Testing the waters communications, or TTW, allows issuers to gauge potential market interest in a contemplated securities offering by communicating with certain investors prior to filing a registration statement with the Securities and Exchange Commission (SEC). While TTWs meetings are commonly a feature of initial public offerings (IPOs), they are also used in a variety of other types of securities offerings. Discussions with prospective investors in TTW meetings can also provide a company with helpful feedback.

Rule 163B under the Securities Act of 1933 (Securities Act) enables issuers and their underwriters to hold discussions and presentations with certain institutional investors prior to or after filing a registration statement with the SEC. Specifically, Rule 163B permits meeting with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). TTWs can be in the form of oral or written communications. Rule 163B provides an exemption from the so-called “gun-jumping” provisions of Section 5(c) of the Securities Act, which prohibit selective disclosure of information prior to its public announcement.

In the IPO context, issuers are allowed to “test the waters” during the so-called waiting period. The waiting period stage of an IPO starts after the issuer publicly files a registration statement with the SEC and extends until the time that such registration statement is declared effective by the SEC. During the waiting period, issuers are generally permitted to make oral TTWs communications, but there are a number of restrictions associated with written TTWs communications. Most TTW meetings tend to take place in the timeframe after the company has confidentially submitted a registration statement with the SEC and prior to the public filing of the registration statement.

The timing and extent of TTWs activities depends on the circumstances surrounding a particular IPO. For example, a company in the life sciences industry may want to engage in more TTW presentations since the success of the company may be especially dependent on one technology and the company may not be generating revenue yet. A life sciences company’s success may also hinge on FDA or other regulatory approval. TTW presentations may also be helpful for explaining highly technical concepts to prospective investors.

Issuers need to be careful to make sure that TTWs communications do not trigger liability under the securities laws. TTWs communications will still be subject to the antifraud provisions under Rule 10b-5 of the Securities Exchange Act of 1934, which makes it illegal to deceive or defraud someone in connection with the sale of securities. Section 12(a)(2) of the Securities Act will also still apply, which creates liability for a person that offers or sells securities by disseminating false or materially misleading information.

Issuers should also be vigilant about whether TTWs communications could trigger disclosure obligations under Regulation FD. If material non-public information (MNPI) is selectively disclosed to certain investors, Regulation FD requires prompt public disclosure by either filing a Form 8-K or issuing a press release. The most common exemption to Regulation FD involves “wall-crossing” investors. If QIBs and IAIs are subject to an obligation to keep the received information confidential, the information from the TTWs communications would not have to be publicly disseminated in a Form 8-K filing.