“Testing the waters” (TTW) communications let an issuer conducting an IPO, and anyone acting on its behalf, such as its underwriters, gauge institutional investor interest in a potential registered securities offering before (or after) filing a registration statement. SEC Rule 163B provides an exemption that permits these “test-the-waters communications” when they are directed only to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs), or persons the issuer reasonably believes are QIBs/IAIs.
What SEC Rule 163B Does (and Does Not Do)
Rule 163B governs who you may communicate with and provides the exemption for those communications. It does not impose specific required legends or a filing requirement for TTW materials (although legends are strongly recommended as a best practice). Importantly, the SEC’s anti-fraud provisions apply to TTW content, so presentations and scripts must be truthful, not misleading, and appropriately balanced.
The core conditions for relying on Rule 163B are:
- The issuer (or any person acting on its behalf, such as an underwriter) has a reasonable belief that each recipient is a QIB or an IAI; and
- The communication is directed only to QIBs/IAIs (or persons the issuer reasonably believes are QIBs/IAIs).
Key Definitions: QIB and IAI
Qualified Institutional Buyer (QIB): Generally, a QIB is an institutional investor that meets the thresholds in SEC Rule 144A. Commonly, institutions that own and invest at least $100 million in securities of unaffiliated issuers (with different standards for certain entities).
Institutional Accredited Investor (IAI): An IAI is an institutional entity that qualifies as an accredited investor under SEC Rule 501(a). For example, certain banks, registered investment companies, business development companies, and large entities that meet specified asset tests.
Examples of QIBs/IAIs in Practice
- Large mutual fund complexes and registered investment advisers managing institutional assets.
- Insurance company general accounts and large pension plans.
- Certain banks, trust departments, and broker-dealers (as applicable under the rules).
- Private funds that qualify as institutional accredited investors and/or meet QIB standards.
Why Companies Use Testing the Waters Communications
TTW helps issuers pressure-test valuation, timing, and messaging before publicly launching an offering. Used correctly, it can reduce execution risk, help calibrate a preliminary price range, and identify disclosure or diligence gaps early.
Do’s and Don’ts for Testing the Waters (Rule 163B)
Do:
- Treat the company and underwriters as one team for Rule 163B compliance; coordinate messaging and process controls with counsel and the underwriting syndicate (e.g., Cantor/DLA) and with Roth for compliance where applicable.
- Limit the audience to QIBs/IAIs (or persons you reasonably believe are QIBs/IAIs) and keep a written record supporting that reasonable belief.
- Use invite-only sessions with door/badge checks, attendee lists, written investor reps/certifications, and clear “no recording/no forwarding” rules.
- Watermark TTW decks, control distribution (including hard copies), and maintain dated versions of decks and scripts.
- Keep content accurate, balanced, and consistent with expected registration statement disclosure; assume the SEC may request TTW materials during the S‑1 review process.
Don’t:
- Do not take money, accept commitments, promise allocations, or do anything that looks like taking orders for the offering.
- Do not share TTW materials publicly (no online posting, no press, no social media, and no conference apps that reach a mixed audience).
- Do not allow widespread forwarding of emails or decks; avoid uncontrolled distribution channels.
- Do not use hype-driven language such as “can’t miss” or “great investment,” which can look like improper market conditioning outside a limited institutional TTW discussion.
- Do not include statements that are misleading by omission; avoid selective, one-sided presentations of risks, projections, or key metrics.
Recommended TTW Legends (Best Practice)
Although Rule 163B does not mandate legends, a legend package is recommended to reduce regulatory and litigation risk. Common legend concepts include:
- “For informational purposes only.”
- “Not an offer to sell or a solicitation of an offer to buy.”
- “No money is being solicited, and no commitments will be accepted.”
- “Any offer will be made only by means of a prospectus (once available).”
- “Confidential: do not redistribute.”
- Forward-looking statements disclaimer (and meaningful cautionary language).
Process Controls and Recordkeeping
Build an audit-ready file. Maintain dated copies of decks and scripts, attendee lists, and distribution logs. If decks are updated, archive prior versions and track what changed. For meetings, preserve a clean list of invitees and attendees, along with any QIB/IAI certifications.
FAQ: Rule 163B Testing the Waters
Does Rule 163B require TTW materials to be filed with the SEC?
No. Rule 163B itself does not impose a filing requirement for TTW materials. However, keep copies and logs because the SEC may request them during an IPO review.
Can we use TTW communications with retail investors?
No. Rule 163B is limited to QIBs and IAIs (or persons you reasonably believe are QIBs/IAIs).
Can underwriters conduct TTW on the issuer’s behalf?
Yes. Rule 163B permits communications by the issuer or persons acting on the issuer’s behalf, such as underwriters, subject to the rule’s conditions.
What’s the biggest compliance risk in TTW?
Uncontrolled distribution and content that could be viewed as misleading or overly promotional. Treat TTW like it will be scrutinized under anti-fraud standards.
Need a TTW deck legend, distribution checklist, or a tailored Rule 163B compliance playbook for your offering? Visit SecuritiesLawyer101 for practical securities law guidance and templates.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].
Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com