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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \188\ See supra notes 173-174 and accompanying text.
---------------------------------------------------------------------------

    We estimate that there were approximately 975 registered broker-
dealers that reported being underwriters or selling group participants
for

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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

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

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

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.

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

     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.'').
---------------------------------------------------------------------------

     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.
    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \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

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.
---------------------------------------------------------------------------

    \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

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \257\ See supra note 131.
    \258\ See supra Section IV.C.5.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \259\ See 5 CFR 1320.3(c); 44 U.S.C. 3506.
    \260\ 5 CFR 1320.11; 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \261\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Small entities meeting the definition of EGC are currently eligible
to engage in test-the-waters communications pursuant to Section 5(d) of
the Securities Act. These small entities and

other small entities that do not meet the definition of EGC 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.
---------------------------------------------------------------------------

    \265\ See Section VI.C above.
---------------------------------------------------------------------------

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