Testing the Waters
Testing the Waters (TTW) is a JOBS Act provision that allows Emerging Growth Companies to engage in preliminary oral or written communications with qualified institutional buyers and institutional accredited investors before or after filing a registration statement, in order to gauge interest in a potential IPO before committing to the full offering process.
Prior to the JOBS Act, securities law imposed strict limitations on communications that could be made by a company or its underwriters prior to an effective registration statement. These pre-filing restrictions, rooted in the anti-gun-jumping provisions of the Securities Act of 1933, were designed to prevent premature market conditioning. The JOBS Act created a targeted exception for EGCs, codified in Section 5(d) of the Securities Act, that permits communications with sophisticated institutional investors before the filing is made.
In practice, Testing the Waters involves members of a company's senior management team — typically the CEO and CFO — meeting with institutional investors, often accompanied by the lead underwriter, to present a preliminary overview of the business. These meetings may occur before the company has even submitted a draft registration statement to the SEC. The meetings are legally considered offers, but the JOBS Act exempts EGCs from the prohibition on pre-filing offers when the audience is limited to qualified institutional buyers (QIBs, generally institutions managing at least $100 million in securities) and institutional accredited investors.
The TTW process serves several commercially important functions. Management teams can obtain genuine market feedback on valuation expectations before committing to the legal and financial costs of a full registration process. If the feedback suggests that the market will not support the valuations management expects, the company can quietly withdraw from IPO planning without any public disclosure. Underwriters use TTW meetings to gather intelligence about which institutions are likely to be anchor participants in the book-building process.
In 2017, the SEC extended TTW communications to all issuers, not just EGCs, in connection with registered offerings. However, the provision remains most associated with EGC IPOs because it was originally created for that context and is most commonly utilized by earlier-stage growth companies where valuation uncertainty is highest.
TTW communications are subject to anti-fraud provisions. Statements made in TTW meetings cannot be materially misleading, and they must be consistent with disclosures ultimately made in the registration statement. Companies and underwriters maintain records of TTW meetings and materials as a standard compliance practice. The SEC may review TTW materials as part of its examination of the registration statement, ensuring that preliminary investor communications are not inconsistent with the disclosures ultimately presented in the prospectus.