Today the SEC announced an amendment, effective in about two months, of regulations that will allow all companies to “test the waters” for an IPO without risking violation of the Securities Act. The original regulation allowed emerging companies (as defined) to speak to certain qualified investors (large and sophisticated, as defined) to test the market by asking potential investors as to their level of interest in an IPO that was going to be filed or had just recently been filed. Absent this regulation, such contact in most instances violated Section 5 of the ’33 Act as a solicitation of investment without an effective Registration Statement. The purpose was to jump-start investment in emerging companies.

The expanded regulation makes this “testing the waters” approach open to all companies regardless of size or stage of development, again designed to foster greater use of the Federal securities registration system. Why now?

You no doubt have observed that many large and successful companies, indeed some unicorns, have remained privately held. And, helped by registration relaxation under the ’34 Act, these companies could grow, have many shareholders, permit some trading of their securities, all without ever having to become subject to Federal registration and disclosure and governance control under any Federal law. This resulted in a decline in IPOs. This decline was thought to be to the detriment of the regulated trading markets. The SEC has taken this new action in order to increase “the likelihood of successful public securities offerings,” according to SEC Chair Jay Clayton.