Testing the Waters – Section 105(c) of the JOBS Act




Posted by on October 11, 2016

Testing the Waters – Section 105(c) of the JOBS Act- The waiting or pre-effective period is that time frame between the filing date of a registration statement and the effective date. As with all periods in the offering process, communications with potential investors are strictly limited and regulated during this period. Also, as with other offering periods, many exemptions and safe harbors exist to allow for communications during the pre-effective waiting period.

The pre-effective period is the period during which, among other things, the company begins marketing the offering, through real-time oral offers, including calls to potential investors. The oral offers need not be accompanied by documentation or a copy of the filed S-1 but are subject to the anti-fraud provisions under the securities laws. Section 5(b)(1) of the Securities Act prohibits written offers other than by means of a prospectus that meets the requirements of Section 10 of the Securities Act. An S-1 meets such requirements and so any written offers would need to be accompanied by the filed preliminary S-1. Such bans are designed to prohibit inappropriate marketing, conditioning or “hyping” of the security before all investors have access to publicly available information about the company so that they can make informed investment decisions.

Other than a free writing prospectus for qualified companies and test-the-waters communications by an emerging growth company satisfying the requirements of Section 5(d) of the Securities Act (i.e., Rule 105(c) of the JOBS Act), the only written offer materials that may be distributed by the company during this period is the preliminary prospectus, which must satisfy specified SEC requirements. Rule 105 is the same during the pre-effective period as it is before filing. I will give a reminder on those provisions as well as details on free writing prospectus and communications not deemed an offer in future Lawcasts in this series.

While binding commitments cannot be made during this period, the underwriters will receive indications of interest from potential purchasers, including as to the price they would be willing to pay and the number of shares they would purchase. During this period, key management personnel generally will make a series of presentations covering the company’s business and industry, market opportunities and financial matters to the investment community. The underwriters will use these presentations as an opportunity to ask questions and establish their due diligence. This presentation period is commonly referred to as the “road show” and generally is conducted in the two-to-three-week period immediately prior to the effectiveness of the registration statement and ability to complete actual sales of the securities.”