Throwing the baby out with the tested waters

With the recent SEC proposal that would permit all companies, as opposed to just “emerging growth companies,” to talk to institutional investors prior to filing an offering with the SEC, we are heading towards more confusion with respect to what companies raising funds can say when.

The confusion stems from the fact that the Securities Act of 1933 regulates both “offers” and sales of securities, and the term “offer” is very broadly defined.* When I used to teach securities law to new lawyers I used to joke that the mere statement “This is not an offer of securities” is in fact an offer of securities. The US is somewhat unique in its regulation of offers, in addition to sales, of securities. Over the years, the SEC has eased up on the circumstances under which companies can make offers without having to register them with the SEC and there are now a slew of rules and safe harbors blessing certain types of communication under certain circumstances.

Of interest to early stage companies right now is the following:

• Companies making an offering under Regulation CF cannot test the waters at all, so they can’t ask potential investors “Is it worth us paying an accountant to review our financial statements so that we could make a Regulation CF offering?” They just have to launch and hope for some market interest.
• Companies making a Regulation A offering may test the waters providing that they include a legend explaining what is going on and file all the TTW materials with the SEC (who does actually check those materials for consistency with the official offering circular).
• Companies making offerings to accredited investors only under Rule 506(c) of Regulation D can make offers at any time and by any method they like and to whomever they like, provided they only sell to verified accredited investors.
• Emerging growth companies can pitch ahead of a registered public offering to certain institutional investors, and the SEC is proposing extending this ability to all companies.

Wouldn’t now be a good time to ask whether we need to regulate offers in this manner at all? Could we just have a simple rule that says that where a company is making an offering where the content and timing of disclosure is regulated (ie, registered offerings, Regulation A offerings and Regulation CF offerings), materials used to test the waters must be included in the filing with the SEC (they would be subject to antifraud liability in any case)?

This isn’t a new suggestion:  back in 1995, Linda Quinn, Director of the Division of Corporation Finance, reckoned the SEC had the power to, effectively, deregulate “offers.”

Anyone who agrees should comment on the SEC’s proposal and suggest that rather than expanding the ability to test the waters incrementally, we throw out the reason why we need to have TTW rules in the first place – the regulation of “offers.”