EGC or WKSI, to engage in wall-crossing activities even 
when it does not have a registration statement on file''). See also, 
generally, supra note 157.
---------------------------------------------------------------------------

    In cases where issuers authorize intermediaries to engage in test-
the-waters communications on their behalf under Rule 163B in connection 
with a contemplated registered securities offering, to the extent that 
intermediaries incur costs associated with testing the waters and 
meeting the requirements of Rule 163B, we anticipate that 
intermediaries generally will pass through such costs to issuers, along 
with other offering expenses.
3. Potential Benefits to Investors
    To the extent that the final rule encourages additional issuers to 
conduct a registered securities offering, a broader set of investors 
might allocate capital more efficiently among issued securities. These 
efficiency benefits are more likely to accrue to non-accredited 
investors, whose investments are more reliant on public markets due to 
their limited ability to invest 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 final 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 will not be restricted 
and such securities are more likely to have a secondary market). If 
additional issuers consider registered offerings, investors also will 
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 final 
rule also could benefit existing shareholders of affected issuers.
    Test-the-waters communications might in some circumstances offer 
some solicited investors the potential benefit of additional time to 
evaluate, understand, and ask questions about potential future 
investment opportunities before a registration statement is publicly 
filed. In some cases, the additional lead time before a potential 
offering might provide some solicited investors with small incremental 
informational benefits in the form of better informed decisions about 
future investments in the related offering and allocation of capital 
across issuers and sectors.
    However, the incremental value, if any, of the early arrival of 
such information about any individual contemplated offering at the 
test-the-waters stage is likely small, for several reasons: (i) It is 
difficult for solicited investors to take advantage of the early 
arrival of test-the-waters information because no investor commitments 
can be made at that stage; (ii) even if solicited investors view the 
potential offering as an attractive investment opportunity on the basis 
of test-the-waters communications, the information is highly 
preliminary in nature and offering terms may change after testing the 
waters; (iii) 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, which further attenuates the 
incremental value of the information conveyed to solicited investors 
through test-the-waters communications; (iv) to the extent that under 
the baseline potential issuers newly eligible for testing the waters 
under the final rule would have otherwise provided similar information 
to the same institutional investors in the course of seeking private 
financing, such potential informational benefits could be reduced; (v) 
potential informational benefits to solicited investors likely would be 
even smaller for issuers in follow-on offerings, as such issuers will 
have provided disclosures in an IPO registration statement and 
subsequent Exchange Act reports; and (vi) communications made pursuant 
to the final rule may be subject to Regulation FD (to the extent that 
an issuer is not exempt from Regulation FD and is not eligible for an 
exception) and thus may be required to be publicly filed, which would 
make the information available to all investors.
4. Potential Costs to Investors
    Selective solicitation of QIBs and IAIs may result in the solicited 
institutional investors potentially having a competitive advantage 
relative to investors that are not solicited. This competitive 
advantage may stem from early access to preliminary information about 
contemplated registered offerings, which might potentially place some 
investors that are not solicited at a relative competitive 
disadvantage.\204\ This potential effect is likely to be mitigated by 
several factors, including:
---------------------------------------------------------------------------

    \204\ See also letter from Better Markets (stating that 
``permitting issuers (and persons authorized to act on their behalf, 
including underwriters) to communicate with QIBs and IAIs of their 
choosing would increase the problem of information asymmetry between 
investors who are `in the know' and investors who learn about the 
existence and characteristics of a securities offering only once it 
is made public through the ordinary filing of a registration 
statement. This risks de-leveling the playing field and giving 
further advantage to some sophisticated investors, who are able to 
afford underwriters and other intermediaries who are more connected 
to existing or prospective issuers, over other investors, who are 
otherwise qualified (e.g., smaller pension funds or asset managers) 
that do not have similar connections. The problem of information 
asymmetry becomes more pronounced the more beneficial and 
informative the [testing-the-waters] communications become.'').
---------------------------------------------------------------------------

     The inability of solicited investors to invest in the 
contemplated offering at the test-the-waters stage;
     The likely preliminary nature of the information conveyed 
during testing the waters;
     The access of all investors to registration statement 
disclosures if the issuer proceeds with an offering; and
     Regulation FD, which would require the public disclosure 
of material nonpublic information, making it available to all 
investors, in certain circumstances (to the extent applicable to the 
issuer conducting test-the-waters communications).

Furthermore, to the extent that offering terms for issuers that proceed 
with an

[[Page 53029]]

offering are informed by testing the waters, investors who were not 
solicited may benefit from being able to invest at a price that 
reflects information gathered during testing the waters, which should 
further mitigate any disadvantage to investors who were not solicited.
    Solicited investors may also potentially derive competitive 
advantages from the ability to provide feedback to the issuer at the 
early stages of the offering process and thereby potentially exert some 
influence over future offering terms, should the issuer proceed with an 
offering. However, in assessing this potential effect of the final rule 
relative to the baseline, we recognize that, aside from test-the-waters 
communications (whether under Section 5(d) or under the final rule), 
disparities in investor access to the issuer and the ability to exert 
influence over the offering process routinely emerge under the 
baseline. For instance, issuers (and intermediaries, if applicable) 
also commonly solicit a select subset of eligible investors in the 
course of the bookbuilding process for IPOs, in confidentially marketed 
follow-on offerings, and in private placements.
    Further, in assessing the potential costs of the final rule to 
investors due to disparate access to issuers contemplating registered 
securities offerings and information about such offerings, relative to 
the baseline, we recognize that, in the absence of the final rule, 
disparities in investor access to issuers and information about 
contemplated registered offerings already exist for EGC issuers, which 
account for a considerable share of issuers in IPOs.\205\
---------------------------------------------------------------------------

    \205\ See supra note 181.
---------------------------------------------------------------------------

    Some solicited investors might potentially use the information from 
test-the-waters communications to realize trading profits at a cost to 
investors that were not solicited. Such trading may, for instance, 
involve issuers with a traded class of securities that test the waters 
in conjunction with a follow-on offering; peers or competitors (with a 
traded class of securities) of issuers engaging in test-the-waters 
communications; or, in some limited instances of issuers contemplating 
an IPO whose unregistered securities have a secondary trading market, 
private securities of those issuers.\206\ 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 IV.A above.
---------------------------------------------------------------------------

    \206\ In recent years, markets have developed that facilitate 
the resale of securities of non-reporting companies. See Concept 
Release on Harmonization of Securities Offering Exemptions, Release 
No. 33-10649 (Jun. 18, 2019) [84 FR 30460 (Jun. 26, 2019)] 
(``Harmonization Concept Release''), at n. 34. See also David F. 
Larcker, Brian Tayan, and Edward Watts, Cashing it in: Private-
Company Exchanges and Employee Stock Sales Prior to IPO, Stanford 
Closer Look Series (Sep. 12, 2018) (``The pre-IPO marketplace has 
traditionally been dominated by networks of venture-capital firms, 
private placement agents, brokers, and banks. These markets have 
historically been fragmented and opaque, severely limiting access 
and transparency for potential investors. In the response to the 
trend of companies staying private longer, a number of secondary 
private-company marketplaces have evolved to facilitate transactions 
between employees or early stage investors wishing to liquidate a 
portion of their holdings and qualified buyers. Buyers generally 
include wealthy individuals, venture-capital firms, hedge funds, 
private equity firms, and institutional investors.'').
---------------------------------------------------------------------------

    In light of the factors discussed above, we do not anticipate the 
final rule to have a significant adverse competitive impact on 
investors that are not solicited under the final rule.
    The 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 rely on test-the-waters communications 
rather than the filed offering materials in their investment decisions. 
We expect that any such potential adverse effects on solicited 
investors would be alleviated by the following factors:
     Because test-the-waters communications represent an offer 
of securities, although they will not be subject to liability under 
Section 11 of the Securities Act, they will 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.\207\ In 
addition, the associated risk of private securities litigation may 
further reduce incentives to engage in misleading test-the-waters 
communications.
---------------------------------------------------------------------------

    \207\ Some states also may impose blue-sky restrictions on pre-
offering communications related to non-exchange-listed securities 
offerings.
---------------------------------------------------------------------------

     Reputational concerns of underwriters and/or issuers that 
may expect to participate in future offerings with the same 
institutional investors may reduce the incentives to engage in 
misleading test-the-waters communications with these investors.
     The issuer will 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 solicited QIB or IAI will 
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. 
Moreover, the Commission has reiterated that information provided in 
test-the-waters communications must not contain material misstatements 
or omissions at the time the communication is made.\208\
---------------------------------------------------------------------------

    \208\ See Section II.A.3.
---------------------------------------------------------------------------

     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.
     Test-the-waters communications will be permitted only with 
QIBs and IAIs. Although the level of investor sophistication may vary 
somewhat across such investors,\209\ 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.
---------------------------------------------------------------------------

    \209\ For example, the level of sophistication may be relatively 
higher for the larger institutions, which are likely to have more 
investment and due diligence expertise than relatively smaller QIBs 
and IAIs.
---------------------------------------------------------------------------

     The final rule might be less likely to be relied upon by 
micro-cap firms,\210\ because institutions tend to have smaller stakes 
in such issuers.\211\
---------------------------------------------------------------------------

    \210\ One commenter suggested that, some microcap firms may be 
associated with a higher risk to investors. See infra note 238 
(letter from Better Markets). See also, e.g., Joshua White (2016) 
Outcomes of Investing in OTC Stocks, white paper, https://www.sec.gov/dera/staff-papers/white-papers/16dec16_white_outcomes-of-investing-in-otc-stocks.html; infra note 239 (discussing academic 
studies).
    \211\ 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.

---------------------------------------------------------------------------

[[Page 53030]]

     If an issuer proceeds with an offering, written test-the-
waters materials generally may be subject to staff review.\212\
---------------------------------------------------------------------------

    \212\ Based on a review of staff comment letters issued in 
connection with IPO registration statements of EGCs during 2012-2018 
identified through Intelligize data, comment letters commonly 
request issuers to submit to the staff for review any written test-
the-waters communications made in reliance on Section 5(d). See also 
supra Section II.A.
---------------------------------------------------------------------------

    In evaluating any potential adverse effects of the risk of 
incomplete or misleading test-the-waters communications under the final 
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 than registered offerings. 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 final rule induces some 
issuers to elect a registered offering instead of a private placement, 
the amount of disclosure and the level of investor protection afforded 
to the investors in the issuer's securities will be expected to 
increase relative to the baseline.
    The final rule requires that the solicited investor be a QIB or 
IAI, or that the issuer or person acting on behalf of the issuer 
reasonably believe the investor to be a QIB or IAI. Following the 
regulatory framework for private placements under Rule 506(b) and Rule 
144A, and as proposed, Rule 163B does not require issuers to verify the 
status of solicited investors or prescribe specific steps that issuers 
must take to establish a reasonable belief.\213\ While issuers will not 
be required to verify investor status, the rule limits solicitations to 
QIBs or IAIs, and requires issuers to have a reasonable belief that the 
intended recipients of the test-the-waters communications are QIBs or 
IAIs. As discussed above, the issuer could not, for example, form such 
reasonable belief if it has knowledge that the investor is not a QIB or 
IAI. Further, as discussed above, the Commission has provided guidance 
that issuers may continue to rely on existing means of establishing 
reasonable belief that are used in Rule 506 or Rule 144A offerings. We 
believe that issuers and underwriters might draw on some of the 
existing market practices developed for determining QIB status in Rule 
144A offerings and IAI status in Rule 506 offerings for purposes of 
forming a reasonable belief about the status of investors they solicit 
under the final rule.\214\ We recognize, as stated in the Proposing 
Release, that if the reasonable belief provision results in the 
solicitation of some investors that are not QIBs or IAIs, this may in 
some instances contribute to less informed investment decisions by some 
of those investors, to the extent that (i) such non-QIB/non-IAI 
investors, which may be less sophisticated in their ability to process 
information than QIBs or IAIs, rely on test-the-waters communications 
and not on the registration statement, and (ii) the information in 
test-the-waters communications substantially differs from the 
information in the registration statement.\215\ Although we acknowledge 
that the reasonable belief provision could impact the risk of 
soliciting investors that are not QIBs or IAIs, we lack data that would 
allow a quantification of the incremental impact of this provision, if 
any, on such investors. Based on the qualitative analysis of the risks 
and benefits of the reasonable belief standard, however, we are 
persuaded that the final rule strikes the appropriate balance between 
realizing the intended economic benefits of the rule for issuers and 
providing appropriate investor protections.
---------------------------------------------------------------------------

    \213\ Rule 144A(d) specifies nonexclusive means to establish a 
reasonable belief as to whether a prospective purchaser is a QIB. 
See supra note 103.
    Rule 506(c) contains a requirement to verify investor status 
before sales are made and provides nonexclusive means on which 
issuers may rely to verify accredited investor status (although 
those means pertain to natural persons). As distinct from Rule 
506(c), which conditions sales on verification of investor status, 
the final rule concerns offers. Crucially, nothing in the final rule 
changes the requirement that sales be made only pursuant to an 
effective registration statement, which affords purchasers the 
benefit of registration statement disclosures and the robust set of 
protections of the registration process.
    \214\ See, e.g., letter from Cravath (stating that ``[i]ssuers 
currently rely on various indicia (publicly available financial 
statements of prospective investors, documents filed by them with 
the Commission or other government agencies, or a certification by 
the chief financial officer of such prospective purchaser, among 
others) to establish a reasonable belief regarding an investor's 
status as a QIB or accredited investor, and we think such system 
works reasonably well to ensure appropriate status. Issuers and 
their advisors should be allowed to follow reasonable steps based on 
the particular facts and circumstances of a prospective investor 
without having to abide by inflexible prescribed methods that may be 
unduly costly or time consuming.'') and letter from SIFMA (stating 
that ``[b]roker-dealers participating in Rule 144A offerings have 
experience applying the standard, which is applied in such offerings 
using largely consistent practices'').
    \215\ See also letter from Better Markets.
---------------------------------------------------------------------------

    While one commenter objected to the reasonable belief provision on 
investor protection grounds,\216\ various other commenters expressed 
support for the reasonable belief provision and stated that it is 
consistent with investor protection.\217\ Overall, after evaluating 
commenter input, we continue to believe that the potential costs to 
investor protection from inadvertent solicitation of investors that are 
not QIBs or IAIs but that issuers (or persons authorized to act on 
their behalf) reasonably believe to be QIBs or IAIs will be 
substantially alleviated by the mitigating factors discussed above, in 
particular:
---------------------------------------------------------------------------

    \216\ See id.
    \217\ See letters from CCMC; Cleary (stating that ``we agree 
with the view expressed in the Release that a facts-and-
circumstances approach is sufficient and that an issuer should 
continue to rely on its current methods for developing a reasonable 
belief regarding investor status under Rule 144A and Rule 501(a)''); 
Cravath (stating that ``[u]nlike in the context of Rule 506(d), all 
investors who are targeted with Rule 163B communications and who in 
turn proceed to make an investment in the issuer will ultimately 
have the benefit of a registration statement that has been declared 
effective and would presumably be in compliance with the Securities 
Act and the rules and regulations thereunder''); Davis Polk (stating 
that ``the reasonable-belief standard is sufficient, and that the 
standard for rule 163B needs to be no more burdensome for companies 
and their underwriters than current practice in rule 144A and 
Section 4(a)(2) private placements, in which companies and their 
underwriters refer to their own documentation as well as to 
industry-known reliable sources to check investor qualification. 
after all, unlike with Regulation D offerings, no investors will 
purchase securities in an offering subject to proposed rule 163B 
until they have been furnished with a statutory prospectus.''); 
Hamilton (stating that ``[g]iven that the investors will not 
actually invest until a registration statement has been filed, we 
believe the `reasonable belief' requirement is adequate''); and 
SIFMA (stating that ``[w]e believe the reasonable belief standard 
should be retained as proposed. Market participants are familiar 
with the reasonable belief standard. Existing guidance and practice 
is sufficient for issuers and broker-dealers. We do not believe 
there is widespread misapplication of the standard.'').
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     The requirement to publicly file a registration statement 
for issuers that determine 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;
     The applicability of general anti-fraud provisions and 
liability under Section 12(a)(2) of the Securities Act, as well as the 
risk of private securities litigation;
     The ability of the staff to review test-the-waters 
materials for issuers that proceed with a public offering;

[[Page 53031]]

     The reputational incentives of underwriters and issuers; 
and
     For issuers in follow-on offerings, the availability of 
past registration statements and Exchange Act filings that provide 
additional disclosures about the issuer and can aid solicited investors 
in the interpretation and verification of information in test-the-
waters communications.
    After considering the available market and academic evidence, as 
well as commenter feedback, we do not see a basis to conclude that the 
final rule will result in significantly increased risk of investor 
harm, relative to the baseline, as a result of inadvertent solicitation 
of investors that are not QIBs or IAIs.
5. Variation in Economic Impact Due to Issuer Characteristics
    The described economic effects of the final rule are expected to 
vary as a function of issuer and offering characteristics and 
investors' ability to process information.\218\ The incremental 
benefits of the final rule are expected to be generally smaller for 
large \219\ 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 \220\ with an established 
track record of capital raising. Issuers whose communications with 
investors may be subject to Regulation FD might also be less likely to 
utilize, and benefit from, the final rule.\221\ In addition, issuers 
with low costs of proprietary disclosure (e.g., low research and 
development intensity and limited reliance on proprietary technology) 
may be less likely to utilize, and benefit from, the final 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 other 
investors that are not QIBs or IAIs, including many registered 
investment companies,\222\ might realize relatively smaller benefits 
from the final rule. Further, issuers relying upon other rules that 
permit offering-related communications may be less likely to benefit 
from the final rule.\223\
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    \218\ However, one commenter stated that the size or reporting 
status of an issuer is not generally correlated with its desire to 
gauge investor interest prior to a registered public offering. See 
letter from Sullivan.
    \219\ 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. See letter from 
CCMC (stating that ``[b]ecause larger, more-diversified companies 
often have more complicated business models that require additional 
explanation relative to smaller ones, we believe non-EGCs would find 
testing the waters attractive''). See also supra note 171.
    \220\ But see letter from Nasdaq (stating that ``[i]n addition 
to facilitating IPOs, the proposal also will facilitate secondary 
offerings by companies that have already gone public'').
    \221\ See supra note 20. But see letter from Davis Polk (stating 
that ``[i]f the proposed offering or its abandonment were itself 
material to investors of an already-public company, the company 
could easily comply with Regulation FD the same way companies do 
today, benefitting all investors equally. The company would have to 
obtain confidentiality undertakings and restrict the contacted 
investors from trading in the company's securities for a day or two, 
until the contemplated offering is publicly launched or abandoned. 
This process ensures that investors are protected and the timing of 
material information disclosure remains fair for all investors.''), 
and letter from SIFMA (stating that ``Regulation FD currently 
provides sufficient flexibility to allow issuers to engage in 
meaningful communications with investors'').
    \222\ See infra note 227.
    \223\ See supra Section II.D. For example, WKSIs may elect to 
rely on Rule 163. We estimate that there were approximately 3,621 
WKSIs that filed Securities Act registration statements or Exchange 
Act periodic reports in 2018, based on the analysis of filings of 
automatic shelf registration statements and XBRL data in periodic 
reports during calendar year 2018. See also Securities Offering 
Reform for Closed-End Investment Companies, Release No. 33-10619 
(Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)] (proposing to expand 
the availability of Rule 163 to BDCs and registered closed-end 
funds).
---------------------------------------------------------------------------

    In contrast, other types of issuers might realize relatively 
greater benefits from expanded testing the waters under the final rule. 
Because Rule 163B mitigates the risk of competitors learning 
potentially valuable proprietary information about the issuer's 
financing needs, business, products, and research and development, it 
is expected to particularly benefit issuers with high costs of 
proprietary disclosure (e.g., issuers in research and development-
intensive industries, such as life sciences and technology). In 
addition, issuers not subject to Regulation FD are more likely to 
utilize, and benefit from, the final rule.\224\ 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 final 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. These 
uncertainties are particularly present for: IPO issuers; issuers with 
high information asymmetries or a lesser degree of investor recognition 
(e.g., small issuers, issuers with limited operating history, foreign 
issuers); and issuers of securities with high information sensitivity 
(e.g., equity, convertible debt, speculative-grade straight debt) or 
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 with 
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.\225\ 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 under the final rule.\226\
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    \224\ See supra note 21.
    \225\ In 1995 the Commission proposed to expand permissible pre-
IPO solicitations of interest for most issuers, subject to certain 
conditions. 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''). While this proposal was never 
adopted, it would have excluded certain specified categories of 
issuers, particularly blank check and penny stock issuers ``because 
of the substantial abuses that have arisen in such offerings.'' 
However, the proposal did not impose restrictions on investors to 
whom test-the-waters communications may be directed. In contrast, 
the final rule discussed in this release is limited to QIBs and 
IAIs, which are expected to have a high level of sophistication in 
processing investment information.
    \226\ However, certain characteristics of such issuers (e.g., 
size, exchange listing approval, more established track record, and 
low information asymmetry) that attract institutional investors may 
reduce the value of testing the waters.
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    The final rule will 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 
final 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 will likely be limited for funds.\227\ Further, as

[[Page 53032]]

discussed in Section II.E above, with respect to registered investment 
companies, 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. If these funds continue to file a single registration 
statement under both Acts, as one commenter suggested they would, they 
will be less likely to benefit from the option to conduct test-the-
waters communications prior to a public registration filing.\228\ Since 
a BDC is not required to register under the Investment Company Act, it 
may be more likely to benefit from the final rule with respect to pre-
filing communications. However, like registered investment companies, 
many BDCs have relatively high levels of retail investor ownership, 
which may reduce the likelihood that these BDCs will engage in and 
benefit from these pre-filing communications under Rule 163B.\229\
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    \227\ The vast majority (89%) of mutual fund shares are 
estimated to be held through retail accounts. See 2019 ICI Factbook. 
Based on staff analysis of Form 13F data, the mean institutional 
holding is estimated to be approximately 48% for exchange-traded 
funds and 23% for registered closed-end funds. Therefore, among 
registered investment companies, mutual funds may be least likely to 
rely on the final 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 29%, so the benefits of the 
final rule may be similarly limited for some BDCs. We calculated 
``institutional holding'' as the sum of shares held by institutions 
(as reported on Form 13F filings) divided by shares outstanding (as 
reported in CRSP). Year-end 2018 Form 13F filings were used to 
estimate institutional ownership. Closed-end funds were matched to 
reported holdings based on CUSIP. As a caveat, we note that there 
are long-standing questions around the reliability of data obtained 
from Form 13F filings. See Covered Investment Fund Research Reports, 
Release No. 33-10580 (Nov. 30, 2018) [83 FR 64180, 64199 (Dec. 13, 
2018), n. 223].
    \228\ See letter from ICI. 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.
    \229\ See supra note 227.
---------------------------------------------------------------------------

    Some funds that preliminarily engage in exempt offerings, including 
certain registered closed-end funds and BDCs, could rely on the final 
rule to engage in pre-filing communications if they are considering a 
subsequent registered offering. In addition, funds could realize 
benefits from relying on Rule 163B for post-filing communications. The 
final rule will 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. We recognize, however, that funds may choose to 
rely on other available communications rules to engage in post-filing 
communications instead of Rule 163B. If funds continue to rely on these 
other rules, funds' cost savings associated with Rule 163B for post-
filing communications likely will not be significant.\230\
---------------------------------------------------------------------------

    \230\ See letter from ICI (expressing doubt that funds would 
rely on proposed Rule 163B for post-filing communications since they 
are already familiar with other communications rules and stating 
that the proposed rule would likely provide only minimal cost 
savings for funds over existing rules).
---------------------------------------------------------------------------

6. Variation in Economic Impact Due to Investor Characteristics
    The composition of QIBs and IAIs solicited in conjunction with an 
issuer's contemplated registered offering also might affect the 
economic impact of the final 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 final rule, those QIBs and IAIs that 
mainly invest in the securities of such issuers may be less affected by 
the final rule.
    As a general consideration, the provisions of 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.

D. Reasonable Alternatives

    We evaluate reasonable alternatives to the final rule and their 
anticipated economic effects below. The final rule will provide the 
option to engage in test-the-waters communications to all issuers. The 
conditions of Rule 163B will be generally similar to the requirements 
presently applicable to EGC issuers under Section 5(d). As an 
alternative, we could apply substantially different requirements to 
test-the-waters communications under Rule 163B. Compared to the final 
rule, applying less extensive (more extensive) requirements to test-
the-waters communications under the final 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 final rule. Further, compared to the final rule, applying 
more extensive requirements to test-the-waters communications under 
Rule 163B could reduce the benefit of the final rule for non-EGC 
issuers that are comparable to EGC issuers or that face similar 
challenges in gauging investor demand for a public offering but that 
remain ineligible to test the waters under Section 5(d). The effects 
specific to individual reasonable alternatives are discussed in greater 
detail below.
    The final rule will permit all issuers to test the waters, which 
was generally supported by commenters.\231\ As an alternative, the 
final rule could exclude certain categories of issuers,\232\ such as 
blank check issuers,\233\ penny stock

[[Page 53033]]

issuers,\234\ ABS issuers,\235\ foreign issuers,\236\ or all or some 
registered investment companies.\237\ If, as one commenter 
suggested,\238\ some solicited investors make less informed decisions 
as a result of test-the-waters communications by these categories of 
issuers,\239\ the alternative of excluding these categories of issuers 
might potentially result in more efficient investor decisions compared 
to the final rule. However, we expect several factors to mitigate this 
concern: the availability prior to investing of the registration 
statement to the solicited investors in addition to any test-the-waters 
communications, should the issuer proceed with an offering; the 
generally high level of sophistication of QIBs and IAIs in processing 
information; and the other mitigating factors discussed in Section 
IV.C.4 above.\240\ To the extent that these categories of issuers would 
have elected to test the waters under the final rule, this alternative 
would not allow such issuers to realize the benefits of the final rule 
(e.g., potentially more efficient and lower cost of capital raising), 
particularly non-EGC issuers ineligible under Section 5(d).\241\ To the 
extent that some of these issuers may be less likely to rely on Rule 
163B as discussed in Section IV.C.5 above, the effects of excluding 
them from Rule 163B would be more limited.
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    \231\ See, e.g., letters from CCMC, B. Clark, Cravath, ICI, 
Nasdaq, and Sullivan.
    \232\ In the 1995 Proposing Release, 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 Proposing Release would have allowed testing the 
waters with all investors, not just QIBs and 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.
    \233\ We estimate that 228 issuers, other than ABS issuers or 
registered investment companies, 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 2018, were blank check issuers based on Ives Group's 
Audit Analytics and OTC Markets data as of December 2018 and XBRL 
data in filings made during calendar year 2018. Based on Ives 
Group's Audit Analytics data as of December 2018, among those, 
approximately 79% were EGCs. Blank check issuer status was 
determined based on having SIC code 6770.
    \234\ We estimate that 1,314 issuers, other than ABS issuers or 
registered investment companies, 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 2018 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 December 2018. Including both OTC-quoted and exchange-listed 
securities, we estimate that 2,187 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 2018 had at least one class of shares (on 
the OTC Market or a national securities exchange) with a closing 
price below $5 based on OTC Markets or Ives Group's Audit Analytics 
data as of December 2018. Based on Ives Group's Audit Analytics data 
as of December 2018, among those, approximately 30% were EGCs.
    \235\ See supra note 179.
    \236\ We estimate that 1,115 issuers, other than ABS issuers or 
registered investment companies, filed annual reports on Form 20-F 
or 40-F or registration statements on Form F-1, F-3, F-4, or F-10, 
or amendment to it, during calendar year 2018. Based on Ives Group's 
Audit Analytics data as of December 2018, among those, approximately 
24% were EGCs.
    \237\ See supra note 180 and supra Section II.E.
    \238\ See letter from Better Markets (expressing concern 
regarding the reasonable belief standard and stating that there 
might be particular risks with permitting ``blank check, penny stock 
issuers, asset-backed securitizers, leveraged business development 
companies, and certain investment companies'' to engage in Rule 163B 
communications).
    \239\ See also supra note 225. We note, however, that concerns 
raised in some studies about risks involving some microcap firms 
significantly predate the availability of testing the waters or are 
not focused on solicitations targeted at QIBs and IAIs. See, e.g., 
Kevin C. Bartels, Click Here to Buy the Next Microsoft: The Penny 
Stock Rules, Online Microcap Fraud, and the Unwary Investor, 75 Ind. 
L. J. 353, 353-377 (2000); Reajesh Aggarwal & Guojun Wu, Stock 
Market Manipulations, 79 J. Bus. 1915, 1915-1953 (2006); Daniel J. 
Bradley, John W., Cooney, Jr., Steven D. Dolvin, & Bradford D. 
Jordan, Penny Stock IPOs, 35 Fin. Mgmt. 5, 5-29 (2006) (examining 
the 1990-1998 period); Randolph Beatty & Padma Kadiyala, Impact of 
the Penny Stock Reform Act of 1990 on the Initial Public Offering 
Market, 46 J. L. & Econ. 517, 517-541 (2003); Michael Hanke, M. & 
Florian Hauser, On the Effects of Stock Spam Emails, 11 J. Fin. 
Markets 57, 57-83 (2008); Rainer B[ouml]hme & Thorsten Holz, The 
Effect of Stock Spam on Financial Markets (Working Paper, 2006); 
Shimon Kogan, Tobias Moskowitz, & Marina Niessner, 2018, Fake News: 
Evidence from Financial Markets (Working Paper, 2018); Jonathan 
Clarke, Hailiang Chen, Ding Du, & Yu Jeffrey Hu, Fake News, Investor 
Attention, and Market Reaction (Working Paper, 2018); Thomas 
Renault, Market Manipulation and Suspicious Stock Recommendations on 
Social Media (Working Paper, 2017). (Working papers and reports 
cited here and elsewhere have not undergone peer review and may be 
revised at a future date.)
    \240\ See, e.g., letter from Cravath (stating that QIBs and IAIs 
have the sophistication to evaluate investment opportunities 
regardless of the type of issuer).
    \241\ See also letter from Nasdaq (stating that the proposal 
will level the playing field in secondary offerings by companies 
that have already gone public).
---------------------------------------------------------------------------

    Similar to Section 5(d), the final rule will permit solicitation of 
investor interest both before and after the filing of a registration 
statement. As an alternative, the final rule could permit issuers to 
test the waters only before or only after the public filing of the 
registration statement. Compared to the final 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).\242\
---------------------------------------------------------------------------

    \242\ See also supra note 193 and accompanying text.
---------------------------------------------------------------------------

    Similar to Section 5(d), the final rule will not require issuers to 
use legends with test-the-waters communications. As an alternative, the 
final rule could require issuers to include certain legends with test-
the-waters communications. Compared to the final rule, the alternative 
of requiring legends on test-the-waters communications under the final 
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 final rule.\243\
---------------------------------------------------------------------------

    \243\ See, e.g., letters from CCMC, Cleary, Cravath, Davis Polk, 
Federated, ICI, SIFMA, and Sullivan.
---------------------------------------------------------------------------

    Similar to Section 5(d), the final rule will not require issuers to 
publicly file test-the-waters communications. As an alternative, we 
could require the filing of test-the-waters communications. Compared to 
the final 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 Rule 163B. These potential costs include the 
direct cost of filing additional exhibits and costs associated with 
requesting confidential treatment or disclosing proprietary 
information. For example, in instances where test-the-waters materials 
contain proprietary information, the disclosure of which could cause 
competitive harm, this alternative could impose 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 deter issuers 
from relying on the final rule and thereby decrease the benefits of the 
final rule for the level, efficiency, and cost of capital raising for 
affected issuers, particularly non-EGC issuers.
    Compared to the final 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 associated with the 
final rule discussed in Section IV.C.4 above, including the ability of 
investors to review the information in the registration statement 
before investing; the generally high 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 final rule, the alternative of filing 
test-the-waters materials with the registration statement could offer 
informational benefits to investors that have not been solicited.\244\ 
However, the benefits of this alternative, compared to the final rule, 
are likely minimal because issuers already are required to disclose

[[Page 53034]]

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. Further, in certain circumstances, communications under the 
final rule may be subject to Regulation FD, as discussed in Section 
IV.A above. In addition, test-the-waters communications are frequently 
made in oral format,\245\ which attenuates the economic effects of a 
filing requirement for written test-the-waters materials.
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    \244\ One commenter stated that ``[r]equiring the filing of 
these already-prepared and disseminated communications would add no 
additional burden on the issuers and would provide the Commission 
with information to monitor and police the market. Moreover, this 
requirement would allow current and future investors to compare the 
[testing-the-waters] communications (and the claims made therein) 
with the prospectus of the issuer and the performance of the 
securities themselves.'' See letter from Better Markets.
    \245\ See letter from Davis Polk. Issuers that find the filing 
requirement to be costly may elect to engage only in oral test-the-
waters communications under this alternative, further mitigating the 
effects of a filing requirement.
---------------------------------------------------------------------------

    Building on the existing provisions of Section 5(d), as proposed 
the final rule will permit issuers to test the waters with QIBs and 
IAIs. As an alternative, the final rule could permit issuers to test 
the waters with all investors,\246\ or with a broader subset of 
investors.\247\ This alternative might benefit issuers, particularly 
issuers whose offerings attract investors that are not QIBs or 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, 
the Commission has not previously recognized non-accredited investors 
as having the ability to fend for themselves for purposes of securities 
offerings under the Securities Act, and non-accredited investors have 
not been included among the investors eligible for solicitation under 
Section 5(d).
---------------------------------------------------------------------------

    \246\ For example, Rules 163 and 164 under the Securities Act 
permit eligible 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.
    \247\ See letters from Federated and ICI (recommending that 
funds be permitted to solicit registered investment advisers); L. 
Ameri (recommending expanding the rule to include individual 
accredited investors); C. Anderson (generally recommending that the 
rule be ``expanded beyond this small group of accredited 
investors''); CCMC (recommending expanding the rule to non-U.S. 
parties who may purchase outside of the U.S. in a non-U.S. tranche 
of a registered offering); and SIFMA (recommending expanding the 
rule to include individual accredited investors). The scope of 
investors that may be solicited under the final rule is unchanged 
from the proposal. The solicitation of QIBs and IAIs under the final 
rule is in line with testing the waters under Section 5(d).
    Separately, the Commission is continuing to consider the broader 
question of which categories of investors (including natural persons 
and entities) should be treated as sophisticated and able to fend 
for themselves as part of the ongoing review of the accredited 
investor definition under Rule 501. See Harmonization Concept 
Release.
---------------------------------------------------------------------------

    Similar to Section 5(d), the final rule will 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), which was supported by all commenters that 
expressed a view on this provision.\248\ 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 final rule from engaging in other communications under 
the existing rules. Compared to the final 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. One 
commenter further suggested that non-exclusivity is particularly 
important to preserve the viability of various market practices that 
have developed in the absence of a comprehensive rule such as proposed 
Rule 163B.\249\ 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.
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    \248\ See letters from CCMC, Dechert, Federated, and ICI.
    \249\ See letter from CCMC.
---------------------------------------------------------------------------

    The final rule does not limit the scope of the content or types of 
information 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 final rule.\250\ Limiting the scope of 
test-the-waters communications could lower the potential for incomplete 
or misleading information or improve comparability in such materials, 
which could benefit investors. However, we believe that these benefits 
to investors would be relatively insignificant given the sophisticated 
nature of investors that may receive the test-the-waters communications 
and the other mitigating factors analyzed in Section IV.C.4.\251\ Such 
restrictions also may reduce the utility of test-the-waters 
communications to issuers and the associated benefits for capital 
formation, compared to the final rule.
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    \250\ See letter from ICI (recommending that the Commission 
require funds to include performance information in a standardized 
manner in their test-the-waters communications similar to Rule 482). 
See also supra Section II.E (explaining why we are not requiring 
fund issuers to include standardized performance information in 
their test-the-waters communications).
    \251\ See also letter from Hamilton (stating that this 
alternative ``seems to offer little real benefit to investors, 
especially given that there would be no restriction on the use made 
of testing the waters communications by EGCs'').
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    As discussed above, Rule 163B contains a reasonable belief 
provision, which was supported by most commenters,\252\ 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 take specified steps 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.\253\ Compared to the final rule, these 
alternatives might result in a lower risk of solicitation of investors 
that are not QIBs or IAIs.\254\ However, they also might significantly 
increase costs for issuers electing to rely on the final 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 final rule.\255\ The incremental investor protection 
benefits of this alternative, compared to the final rule, may be 
limited by factors that already mitigate the potential harm to an 
investor that could be solicited based on an incorrect, though

[[Page 53035]]

reasonable belief, that the investor is a QIB or an IAI. As discussed 
in greater detail in Section IV.C.4 above, these include the 
requirement to publicly file a registration statement for issuers that 
determine 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; the 
applicability of general anti-fraud provisions and liability under 
Section 12(a)(2) of the Securities Act, as well as the risk of private 
securities litigation; the ability of the staff to review test-the-
waters materials for issuers that proceed with a public offering; the 
reputational incentives of underwriters and issuers; and, for issuers 
in follow-on offerings, the availability of past registration 
statements and Exchange Act filings that provide additional disclosures 
about the issuer and can aid solicited investors in the interpretation 
and verification of information in test-the-waters communications.\256\
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    \252\ See letters from CCMC, Cleary, Cravath, Davis Polk, 
Hamilton, and SIFMA.
    \253\ See letter from Better Markets (stating that ``at a 
minimum, the Commission must establish specific criteria that 
issuers must use to evaluate the status of the investor and ensure 
the investor is in fact a QIB or an IAI'').
    \254\ See id. (stating that the proposed rule would permit 
solicitations to retail and other investors lacking sophistication 
by issuers relying on a check-the-box or other self-certification 
method).
    \255\ See, e.g., letter from Davis Polk (stating that the 
standard for proposed Rule163B should be no more burdensome for 
issuers and their underwriters than current practice in Rule 144A 
and Section 4(a)(2) private placements, which permit issuers and 
their underwriters to refer to their own documentation as well as to 
industry-known reliable sources to check investor qualification).
    \256\ See also supra note 217.
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    As discussed in Section II.E. above, although funds are eligible to 
rely on the final rule, the final rule does not affect Investment 
Company Act registration requirements. As an alternative, following the 
suggestion of two commenters,\257\ we could provide an exemption from 
Investment Company Act registration to funds while they engage in test-
the-waters communications under Rule 163B. In light of the existing 
industry practice discussed in the Proposing Release, whereby funds 
commonly file a single registration statement under both the Investment 
Company Act and the Securities Act to take advantage of certain 
efficiencies, such an alternative would allow funds to more effectively 
use the rule to engage in pre-filing communications. However, the 
benefits of such an alternative may be limited since communications 
under the rule are limited to QIBs and IAIs and most funds have a large 
retail investor base.\258\ Further, such an exemption could impose 
significant costs on investors in a resulting public offering if funds 
relying on it engage in activities that are contrary to the substantive 
requirements of the Investment Company Act that protect investors in a 
registered fund's offering (e.g., certain self-dealing transactions--
which the Act prohibits for registered funds--that benefit a fund's 
investment adviser or other affiliated persons while the fund is 
actively considering and soliciting interest in a public offering).
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    \257\ See supra note 131.
    \258\ See supra Section IV.C.5.
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V. Paperwork Reduction Act

    As discussed in the Proposing Release, the final rule does not 
impose any recordkeeping requirement or otherwise constitute a 
``collection of information'' as defined in the regulations 
implementing the Paperwork Reduction Act of 1995 (``PRA'').\259\ The 
Commission did not receive public comments in response to its request 
for comments in the Proposing Release regarding the assertion that the 
proposed rules would not create any new, or revise any existing, 
collection of information pursuant to the Paperwork Reduction Act. 
Accordingly, we are not submitting the final rule to the Office of 
Management and Budget for review in accordance with the PRA.\260\
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    \259\ See 5 CFR 1320.3(c); 44 U.S.C. 3506.
    \260\ 5 CFR 1320.11; 44 U.S.C. 3507(d).
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VI. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act 
(``RFA'').\261\ It relates to final Rule 163B and final amendments to 
Rule 405 of the Securities Act. An Initial Regulatory Flexibility Act 
Analysis (``IRFA'') was prepared in accordance with the Regulatory 
Flexibility Act and included in the Proposing Release.
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    \261\ 5 U.S.C. 601 et seq.
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A. Reasons for, and Objectives of, the Amendments

    In 2012, Congress passed the JOBS Act, which created new Section 
5(d) of the Securities Act permitting EGCs to engage in test-the-waters 
communications. The purpose of the final rule is to permit all 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. These amendments 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. The need for, and objectives 
of, the final rule are discussed in more detail in Section II above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, the Commission requested comment on any 
aspect of the IRFA, including the number of small entities that would 
be affected by the proposed rules, the nature of the impact, how to 
quantify the number of small entities that would be affected, and how 
to quantify the impact of the proposed amendments. We did not receive 
comments specifically addressing the IRFA.

C. Small Entities Subject to the Amendments

    The final rule will affect issuers that are small entities. The RFA 
defines ``small entity'' to mean ``small business,'' ``small 
organization,'' or ``small governmental jurisdiction.'' \262\ 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.
---------------------------------------------------------------------------

    \262\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

    The rule will permit all issuers, including small entities, to 
engage in test-the-waters communications. We estimate that there are 
currently 1,171 issuers that file with the Commission, other than 
investment companies, that would be eligible to rely on the final rule 
that may be considered small entities.\263\ In addition, we estimate 
that, as of December 2018, there were 114 registered investment 
companies and BDCs that would be eligible to rely on the final rule 
that may be considered small entities.\264\
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    \263\ This estimate is based on staff analysis of issuers, 
excluding co-registrants, with EDGAR filings of Form 10-K, 20-F and 
40-F, or amendments thereto, filed during the calendar year of 
January 1, 2018 to December 31, 2018. Analysis is based on data from 
XBRL filings, Compustat, and Ives Group Audit Analytics.
    \264\ 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.
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    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

[[Page 53036]]

other small entities that do not meet the definition of EGC may rely on 
Rule 163B. Because reliance on the rule is voluntary, we cannot 
accurately estimate the number of small entities that will choose to 
test the waters, though we anticipate that the small entities most 
likely to engage in these communications will be those that expect the 
benefits of this strategy to outweigh the costs.

D. Reporting, Recordkeeping and Compliance Requirements

    The purpose of the 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 rule, the use of test-
the-waters communications is voluntary and any communications that 
comply with the rule do 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 rule does not impose a filing requirement, the rule is not 
expected to significantly impact existing reporting, recordkeeping, and 
other compliance burdens. Small entities choosing to avail themselves 
of the 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 
rule to all issuers, including small entities, in Section IV above.

E. Agency Action To Minimize Effect on Small Entities

    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 final 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.
    For the reasons given above, we believe the rule will limit the 
compliance burden on issuers, including small entities that choose to 
rely on the rule.\265\ We do not believe that the rule will impose any 
significant new compliance obligations. Accordingly, we generally do 
not believe it is necessary to establish different compliance 
requirements or to exempt small entities from all or part of the rule.
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    \265\ See Section VI.C above.
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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 Final Amendments

    In accordance with the foregoing, we are amending 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:


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) 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).
    (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 described in paragraph (c) of this section 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 will 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 with the Commission, including 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.
    (c) Communications under this rule may be made with potential 
investors that are, or that an issuer or person authorized to act on 
its behalf reasonably believes are:
    (1) Qualified institutional buyers, as defined in Sec.  230.144A; 
or
    (2) Institutions that are accredited investors, as defined in 
Sec. Sec.  230.501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8).

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 (Sec.  
230.163B) or on section 5(d) of the Act.
* * * * *

    By the Commission.

    Dated: September 25, 2019.
Vanessa Countryman,
Secretary.
[FR Doc. 2019-21304 Filed 10-3-19; 8:45 am]
BILLING CODE 8011-01-P


