SEC Makes Amendments to “Test-the-Waters” and “Demo Day” Communications Rules

Changes facilitate better access to capital and investment opportunities

Part 2

By Julie Herzog

The SEC recently amended its exempt offering framework rules in an effort to promote capital formation and expand investment opportunities while preserving or improving important investor protections. The new rules take effect 60 days after publication in the Federal Register.

In my first post on this topic, I covered the history of the SEC Exempt Offering Framework rules and focused specifically on changes regarding Integration Framework, Offering and Investment Limits. In this post, I will cover “Test-the-Waters” and “Demo Day” Communications.

“Test-the-Waters” Communications

New Rule 241 will enable all issuers to engage in “test-the-waters” communications with qualified institutional buyers and institutional accredited investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering.

These communications will be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement.

It is important to note that under the new Securities Act Rule 241, the testing-the-waters material must state all of the following:

  • The issuer is considering an offering of securities exempt from registration under the Securities Act, but has not determined a specific exemption the issuer intends to rely on for the subsequent offer and sale of the securities.

  • No money or other consideration is being solicited. If sent, it will not be accepted.

  • No offer to buy the securities can be accepted and no part of the purchase price can be received until the issuer determines the exemption under which the offering is intended to be conducted and, where applicable, the filing, disclosure or qualification requirements of such exemption are met.

  • An interested party is under no obligation or commitment of any kind.

  • No solicitation or acceptance of money or other consideration, or of any commitment, binding or otherwise, will be permitted until the issuer makes a determination as to the exemption to be relied on and the offering has commenced.

The benefit of the expanded test-the-waters provision is that it will provide issuers flexibility in determining whether to proceed with a registered public offering while maintaining appropriate investor protections. Until the issuer determines which exemption it will use, and the offering is commenced, no money or other consideration may be solicited or accepted from investors.

 “Demo Day” Communications

“Demo days” are sponsored meetings during which issuers present their business to potential investors. New Rule 148 provides that certain “demo day” communications will not be deemed general solicitation or general advertising if the communications are made in connection with a seminar or meeting sponsored by a college, university, or other institution of higher education, state or local government or instrumentality of a state or local government, a nonprofit or an angel investor group, incubator or accelerator

Rule 148 does place conditions on its exemptions, which are as follows:

  • More than one issuer must participate in the event.

  • The sponsor may not make investment recommendations, provide investment advice to attendees of the event, or receive compensation for making introductions or compensation that might require the sponsor to register as a broker.

  • Virtual participation in the event is limited.

  •  Advertising for the meeting or seminar may not reference a specific offering of securities.

In my next post, we’ll review the changes to Accredited Investor Verification Methods and Financial Statement Requirements in Rule 506(b) Offerings

For a more detailed account and explanation of the SEC rule amendments, please see the final rules and/or review the SEC table that provides an overview of the principal private offering exemptions.

If you have questions about the potential implications of the amended rules on your business, the experienced corporate attorneys at Fortis Law Partners are here to help.

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