The two categories with whom potential issuers can talk are qualified institutional buyers or institutional accredited investors. At the end of September 2019, the SEC said all stock issuers, not just EGCs, could test the waters with those two groups. The thing to watch for going forward is whether any of the information disclosed under this rule might run afoul of restrictions in Regulation Fair Disclosure (Reg. FD), which requires public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders.

This new rule from the SEC is designed partly to lower the costs and improve the chances of success of filing an IPO. In comments to the SEC after the proposed rule was issued, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness stated: “We believe test-the-waters communications aid issuers in assessing investor demand and structuring their offerings, and expect that expanding the use of this technique beyond EGCs would motivate more private companies to consider a public offering.”

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