[Federal Register Volume 84, Number 193 (Friday, October 4, 2019)]
[Rules and Regulations]
[Pages 53011-53036]
[FR Doc No: 2019-21304]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

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

Solicitations of Interest Prior to a Registered Public Offering

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting a new communications rule under the Securities
Act of 1933 that permits issuers to engage in oral or written
communications with certain potential investors, either prior to or
following the filing of a registration statement, to determine whether
such investors might have an interest in a contemplated registered
securities offering.

DATES: Effective December 3, 2019.

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

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

Table of Contents

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

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

I. Introduction

    The Commission proposed Rule 163B \1\ under the Securities Act to
permit issuers to engage in oral or written communications with
potential investors that are, or are reasonably believed to be,
qualified institutional buyers (``QIBs''), as that term is defined in
paragraph (a) of 17 CFR 230.144A (``Rule 144A''), or institutional
accredited investors (``IAIs'').\2\ The proposed rule would allow these
communications, either prior to or following the filing of a
registration statement, to determine whether such potential investors
might have an interest in a contemplated registered securities
offering.\3\ The proposed rule would extend the accommodations
currently available to emerging growth companies (``EGCs'') \4\ under
Securities Act Section 5(d) \5\ to all issuers, including fund issuers.
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    \1\ See Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28,
2019)] (``Proposing Release'').
    \2\ An institutional accredited investor refers to any
institutional investor that is also an accredited investor, as
defined in 17 CFR 230.501 (``Rule 501'') of Regulation D.
    \3\ Communications between an issuer and potential investors for
the purpose of assessing investor interest before having to commit
the time and expense necessary to carry out a contemplated
securities offering are often referred to as ``testing the waters,''
and we use this term and its derivations throughout this release to
refer to such communications.
    \4\ The Section 5(d) exemption is available to ``emerging growth
companies.'' An emerging growth company refers to an issuer that had
total annual gross revenues of less than $1.07 billion during its
most recently completed fiscal year and, as of December 8, 2011, had
not sold common equity securities under a registration statement.
That issuer continues to be an emerging growth company for the first
five fiscal years after the date of the first sale of its common
equity securities pursuant to an effective registration statement,
unless one of the following occurs: its total annual gross revenues
are $1.07 billion or more; it has issued more than $1 billion in
non-convertible debt in the past three years; or it becomes a
``large accelerated filer,'' as defined in 17 CFR 240.12b-2 (``Rule
12b-2'') under the Securities Exchange Act of 1934 [15 U.S.C. 78a et
seq.] (the ``Exchange Act''). See Rule 405 and Rule 12b-2 (defining
``emerging growth company'').
    \5\ 15 U.S.C. 77e(d).
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    We received approximately 20 comment letters in response to the
Proposing Release.\6\ We have reviewed and considered the comments that
we received on the Proposing Release. Commenters broadly supported the
proposal to allow all issuers to test the waters with QIBs and IAIs
before and after filing a registration statement to gauge interest in a
contemplated registered offering. After taking into consideration the
public comments, we are adopting the amendments largely as proposed.
For the reasons set forth below, in certain cases we are adopting
modifications to the proposal. The changes we are adopting are designed
to address aspects of the proposal, such as the proposed anti-evasion
provision, that could raise uncertainty for issuers seeking to rely on
the rule. Below we discuss, in turn, the general exemption for test-
the-waters communications; the scope of issuers eligible to rely on the
rule; the types of investors issuers may communicate with under the
rule; non-exclusivity of the rule; and considerations for investment
companies' use of the rule.
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    \6\ See letters from: S. Lara Ameri (``S. Ameri''); Clint
Anderson (``C. Anderson''); American Securities Association
(``ASA''); Better Markets (``Better Markets''); Center for Capital
Markets Competitiveness (``CCMC''); Bayley Clark (``B. Clark'');
Cleary Gottlieb Steen & Hamilton LLP (``Cleary''); Cravath, Swaine &
Moore LLP (``Cravath''); The Credit Roundtable (``CRT''); Davis Polk
& Wardwell LLP (``Davis Polk''); Dechert LLP (``Dechert'');
Federated Investors, Inc. (``Federated''); Hamilton & Associates Law
Group, P.A. (``Hamilton''); Investment Company Institute (``ICI'');
Nasdaq, Inc. (``Nasdaq''); Raymond Kenneth Petry (``R. Petry'');
Austin J. Rahskopf (``A. Rahskopf''); Securities Industry and
Financial Markets Association (``SIFMA''); Monica Stuchlik (``M.
Stuchlik''); and Sullivan & Cromwell LLP (``Sullivan''). Comment
letters related to the Proposing Release are available at https://www.sec.gov/comments/s7-01-19/s70119.htm.
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II. Discussion of the Amendments

A. Exemption Allowing Test-the-Waters Communications

1. Proposed Amendments
    Proposed Rule 163B would permit any issuer or person authorized to
act on behalf of an issuer,\7\ including an underwriter, either prior
to or following the filing of a registration statement, to engage in
oral or written communications with potential investors that are, or
that the issuer reasonably believes are, QIBs or IAIs, to determine
whether such investors might have an interest in the contemplated
offering.
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    \7\ Under the proposed rule, an issuer or a person authorized to
act on its behalf may rely on the rule. In this release, for ease of
discussion, we sometimes refer only to an issuer's reliance on the
rule, though these statements apply equally to an issuer or any
person authorized and acting on its behalf.
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    As discussed in the Proposing Release, Section 5(c) prohibits any
written or oral offers prior to the filing of a registration
statement.\8\ Once an issuer has filed a registration statement,
Section 5(b)(1) limits written offers to a ``statutory prospectus''
that conforms to the information requirements of Securities Act Section
10.\9\ As proposed, Rule 163B communications would be exempt from
Section 5(b)(1) and Section 5(c) \10\ but, as described below, would be
subject to Section 12(a)(2) liability in addition to the anti-fraud
provisions of the federal securities laws.\11\
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    \8\ See Section II.A of the Proposing Release.
    \9\ After effectiveness of a registration statement, a written
offer, other than a statutory prospectus, may be made only if a
final prospectus meeting the requirements of Securities Act Section
10(a) is sent or given prior to or at the same time as the written
offer. See Securities Act Section 2(a)(10) [15 U.S.C. 77b(a)(10)]. A
free writing prospectus, as defined in Securities Act Rule 405,
which is a Section 10(b) prospectus, may also be used after
effectiveness of a registration statement subject to the conditions
of Securities Act Rules 164 and 433. The proposed rule would not
affect these requirements.
    \10\ Section 5(b)(1) does not include a limitation on oral
offers after the filing of a registration statement, and therefore,
Rule 163B does not concern such offers.
    \11\ Section 12(a)(2) of the Securities Act provides purchasers
of an issuer's securities in a registered offering private rights of
action for materially deficient disclosure in oral communications
and prospectuses and imposes liability on sellers for offers or
sales by means of an oral communication or prospectus that includes
an untrue statement of material fact or omits to state a material
fact that makes the statements made, in light of the circumstances
under which they were made, not misleading.
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    Further, as proposed, Rule 163B communications would not need to be
filed with the Commission, including pursuant to 17 CFR 230.424(a)
(``Rule 424(a)'') or 17 CFR 230.497(a) (``Rule 497(a)'') of Regulation
C \12\ under the Securities Act, or pursuant to Section 24(b) of the
Investment Company Act of 1940 \13\ (the ``Investment Company Act'')
and the rules and regulations thereunder.\14\ Nor would such
communications be required to include any specified legends.
Additionally, the Commission proposed to amend Rule 405 to clarify that
a written communication used in reliance on Rule

163B would not constitute a free writing prospectus.
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    \12\ 17 CFR 230.401 through 230.498.
    \13\ 15 U.S.C. 80a-24.
    \14\ See proposed Rule 163B(b)(3).
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    The Commission also clarified in the Proposing Release \15\ that
Rule 163B communications, while exempt from Section 5(b)(1) and Section
5(c) as described above, would be considered ``offers'' as defined in
Section 2(a)(3) of the Securities Act \16\ and would therefore be
subject to Section 12(a)(2) liability in addition to the anti-fraud
provisions of the federal securities laws. Additionally, the Commission
stated that information provided in a test-the-waters communication
under the proposed rule must not conflict with material information in
the related registration statement. It also noted that, as is currently
the practice of Commission staff when reviewing offerings conducted by
EGCs, the Commission or its staff could request that an issuer furnish
any test-the-waters communication used in connection with an
offering.\17\
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    \15\ See Section II.A of the Proposing Release.
    \16\ Securities Act Section 2(a)(3) [15 U.S.C. 77b(a)(3)]
defines ``offer'' as any attempt or offer to dispose of, or
solicitation of an offer to buy, a security or interest in a
security, for value. The term ``offer'' has been interpreted broadly
and goes beyond the common law concept of an offer. See Diskin v.
Lomasney & Co., 452 F.2d 871 (2d. Cir. 1971); SEC v. Cavanagh, 1 F.
Supp. 2d 337 (S.D.N.Y. 1998).
    \17\ See 17 CFR 230.418 under the Securities Act.
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    Finally, the Commission cautioned that issuers subject to
Regulation FD 18 would need to consider whether any
information in the test-the-waters communication would trigger any
obligations under Regulation FD, or whether an exception to Regulation
FD would apply.\19\ Regulation FD requires public disclosure of any
material nonpublic information that has been selectively disclosed to
certain securities market professionals or shareholders \20\ if the
issuer has a class of securities registered under Section 12 of the
Exchange Act or is required to file reports under Section 15(d) of the
Exchange Act.\21\ Thus, communications made under the proposed rule
that also include material nonpublic information could be subject to 17
CFR 243.100(a) of Regulation FD unless an exclusion under 17 CFR
243.100(b)(2) of Regulation FD applies.
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    \18\ See 17 CFR 243.100 et seq. under the Securities Act.
    \19\ See Section II.A of the Proposing Release.
    \20\ See 17 CFR 243.100(b)(1) of Regulation FD. Many QIBs and
IAIs are the types of securities market professionals or
shareholders covered by Regulation FD.
    \21\ See 17 CFR 243.101(b) of Regulation FD. Regulation FD
applies to closed-end companies as defined in Section 5(a)(2) of the
Investment Company Act [15 U.S.C. 80a-5(a)(2)] but not other
investment companies. Regulation FD also does not apply to any
foreign government or foreign private issuer, as those terms are
defined in Securities Act Rule 405.
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2. Comments on the Proposed Amendments Generally
    Commenters broadly supported the proposed exemption for test-the-
waters communications.\22\ Commenters generally concurred that the
proposed exemption would allow issuers adequate flexibility to gauge
market interest,\23\ tailor the size and other terms of the
offering,\24\ reduce the costs of going public \25\ as well as the risk
of disclosing sensitive financial and competitive information when
choosing not to proceed with an IPO,\26\ and ``level the playing
field'' among issuers.\27\ Some commenters asserted that proposed Rule
163B may motivate more companies to conduct registered offerings.\28\
One commenter, however, questioned whether and how the proposed
exemption would increase the number of public offerings.\29\
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    \22\ See letters from S. Ameri, C. Anderson, ASA, CCMC, B.
Clark, Cleary, Cravath, CRT, Davis Polk, Dechert, Federated,
Hamilton, ICI, Nasdaq, R. Petry, A. Rahskopf, SIFMA, M. Stuchlik,
and Sullivan. Comments on the scope of eligible issuers that could
rely on the proposed rule, the types of investors that issuers could
communicate with under the proposed rule, the proposed non-
exclusivity provision, and investment company-specific
considerations are discussed in separate sections below.
    \23\ See letters from CCMC, Cravath, Davis Polk, Hamilton, ICI,
Nasdaq, and Sullivan.
    \24\ See letters from CCMC, Cravath, ICI, and Nasdaq.
    \25\ See letters from CCMC, Cleary, Cravath, Davis Polk, ICI,
Nasdaq, M. Stuchlik, and Sullivan.
    \26\ See letters from CCMC, Cravath, and Nasdaq.
    \27\ See letters from CCMC, Cravath, CRT, Davis Polk, ICI,
Nasdaq, M. Stuchlik, and Sullivan. But see letters from ICI and
Federated (stating that the proposed rule was unlikely to benefit
certain fund issuers); infra Section II.E.
    \28\ See letters from S. Ameri, CCMC, Cleary, Cravath, Hamilton,
and Sullivan.
    \29\ See letter from Better Markets. This commenter also
questioned whether the Commission has the requisite authority to
expand by rule the exemption available to EGCs under Section 5(d) to
all issuers. See infra Section II.A.3.
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    Commenters also broadly supported the view that the proposal does
not raise significant investor protection concerns.\30\ Several
commenters noted that investor protection concerns are mitigated by:
(1) The limitation on offerees to QIBs and IAIs; \31\ (2) the
application of the anti-fraud provisions of the federal securities
laws, as well as potential liability under Section 12(a)(2) of the
Securities Act, to proposed Rule 163B communications; \32\ (3) the need
for test-the-waters communications generally to be consistent with the
disclosure in any filed registration statement; \33\ (4) the
application of Regulation FD to communications made by issuers subject
to those rules; \34\ and (5) the fact that, where an issuer proceeds
with a registered offering, offerees will be able to compare the
information in the test-the-waters materials against the information in
the registration statement and purchasers will ultimately receive a
prospectus subject to Section 11 and Section 12(a)(2) liability.\35\
One commenter expressed concerns that the proposed reasonable belief
standard regarding investor status would create the risk of
solicitations to retail and other investors lacking sophistication by
permitting issuers to rely on a ``check-the-box'' or other self-
certification method of determining investor status, as discussed in
more detail in Section II.C below.\36\
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    \30\ See letters from ASA, CCMC, Cravath, Hamilton, and Nasdaq.
    \31\ See letters from CCMC, Cravath, Davis Polk, Hamilton, ICI,
Nasdaq, A. Rahskopf, SIFMA, and Sullivan.
    \32\ See letters from CCMC, Cravath, Davis Polk, and ICI.
    \33\ See letters from ASA, CCMC, Cravath, ICI, SIFMA, and
Sullivan.
    \34\ See letters from ASA and Davis Polk.
    \35\ See, e.g., letters from Cravath, Davis Polk, and SIFMA.
    \36\ See letter from Better Markets.
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    Most commenters indicated that Rule 163B should not require issuers
to file test-the-waters communications or include legends or
disclaimers.\37\ Commenters noted, among other reasons, that: (1) Such
a requirement would be inconsistent with test-the-waters communications
under Section 5(d) \38\ and other rules; \39\ (2) Section 12(a)(2) and
Section 10(b) liability would provide adequate safeguards for QIBs and
IAIs; \40\ and (3) the staff could continue its practice of reviewing
written test-the-waters materials used in connection with a registered
offering.\41\ On the other hand, one commenter asserted that the
Commission should require issuers to file test-the-waters materials in
those instances when an issuer files a related registration statement
since filing of these already-prepared and disseminated communications
would add no additional burden on the issuers, would provide the
Commission with information to monitor the market, and would allow
investors to compare the

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

the anti-evasion language in proposed Rule 163B(a)(2) and revising the
definition of ``free writing prospectus'' in Rule 405.
    As a preliminary matter, the Commission has the requisite authority
to extend the accommodations currently available under Section 5(d) to
all issuers.\64\ Section 28 of the Securities Act gives the Commission
broad authority to ``conditionally or unconditionally exempt any person
. . . or any class or classes of persons . . . from any provision or
provisions of'' the Securities Act and rules or regulations issued
thereunder ``to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.'' \65\ Rule 163B will exempt from certain
requirements the class of persons who are issuers contemplating a
registered securities offering and who meet the conditions set forth in
the rule. As explained here and in the Proposing Release, we believe
that the final rule furthers the public interest and includes
appropriate investor protections.
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    \64\ See letter from Better Markets (expressing concern that the
Commission lacks the authority to extend the accommodations
currently available under Section 5(d) to all issuers).
    \65\ 15 U.S.C. 77z-3.
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    Nothing in the Jumpstart Our Business Startups Act (the ``JOBS
Act'') \66\ indicates that Congress sought to limit the Commission's
ability to extend the accommodations currently available to EGCs to
other issuers, nor does Section 28 include any such limitation. The
final rule's use of exemptive authority is thus consistent with the
plain language of Section 28.
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    \66\ Public Law 112-106, 126 Stat. 306 (2012).
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    We agree with commenters that the final rule generally will allow
issuers to consult effectively with investors as they evaluate market
interest in a contemplated registered securities offering before
incurring the costs associated with such an offering, while maintaining
adequate investor protections.\67\ As commenters noted, several aspects
of the rule will mitigate investor protection concerns, notably:
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    \67\ We recognize that Rule 163B may be less beneficial to
certain fund issuers. See infra Section II.E.
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     The limitation of Rule 163B communications to investors
that are financially sophisticated, and, as one commenter said, ``are
unlikely to ignore the statutory prospectus and rely exclusively on
information provided to them during the [test-the-waters] process'';
\68\
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    \68\ See letter from Davis Polk.
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     The application of the anti-fraud provisions of the
federal securities laws and exposure to Section 12(a)(2) liability;
\69\
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    \69\ Liability under Section 12(a)(2) will attach to test-the-
waters oral and written communications under the rule both before
and after a registration statement has been filed. Communications
under the final rule will also be subject to the anti-fraud
provisions of Securities Act Section 17(a) and Exchange Act Section
10(b) and Rule 10b-5 thereunder.
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     The continued application of Regulation FD to certain
issuers; and
     The fact that, should the issuer move forward with the
offering, all investors would ultimately receive a Section 10(a)
prospectus subject to Section 11 and Section 12(a)(2) liability.\70\
---------------------------------------------------------------------------

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

    However, we are not adopting proposed Rule 163B(a)(2), which stated
that the rule would be unavailable for any communication that, while in
technical compliance with the rule, is part of a plan or scheme to
evade the requirements of Section 5 of the Act. We are persuaded by the
commenters who expressed concerns that such language may raise
uncertainty and would risk limiting the utility of the rule.\71\
Communications made under the rule will be deemed offers under Section
2(a)(10) and will still be subject to the anti-fraud and other
applicable provisions of the federal securities laws, and an issuer
that proceeds with the contemplated public offering after testing-the-
waters will be required to file a registration statement. We therefore
believe eliminating the anti-evasion language will avoid any confusion
or chilling effect such language may introduce without introducing
significant risk to investors.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

B. Scope of Eligible Issuers

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

companies and business development companies (``BDCs''))--would be
eligible to rely on the rule.\92\ In the Proposing Release, the
Commission expressed its belief that, in light of its experience with
test-the-waters communications for EGCs under Section 5(d), and given
the sophisticated nature of the institutional investors to which
communications under the proposed rule could be directed, it is
appropriate to expand the accommodation to all issuers.\93\
---------------------------------------------------------------------------

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

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

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

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

C. Investor Status

    As proposed, Rule 163B would permit an issuer to engage in pre- and
post-filing solicitations of interest with potential investors that
are, or that the issuer reasonably believes to be, QIBs or IAIs. A QIB
generally is a specified institution that, acting for its own account
or the accounts of other QIBs, in the aggregate, owns and invests on a
discretionary basis at least $100 million in securities of unaffiliated
issuers.\101\ An IAI is any institutional investor that is also an
accredited investor, as defined in paragraph (a) of Rule 501 of
Regulation D.\102\ Under the proposed rule, any potential investor
solicited must meet, or issuers must reasonably believe that the
potential investor meets, the requirements of the rule. We did not
propose to specify the steps an issuer could or must take to establish
a reasonable belief that the intended recipients of test-the-waters
communications are QIBs or IAIs.\103\ As noted in the Proposing
Release, the limitation of the exemption to these institutional
investors, consistent with Section 5(d), is intended to ensure that
test-the-waters communications are directed to investors that are
financially sophisticated and therefore do not require the same level
of protections provided by the Securities Act's registration process as
other types of investors.\104\
---------------------------------------------------------------------------

    \101\ 17 CFR 230.144A(a)(1)(i). Banks and other specified
financial institutions must also have a net worth of at least $25
million. 17 CFR 230.144A(a)(1)(vi). Unlike other institutions, a
registered broker-dealer qualifies as a QIB if, in the aggregate, it
owns and invests on a discretionary basis at least $10 million in
securities of issuers that are not affiliated with the broker-
dealer. 17 CFR 230.144A(a)(1)(ii).
    \102\ Specifically, for the purposes of the proposed rule, an
IAI would be an institution that meets the criteria of Rule
501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8).
    \103\ Although Securities Act Rule 501(a) does not provide
specific details as to the actions an issuer can take to form a
reasonable belief that an entity meets the definition of an
institutional accredited investor, Rule 144A(d)(1) sets forth non-
exclusive means to determine whether a prospective purchaser is a
QIB. The rule provides that a seller and any person acting on its
behalf are entitled to rely upon the following non-exclusive methods
of establishing the prospective purchaser's ownership and
discretionary investment of securities: (i) The prospective
purchaser's most recent publicly available financial statements;
(ii) the most recent publicly available information appearing in
documents filed by the prospective purchaser with the Commission or
another U.S. federal, state, or local government agency or self-
regulatory organization, or with a foreign governmental agency or
self-regulatory organization; (iii) the most recent publicly
available information appearing in a recognized securities manual;
or (iv) a certification by the chief financial officer, a person
fulfilling an equivalent function, or other executive officer of the
purchaser, specifying the amount of securities owned and invested on
a discretionary basis by the purchaser as of a specific date on or
since the close of the purchaser's most recent fiscal year.
    \104\ See Section II.C of the Proposing Release.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    We are adopting the reasonable belief standard as proposed.
Accordingly, Rule 163B does not specify the steps that an issuer could
or must take to establish a reasonable belief regarding investor status
or require the issuer to verify investor status. As the Commission
noted in the Proposing Release, by not specifying the steps an issuer
could or must take to establish a reasonable belief as to investor
status, this approach is intended to provide issuers with the
flexibility to use methods that are cost-effective but appropriate in
light of the facts and circumstances of each contemplated offering and
each potential investor.\120\
---------------------------------------------------------------------------

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

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

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

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

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

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

D. Non-Exclusivity

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

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

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

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

E. Considerations for Use by Investment Companies

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

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

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

    \127\ See letters from Dechert, Federated, and ICI.
    \128\ See letters from Federated and ICI. See also Proposing
Release at notes 54-57 and accompanying text.
    \129\ See letter from Dechert.
    \130\ This commenter also represented that funds often rely on
Sections 3(c)(1) or 3(c)(7) during their seeding periods before
conducting a registered offering. See letter from Dechert. As
discussed in the Proposing Release, and based on staff experience
and information we have received in other contexts, we continue to
believe this is not the typical practice. See Proposing Release at
note 55. Among other considerations that may contribute to the
common practice of funds registering during their seeding periods, a
fund generally may only include performance information in its
prospectus and sales materials for periods subsequent to the
effective date of its registration statement. See, e.g., infra note
150. Moreover, if a fund is planning to conduct a registered public
offering, the Sections 3(c)(1) and 3(c)(7) exemptions generally
would become unavailable if the fund makes, or proposes to make, a
public offering. See Section 3(c)(1) of the Investment Company Act
[15 U.S.C. 80a-3(c)(1)] (requiring that an issuer ``is not making
and does not presently propose to make a public offering of its
securities''); Section 3(c)(7) of the Investment Company Act [15
U.S.C. 80a-3(c)(7)] (requiring that an issuer ``is not making and
does not at [the time of acquisition of its securities by qualified
purchasers] propose to make a public offering of its securities'').
---------------------------------------------------------------------------

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

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

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

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

    \136\ See Sections 6(f) and 54 of the Investment Company Act [15
U.S.C. 80a-6(f) and 80a-53]; Form N-6F and Form N-54A [17 CFR 274.15
and 274.54]. However, like registered investment companies, many
BDCs have relatively high levels of retail investor ownership, which
may reduce the likelihood that these BDCs will rely on Rule 163B to
test the waters with QIBs and IAIs. See infra note 227.
    \137\ See Proposing Release at note 58 and accompanying text
(recognizing that registered open-end funds may be less likely to
use Rule 163B in this way because they typically offer their shares
to retail investors in registered offerings).
    \138\ See letter from ICI.
---------------------------------------------------------------------------

    In addition to pre-filing communications, Rule 163B will allow a
fund to engage in test-the-waters communications with QIBs and IAIs
after filing a Securities Act registration statement while it continues
to contemplate a registered offering before the registration statement
becomes effective. As discussed in more detail below, while funds may
already engage in these types of communications under other Commission
rules and associated FINRA rules, these communications currently may be
subject to certain filing, legending, or content requirements that Rule
163B would not entail.\139\
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    \139\ See 17 CFR 230.482 (``Rule 482'' under the Securities
Act); 15 U.S.C. 80a-24(g) (Section 24(g) of the Investment Company
Act); 17 CFR 270.34b-1 (Investment Company Act Rule 34b-1); FINRA
Rule 2210.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

III. Other Matters

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

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

IV. Economic Analysis

A. Introduction and Broad Economic Considerations

    We are mindful of the costs imposed by and the benefits obtained
from our rules. Securities Act Section 2(b) \153\ and Investment
Company Act Section 2(c) \154\ require us, when engaging in rulemaking
that requires us to consider or determine whether an action is
necessary or appropriate in (or, with respect to the Investment Company
Act, consistent with) the public interest, to consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 77b(b).
    \154\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    As noted above, Securities Act Section 5(d) was enacted under the
JOBS Act and permits EGCs to engage in communications with QIBs or IAIs
to determine their interest in an offering before or after the filing
of a registration statement. However, companies that do not presently
qualify as EGCs (including companies that previously qualified as EGCs
but that have lost EGC status, larger companies, companies that first
issued common equity pursuant to a Securities Act registration
statement before December 8, 2011, asset-backed issuers, and registered
investment companies) cannot avail themselves of Section 5(d) when
considering raising capital through registered offerings, resulting in
potential competitive impacts. The inability to test the waters may
contribute to reduced willingness of non-EGCs to conduct registered
offerings, compared to EGCs. The Commission proposed Rule 163B to
expand the permissibility of test-the-waters communications to all
issuers that are contemplating registered securities offerings,
regardless of whether such issuers qualify as EGCs. As discussed above,
after considering public comment, the Commission is adopting the final
rule generally as proposed.
    Under the final rule, test-the-waters communications will provide
issuers, particularly non-EGC issuers that are unable to rely on
Section 5(d), with additional tools to gather valuable information
about investor interest before a potential registered offering. By
allowing issuers to gauge market interest \155\ in a contemplated
registered securities offering, these communications could result in a
more efficient and potentially lower-cost and lower-risk capital
raising process for issuers. By extending the flexibility presently
afforded to EGCs to all issuers, the final rule will result in greater
harmonization of offering process requirements between EGC and non-EGC
issuers (including issuers that previously had EGC status but no longer
qualify as EGCs).
---------------------------------------------------------------------------

    \155\ Test-the-waters communications with institutional
investors can help issuers gauge market interest in an offering
because institutions account for a key part of the pool of investors
in many public offerings, particularly for larger companies. See,
e.g., Lowry, M., R. Michaely, and E. Volkova, 2017. Initial public
offerings: a synthesis of the literature and directions for future
research. Foundations and Trends in Finance 11(3-4), 154-320.
---------------------------------------------------------------------------

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

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

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

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

    \158\ See, e.g., letters from ASA (stating its belief that
``[the proposed rule] will ultimately help more companies complete a
successful IPO . . . . When fewer companies go public, long-term
economic growth is inhibited and Main Street investors have fewer
opportunities to invest their hard-earned money in growing
businesses''); CCMC (stating that ``we believe all issuers
contemplating an IPO, regardless of size, would benefit from the
ability to test the waters, and expect that it would likewise
motivate more companies to consider the public offering route'');
Cravath (stating that ``[b]y gathering information from investors
before publicly filing a registration statement, issuers should
increase their likelihood of conducting successful public offerings,
which in turn we believe should result in a greater number of
registered offerings in the United States''); Davis Polk (stating
its belief that the rule ``will greatly ease access to capital'');
and Sullivan (stating its belief that the rule would ``potentially
result[] in additional registered offerings in the United States and
more investment opportunities for U.S. investors, including retail
investors''). However, one commenter questioned whether and how the
proposed exemption would increase the number of public offerings.
See letter from Better Markets (stating that ``[t]he Proposal, in
this instance, is intended to function as a cost-avoidance mechanism
for the prospective issuer but how it will increase public offerings
remains unclear to us'').
    One study found a significant increase in IPO activity,
particularly among pharmaceutical and biotechnology companies, in
the two years after the JOBS Act enactment. See Michael Dambra,
Laura Field, & Matthew Gustafson, The JOBS Act and IPO Volume:
Evidence That Disclosure Costs Affect the IPO Decision, 116 J. Fin.
Econ. 121, 121-143 (2015) (``DFG Study''), at 121 (``[c]ontrolling
for market conditions, we estimate that the JOBS Act has led to 21
additional IPOs annually, a 25% increase over pre-JOBS levels'').
The study notes several caveats related to the interpretation of the
finding, including that ``the recent sustained bull market makes it
impossible to investigate the interaction between the JOBS Act
provisions and market conditions'' and that the estimated increase
in the annual IPO volume outside biotechnology and pharmaceutical
industries is ``small relative to the intertemporal volatility of
IPO volume.'' As a result, the authors caution that ``our results
should be viewed as preliminary, warranting future research on the
topic.'' See DFG Study, at 123.
    In addition, we note that the confounding effects of other
provisions commonly used by EGCs along with testing the waters, such
as the ability to confidentially submit a draft registration
statement for nonpublic review by the staff of the Commission prior
to public filing, makes it difficult to isolate the incremental
effect of the availability of testing the waters on IPO activity
among issuers eligible for EGC status. See DFG Study, at 124 (``In
practice, issuers usually combine [testing the waters] with a second
de-risking provision, allowing EGCs to file their IPO draft
registration statement confidentially.''); and Congressional
Research Service (2018) Capital Markets, Securities Offerings, and
Related Policy Issues (July 26, 2018), https://crsreports.congress.gov/product/pdf/R/R45221 (``CRS Report''), at
18. Further, as a general caveat, we recognize that inferences from
studies of EGC issuers may not be directly applicable to non-EGC
issuers because non-EGC issuers are different from EGC issuers. See
infra notes 182-184.
    \159\ See letter from CCMC.
    \160\ Id. Further, some other issuers that would have attempted
a public offering without testing the waters might see somewhat
increased odds of successful completion of the offering as a result
of testing the waters under the final rule (because they can more
effectively tailor offering terms to market demand based on the
information gathered during testing the waters), resulting in an
incrementally greater number of completed public offerings.
    While it is indeed possible that some issuers may abandon plans
for a registered offering after inferring in the course of testing
the waters under the final rule that there is insufficient market
interest in the offering, in the absence of testing the waters,
those same issuers might have publicly filed and subsequently
withdrawn the offering. This could result in the same number of
completed public offerings but at a higher cost for those issuers
(due to filing and legal fees, as well as reputational costs and
potential costs due to the disclosure of proprietary information
through a public filing).
---------------------------------------------------------------------------

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

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

    By extending to all issuers the flexibility to test the waters
currently available only to EGCs, we expect the final rule will benefit
non-EGC issuers by making them comparable to EGC issuers in this
respect. This difference in the ability to use test-the-waters
communications in gauging investor demand for a public offering is
particularly pronounced today for non-EGCs that are close to meeting--
but marginally fail to meet--EGC eligibility criteria. In turn, to the
extent that EGCs compete with non-EGCs for investor capital and in the
product market, the incremental benefits that accrue to non-EGCs under
the final rule (the ability to pursue a more efficient capital raising
strategy while limiting the risk of early disclosure of proprietary
information) might have an adverse competitive effect on comparable
EGCs.
    On a market-wide basis, providing the option to test the waters to
all issuers is expected to improve the efficiency and lower the cost of
implementing capital raising strategies for issuers contemplating a
registered securities offering.\163\
---------------------------------------------------------------------------

    \163\ See A Financial System That Creates Economic
Opportunities: Capital Markets, U.S. Dep't of the Treasury (2017),
https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-CapitalMarkets-FINAL-FINAL.pdf, at 30 (stating that
``[w]hen combined with the ability to file a registration statement
confidentially with the SEC, testing the waters reduces the
company's risk associated with an IPO. The company has a better
gauge of investor interest prior to undertaking significant expense
and, in the event the company elects not to proceed with an IPO,
information has been disclosed only to potential investors and not
to the company's competitors.''). See also SIFMA Report, at 10-11.
---------------------------------------------------------------------------

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

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

    \164\ See supra note 21 and accompanying text. For instance,
some capital raising methods involve sharing material nonpublic
information about a contemplated registered securities offering with
outsiders who expressly agree to maintain the information in
confidence until the deal is publicly disclosed. However, there is
an inherent risk that a deal may not be consummated. If the deal
fails to go forward, the outside investors will typically remain
bound by the confidentiality agreements until the material nonpublic
information is either no longer material or publicly disclosed by
the issuer.
---------------------------------------------------------------------------

    Where possible, we have attempted to quantify the economic effects
of the final rule. However, in some cases we are unable to do so. For
example, confounding factors (other than testing the waters) that
affect the decision to go public and the cost of capital in registered
offerings, economic differences between non-EGCs (which are more likely
to rely on the final rule) and EGCs (which have been eligible to test
the waters under Section 5(d)), and limitations of historical data on
test-the-waters communications under Section 5(d) make it difficult to
quantitatively predict the extent to which issuers will elect to test
the waters in connection with a contemplated registered securities
offering under the final rule; the extent to which the option to engage
in test-the-waters communications will affect the willingness of
potential issuers newly eligible for testing the waters under the final
rule to conduct registered securities offerings; the effects of test-
the-waters communications on the amount and cost of capital raised; and
the effect of expanding permissible test-the waters communications on
the ability of QIBs and IAIs to form informed assessments of issuer
quality and the securities offered for the purposes of determining
interest in a contemplated offering.
    We have been able to gain some insight into the potential economic
effects of the final rule based on the experience of EGC issuers that
have been permitted to test the waters pursuant to Securities Act
Section 5(d) since April 2012. However, these insights are potentially
limited because of the differences between EGC and non-EGC issuers
(including non-EGC issuers that are investment companies) and the
offerings they undertake; \165\ the voluntary nature of reliance on
Section 5(d) among EGC issuers; \166\ the potential confounding effects
resulting from reliance on other JOBS Act provisions by EGC issuers
simultaneously with reliance on test-the-waters accommodations; and the
generally favorable market conditions observed in the post-JOBS Act
period.\167\ Moreover, while the flexibility to not pursue a registered
offering after gauging investor interest can be valuable to issuers, we
do not have data on EGC issuers that tested the waters under Section
5(d) but subsequently chose not to proceed with a registered offering.
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    \165\ See infra notes 182-184 and accompanying text.
    \166\ See infra note 176.
    \167\ See, e.g., Susan Chaplinsky, Kathleen W. Hanley, & S.
Katie Moon, The JOBS Act and the Costs of Going Public, 55 J. Acct.
Res. 795, 795-836 (2017) (``CHM Study''), at 828 (using a three-year
period post-JOBS Act and finding that ``with few exceptions, the
equity-market conditions of our post-Act sample period have been
generally favorable to IPO issuance. We leave to future work how
issuers' disclosure decisions and investors' reaction to them may
change under less favorable equity market conditions.'') and DFG
Study, at 123 (using a two-year period post-JOBS Act and finding
that ``the recent sustained bull market makes it impossible to
investigate the interaction between the JOBS Act provisions and
market conditions. Thus, the effects of the JOBS Act we find could
differ in a bear market.'').
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    Below we discuss the potential effects of the final rule relative
to the economic baseline, which includes existing requirements
regarding solicitation of investor interest in connection with
registered securities offerings; current practices of EGC issuers
related to testing the waters; and information about filers and other
parties that are likely to be affected by solicitation requirements.

B. Baseline and Affected Parties

1. Baseline
    Section 5(c) of the Securities Act generally prohibits issuers or
other persons from offering securities prior to the filing of a
registration statement. Once a registration statement has been filed,
Section 5(b)(1) generally requires issuers to use a prospectus that
complies with Securities Act Section 10 for any written offers of
securities. As noted above, Securities Act Section 5(d) nonetheless
allows EGCs to engage in test-the-waters communications with QIBs and
IAIs both before and after filing the registration statement.
Currently, only issuers that qualify for EGC status can rely on the
Section 5(d) test-the-waters provision in advance of a contemplated
registered offering. Certain issuers, such as registered investment
companies and issuers of asset-based securities (``ABS issuers''), are
ineligible for EGC status.\168\ Permissible test-the-waters
solicitations, in oral or written form, may be used before or after the
filing of a Securities Act registration statement for an initial or
follow-on registered offering.
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    \168\ However, BDCs, which are closed-end funds exempt from
registration under the Investment Company Act, are eligible for EGC
status.
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    There is some evidence related to the use of test-the-waters
communications by EGC issuers in IPOs. Because disclosure of whether
the issuer has tested the waters is not required in the registration
statement, studies have used various alternative sources of information
to estimate the incidence of test-the-waters communications. Thus,
estimates have varied depending on the sources used, the interpretation
of references to testing the waters in those sources, and sample
construction.\169\ Some studies have estimated the incidence of test-
the-waters communications by IPO issuers based on issuer responses to
staff comment letters associated with IPO registration statement
filings.\170\ Using this method, recent industry studies found that in
2015 and 2016, respectively, 38 percent and 23 percent of EGC IPOs
referenced testing the waters in comment letter responses.\171\ Based
on the analysis of comment letter responses, staff has

estimated that approximately 37 percent of EGC IPOs during 2012-2018
used the test-the-waters provision.\172\ Other studies have estimated
the use of the test-the-waters provision based on whether the
underwriting agreement mentions allowing the underwriter to test the
waters. One academic study found that, based on an analysis of
underwriting agreements filed as exhibits to registration statements,
approximately 71 percent of EGC IPOs authorized underwriters to test
the waters.\173\ Another academic study found that approximately 68
percent of EGC IPOs authorized underwriters to test the waters or,
where information was not available in the underwriting agreement,
mentioned testing the waters in comment letter responses.\174\ Because
underwriting agreement data does not indicate whether the underwriter
actually engaged in test-the-waters communications, these estimates are
considerably higher than the estimates based solely on staff comment
letters. Conversely, estimates based on staff comment letters
referencing the actual use of test-the-waters materials may not be
capturing all instances where testing the waters was conducted.
Nevertheless, we believe estimates based on staff comment letters
referencing actual use of test-the-waters materials are more relevant
for the purposes of this baseline analysis.
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    \169\ The estimates in the reviewed studies have focused on
priced exchange-listed IPOs. As a caveat, information about the use
of the test-the-waters provision by issuers that decide not to file
a registration statement is not available.
    \170\ Because not all issuers in follow-on offerings receive
staff comment letters, this estimate applies only to IPOs. We note
that estimates based on the analysis of issuer responses to staff
comment letters on IPO registration statements will likely be
incomplete for purposes of capturing oral test-the-waters
communications not involving written materials.
    \171\ See, e.g., Tom Zanki, Testing The Waters' Expansion Could
Make IPOs Easier, Law360 (April 30, 2018), https://www.law360.com/articles/1038641 (citing IPO studies by Proskauer Rose LLP, which
showed that 38% and 23% of EGCs used the test-the-waters
accommodation in 2015 and 2016, respectively, with heavy
concentration in the health care and technology-telecommunications-
media sectors). The studies covered a subset of EGC IPOs.
    \172\ EGC IPOs are identified based on Ives Group's Audit
Analytics data on priced offerings. Staff comment letters and
responses containing ``Section 5(d)'' and ``testing the waters''
keywords were retrieved from Intelligize and manually classified.
Missing or ambiguous responses were supplemented with staff analysis
of cover letters submitted by issuers in response to staff reviews
of registration statements, where available.
    \173\ See CHM Study, at 820 (Table 6). The statistic is based on
313 EGC IPOs conducted between April 2012 and April 2015.
    \174\ See DFG Study, at 136 (Table 8). The statistic is based on
155 EGC IPOs conducted between April 2012 and March 2014.
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    The practice of testing the waters is voluntary. Various commenters
stated that testing the waters has proven to be a valuable tool for
EGCs.\175\ Evidence suggests that the provision has been used more
often by EGCs facing uncertainty about potential investor demand for
their securities offering, which may find testing the waters to be more
valuable.\176\ The estimated rate of use of the test-the-waters
provision has varied by sector, with heavy concentration of EGC IPOs
that engaged in testing the waters in the biotechnology,
pharmaceutical, technology, media, and telecommunications
industries.\177\
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    \175\ See, e.g., letter from CCMC (stating that ``[t]he ability
to test the waters is frequently relied upon by EGCs, and that the
practice has served to encourage many companies considering an IPO
to continue along that that [sic] course''); Cleary (stating that
``[e]xperience with EGC issuers has proven the Section 5(d)
accommodation to be a valuable tool in securities offerings,
particularly in the IPO context''); letter from Davis Polk (stating
that ``[p]re-marketing an offering on a confidential basis to a
handful of investors prior to making a final decision to launch has
become a common and useful marketing tool for registered offerings
for EGCs, and we believe the clear ability to engage in these sorts
of investor communications is one of the most beneficial innovations
of the JOBS Act of 2012''); and letter from Nasdaq (stating that
``Nasdaq frequently hears from our listed companies on issues
relating to the capital markets, and based on this feedback, we
believe the current `test the waters' accommodation for EGCs has
been a resounding success'').
    \176\ Issuers may elect to test the waters if they have high
costs of proprietary information disclosure or significant
uncertainty about the interest of potential investors in the
offering.
    According to one law firm study, companies using test-the-waters
communications were heavily concentrated in the health care and
technology-telecommunications-media sectors. See supra note 171.
    Another report similarly concluded, based on the experience
during the first two years after the JOBS Act was enacted, that the
test-the-waters provision may be especially valuable for companies
in industries where valuation is uncertain and the timing of the IPO
depends on regulatory or other approval (e.g., the biotech and
pharmaceutical industries). See CRS Report, at 6.
    According to one academic study, ``smaller firms,
biotech[nology]/pharma[ceutical] firms, and research-intensive firms
are more likely to elect the testing-the-waters provision, which is
consistent with the JOBS Act lowering the cost of proprietary
disclosure.'' See DFG Study, at 122. See also CHM Study, at 823 for
a more general discussion of how the characteristics of EGCs affect
their choice to avail themselves of the accommodations available
under Title I of the JOBS Act (stating, for example, that ``issuers
that disclose less information are those that are more likely to
have higher proprietary information costs and characteristics that
may make them difficult for investors to value''). As a caveat, the
cited academic studies generally exclude self-underwritten IPOs,
penny stocks, and IPOs that are not listed on an exchange.
Therefore, it is unclear if the conclusions would apply to these
types of issuers.
    \177\ See studies discussed in note 176 supra. See also letter
from CCMC (stating that ``[a]mong EGCs, use of test-the-waters
communications during the IPO is not uniform, and varies
considerably by industry. Industries that most frequently use the
accommodation are those that desire to explain complex issues about
their business models to investors. These include life sciences and
biotechnology, telecommunications, and other technology-intensive
businesses.'').
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    We are not aware of significant investor protection concerns that
have arisen to date based on test-the-waters communications by EGCs. We
lack data to perform a comprehensive retrospective analysis of the
content of EGC test-the-waters communications for three reasons: (i)
Such communications are frequently in oral format and thus data on
their content is not available; (ii) where written test-the-waters
materials are submitted by the filer in response to a comment from
staff reviewing the registration statement, upon filer request those
materials generally are returned to the filer or destroyed after the
registration statement review is completed; and (iii) we do not have
data on issuers that engaged in test-the-waters communications but have
elected not to proceed with a contemplated registered offering after
testing the waters.
2. Affected Parties
    We anticipate that the final rule will affect issuers, investors,
and intermediaries.
i. Issuers
    The final rule will affect issuers that are contemplating
registered securities offerings. While the final rule will be available
to all issuers, including EGCs, it will particularly affect non-EGC
issuers that are not allowed to test the waters under Section 5(d). EGC
issuers will remain eligible to rely on Section 5(d). The final rule
will directly affect EGC issuers to the extent that such issuers rely
on the final rule. Issuers that do not rely on the final rule may also
be indirectly affected to the extent that they compete with issuers
that rely on the final rule for investor capital or in the product
market.
    We estimate that there were approximately 1,931 EGCs and 7,551 non-
EGCs that filed Securities Act registration statements or periodic
reports during 2018,\178\ excluding ABS issuers and registered
investment companies. We estimate that in 2018 there were approximately
1,852 ABS issuers \179\ and approximately 12,990 registered investment
companies,\180\

which were ineligible for EGC status. While EGCs made up a minority of
all filers with registration statements declared effective, they
accounted for a majority of new issuers in traditional IPOs.\181\
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    \178\ The estimate is based on the number of unique filers of
registration statements on Form S-1, S-3, S-4, S-11, F-1, F-3, F-4,
or F-10, or periodic reports on Form 10-K, 10-Q, 20-F, or 40-F, or
amendments to them, during calendar year 2018, as well as any BDCs
included in the SEC's July 2018 BDC report at https://www.sec.gov/open/datasets-bdc.html. The BDC report does not exclude filers that
have not yet begun selling shares to the public or filers that have
ceased operations but have not yet withdrawn their registration
statement or election to be regulated as a BDC. EGCs are identified
as of the end of 2018 based on Ives Group's Audit Analytics data. We
include filers of periodic reports because the final rule is
available to seasoned issuers that have already become reporting
companies.
    \179\ The estimate is based on the number of unique CIKs with
ABS-related filings during calendar year 2018 (ABS-15G, ABS-EE, SF-
1, SF-3, 10-D, or amendments to them). The estimate is not limited
to ABS issuers that filed annual reports.
    \180\ We estimate that there were 9,599 mutual fund series
(including funds of funds); 1,978 exchange-traded funds (``ETFs'');
692 registered closed-end funds; five variable annuity separate
accounts registered as management investment companies on Form N-3;
670 variable annuity separate accounts registered as UITs on Form N-
4 and Form N-6; and 46 non-insurance UITs registered on Form S-6.
Taking into account the 4,917 non-insurance UIT series registered on
Form S-6 yields an estimate of approximately 17,861 registered
investment company issuers. These estimates are based on data from
2019 ICI Factbook, Bloomberg, and staff analysis of EDGAR filings.
These estimates include funds of funds and are not limited to
registered investment companies that filed annual reports.
    \181\ Based on Ives Group's Audit Analytics data, during the
period from April 5, 2012 through December 31, 2018, EGC issuers
accounted for approximately 1,267 out of 1,440, or approximately
88%, of priced exchange-listed IPOs (excluding deals identified as
mergers, spin-offs, or fund offerings).
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    The final rule also could affect issuers that are not yet reporting
companies but that elect to test the waters as part of exploring the
possibility of a future registered securities offering. In addition,
because there is no requirement to disclose the use of testing the
waters under Section 5(d), we do not have data on EGCs that have tested
the waters but have elected not to file a registration statement for
the contemplated offering.
    In drawing inferences from the experience of EGCs with the use of
test-the-waters communications, we recognize that there are differences
between a typical EGC and non-EGC issuer. For example, non-EGC IPO
issuers tend to have significantly higher revenues than EGCs due to the
size-based eligibility criteria for EGC status.\182\ Further, non-EGC
issuers include older companies that first issued common equity
pursuant to a Securities Act registration statement before December 8,
2011,\183\ or that lost their EGC status because more than five fiscal
years have elapsed since their first registered common equity sale.
Non-EGC issuers also include ABS issuers and registered investment
companies, which have unique operational and regulatory
characteristics.\184\
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    \182\ For example, one study comparing a subset of exchange-
listed EGC IPOs to exchange-listed non-EGC IPOs noted that ``[a]
high percentage of EGCs are unprofitable and substantially younger
than the control sample and the majority of these IPOs occur in only
two industries--biotech[nology] and pharmaceuticals--that have
limited near-term prospects and little revenue to recognize.'' See
CHM Study, at 828. See also DFG Study, at 127 and 129 (Table 3).
    \183\ An ``issuer shall not be an emerging growth company for
purposes of [the Securities Act and the Exchange Act] . . . if the
first sale of common equity securities of such issuer pursuant to an
effective registration statement under the Securities Act of 1933
occurred on or before December 8, 2011.'' See JOBS Act Title I FAQs.
    \184\ See id.
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ii. Investors
    The final rule will affect QIBs and IAIs that might be solicited in
conjunction with contemplated registered securities offerings. Due to
their portfolio size and/or investment expertise, we expect that such
investors have considerable ability to assess investment opportunities
and acquire and analyze information about securities and their issuers.
Such investors are generally viewed as sophisticated for purposes of
private placements, which are often associated with considerably higher
information asymmetry than registered offerings. Under Title I of the
JOBS Act, EGCs were provided the flexibility to test the waters with
these relatively sophisticated QIB and IAI investors.