Testing The Waters When Conducting An Offering Using Form S-1
Posted by Laura Anthony, Esq. on October 03, 2016
Testing The Waters When Conducting An Offering Using Form S-1- Today is the continuation in a LawCast series detailing testing the waters when conducting an offering using Form S-1.
The pre-filing period is that time frame between the decision to proceed with a public offering and the actual filing of a registration statement with the SEC. During this period, a potential registrant is subject to restrictions on public disclosure relating to the offering. Statements made within 30 days of filing a registration statement that could be considered an attempt to pre-sell the public offering or prime or condition the market in advance of the offering, may be considered an illegal offer, resulting in a Section 5 “gun-jumping” violation, if no exception or safe harbor applies.
This might result in liability for violating securities laws, the SEC’s delaying of the public offering, and/or requiring disclosures of these potential securities law violations in the registration statement. Press interviews, participation in investment banker-sponsored conferences, and new advertising campaigns are discouraged during this period. Although Section 5(c) of the Securities Act prohibits oral and written offers of a security before a registration statement is filed, there are, many exceptions and safe harbor rules to this general prohibition. One of those exceptions is Section 105(c) of the JOBS Act which allows “Test the Waters” communications by an Emerging Growth Company.
In April 2012, the Jumpstart Our Business Startups Act, known as the “JOBS Act” was enacted, which, established a new process and disclosures for public offerings by a new class of companies referred to as “emerging growth companies” or “EGCs.” An EGC is defined as a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011. Section 105(c) of the JOBS Act provides an EGC with the flexibility to “test the waters” by engaging in oral or written communications with qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”) in order to gauge their interest in a proposed offering, whether prior to or following the first filing of any registration statement, subject to the requirement that no security may be sold until the registration statement is effective. There are no form or content restrictions on these communications, and there is no requirement to file written communications with the SEC.
Generally, in order to be considered a QIB, you must own and invest $100 million of securities, and in order to be considered an IAI, you must have a minimum of $5 million in assets. Under the rules, “well-known seasoned issuers,” or WKSIs, can engage in similar test-the-waters communications, but smaller reporting companies that do not otherwise qualify as an EGC cannot.