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Testing-the-waters refers to issuers gauging market interest in their public offering by communicating with certain institutional investors prior to filing a registration statement

Under Sections 5 and 2(a)(3) of the Securities Act, issuers cannot make oral or written offers to sell their securities to prospective investors prior to filing a registration statement, i.e. in the pre-filing period. In 2019, the Securities and Exchange Commission (SEC) promulgated Securities Act Rule 163B to permit issuers to make offers to certain institutional investors, in what is termed “testing-the-waters.” The institutional investors must qualify as qualified institutional buyers (QIBs) or institutional accredited investors (IAIs). Prior to the promulgation of Rule 163B, only emerging growth companies (EGCs) could engage in testing-the-waters communications. The SEC explained in their Rue 163B Press Release that the expansion of testing-the-waters to all issuers “will provide all issuers with flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protections.” 

[Last updated in January of 2022 by the Wex Definitions Team]