SEC Wants to Expand "Test the Waters"

Currently, only emerging growth companies (EGCs) are granted the freedom by the SEC to “test the waters” prior to a stock offering to a designation. A company qualifies as an EGC if it has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and had not sold common equity securities under a registration statement as of December 8, 2011.

Business groups such as the Securities Industry and Financial Markets Association (SIFMA) have advocated for expanding the ability to test the waters to more companies, and there was bipartisan support for that idea in the last Congress, including a 60-0 vote in the House Committee on Financial Services for the Encouraging Public Offerings Act of 2017 (H.R. 3903).

The SEC proposal includes financial reporting restrictions, such as requiring issuers subject to Regulation Fair Disclosure (FD) to consider whether any information in the test-the-waters communication would trigger any obligations under Reg. FD.