AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing a new rule under the Securities Act of 1933 that would permit issuers to engage in oral or written communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers or institutional accredited investors, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. If adopted the rule would extend such accommodation currently available to emerging growth companies to all issuers.

DATES:

Comments should be received by April 29, 2019.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment forms (http://www.sec.gov/​rules/​proposed.shtml); or
• Send an email to rule-comments@sec.gov. Please include File Number S7-01-19 on the subject line.

Paper Comments

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-01-19. This file number should be included in the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (https://www.sec.gov/​rules/​proposed.shtml). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Maryse Mills-Apenteng, Special Counsel, at (202) 551-3430, Office of Rulemaking, Division of Corporation Finance; Angela Mokodean, Senior Counsel, or Amanda Hollander Wagner, Branch Chief, at (202) 551-6921, Investment Company Regulation Office, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing for public comment 17 CFR 230.163B (new “Rule 163B”) under the Securities Act of 1933 [15 U.S.C. 77a et seq.] (“Securities Act”) and amendments to 17 CFR 230.405 (“Rule 405”) under the Securities Act.

Table of Contents

I. Introduction

II. Proposed Amendments

A. Proposed Exemption

B. Eligibility

C. Investor Status

D. Non-Exclusivity of the Proposed Rule

E. Considerations for Use by Investment Companies

III. Economic Analysis

A. Introduction and Broad Economic Considerations

B. Baseline and Affected Parties

1. Baseline

2. Affected Parties

C. Anticipated Economic Effects

1. Potential Benefits to Issuers

2. Potential Costs to Issuers

3. Potential Benefits to Investors

4. Potential Costs to Investors

5. Variation in Economic Impact Due to Issuer Characteristics

6. Variation in Economic Impact Due to Investor Characteristics

D. Reasonable Alternatives

E. Request for Comment

IV. Paperwork Reduction Act

V. Small Business Regulatory Enforcement Fairness Act

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rule

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. Request for Comment

VII. Statutory Authority

I. Introduction

In 2012, Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act”),^[1] which created new Section 5(d) of the Securities Act.^[2] Section 5(d) permits an emerging growth company (“EGC”) ^[3] and any person authorized to act on its behalf to engage in oral or written communications with potential investors that are qualified institutional buyers (“QIBs”), as that term is defined in paragraph (a) of 17 CFR 230.144A (“Rule 144A”), and institutional accredited investors (“IAIs”) ^[4] before or after filing a registration statement to gauge such investors' interest in a contemplated securities offering.^[5] The Commission's rules have long recognized that QIBs and accredited investors have a level of financial sophistication and ability to sustain investment losses that render the protections of the Securities Act's registration process unnecessary.^[6]

Permitting issuers to “test the waters” is intended to provide increased flexibility to issuers with respect to their communications about contemplated registered securities offerings, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.^[7] Although the test-the-waters provisions under Section 5(d) are available only to EGCs, such issuers make up a substantial portion of the IPO market. By one estimate, EGCs “dominate the [IPO] market, accounting for 87% of IPOs that have gone effective since the JOBS Act was enacted in April 2012.” ^[8]

Evidence suggests that a significant percentage of EGC issuers conducting IPOs have availed themselves of the accommodation afforded by Section 5(d),^[9] and there have been calls for the Commission to consider expanding the test-the-waters accommodation to issuers that are not EGCs,^[10] as well as recent proposed legislation to effect such a change statutorily.^[11] In our observation, pre-filing solicitations pursuant to Section 5(d) have not been a significant cause for concern with respect to investor protection. We believe that extending the test-the-waters accommodation to a broader range of issuers than provided in Section 5(d) may benefit more issuers seeking capital in our public markets and level the playing field with respect to permissible investor solicitations for EGCs and other issuers contemplating a registered securities offering. We believe that the ability to test the waters may also encourage additional participation in the public markets. Increased participation in our public markets, in turn, promotes more investment opportunities for more investors, including retail investors, as well as transparency and resiliency in the marketplace.

Notwithstanding Section 5(d), the Securities Act generally restricts communications by issuers contemplating a registered securities offering during various phases of the offering process. Under Section 5 of the Securities Act and related Securities Act rules, the communication restrictions depend primarily on the timing of the communication. Generally, written and oral offers prior to filing a registration statement are prohibited, absent an exemption.^[12] Any violation of these restrictions—whether before, during or after a public offering—is commonly referred to as “gun-jumping.”

Over the years, the Commission has undertaken several initiatives to liberalize communications during the offering process. As part of the Securities Offering Reform rulemaking, the Commission adopted, among other Securities Act communications reforms, 17 CFR 230.163 (“Rule 163”) to provide an exemption from Section 5(c) for pre-filing communications by well-known seasoned issuers (“WKSIs”), without limitation as to the type of investors that may be solicited, subject to certain filing and legending requirements.^[13] Similarly, in its 2015 amendments to Regulation A, the Commission adopted 17 CFR 230.255 (“Rule 255”) that allows eligible issuers conducting an offering under Regulation A to engage in test-the-waters communications with potential investors, without restriction as to the type of investors, subject to compliance with certain disclaimer and filing requirements.^[14] Each of these initiatives has contributed to the modernization of the Securities Act communications rules.^[15]

As we continue to assess the effectiveness of the Securities Act offering communications framework, and in light of our experience with permissible test-the-waters communications under Section 5(d), we are proposing new Rule 163B to allow all issuers, including non-EGC issuers, to engage in test-the-waters communications with potential investors that are, or that the issuer reasonably believes to be, QIBs or IAIs, either prior to or following the date of filing of a registration statement related to such offering.^[16] If adopted, the rule would provide an exemption from Section 5(b)(1) and Section 5(c) of the Securities Act for such communications.

We believe that, by allowing more issuers to engage with certain sophisticated institutional investors while in the process of preparing for a contemplated registered securities offering, the proposed rule could help issuers to better assess the demand for and valuation of their securities and to discern which terms and structural components of the offering may be most important to investors. This in turn could enhance the ability of issuers to conduct successful offerings and lower their cost of capital. To the extent this is the case, the proposed rule could encourage additional registered offerings in the U.S. We believe that increasing the number of registered offerings can have long-term benefits for investors and our markets, including improved issuer disclosure, increased transparency in the marketplace, better informed investors, and a broader pool of issuers in which any investor may invest.

We believe that many benefits of the proposed rule if finalized would similarly apply to investment company issuers. Test-the-waters communications may help investment company issuers better assess market demand for a particular investment strategy, as well as appropriate fee structures, prior to incurring the full costs of a registered offering. However, we also recognize that certain features of investment companies discussed below may make their use of the proposed rule more limited than other issuers.^[17]

II. Proposed Amendments

A. Proposed Exemption

We are proposing an exemption from the gun-jumping provisions of Section 5 of the Securities Act for test-the-waters communications by an issuer contemplating a registered securities offering. Specifically, the proposed exemption would permit any issuer or person authorized to act on behalf of an issuer,^[18] including an underwriter, either prior to or following the filing of a registration statement, to engage in oral or written communications with potential investors that are, or that the issuer reasonably believes are, QIBs or IAIs, to determine whether such investors might have an interest in the contemplated offering.

Section 5(c) prohibits any written or oral offers prior to the filing of a registration statement. Once an issuer has filed a registration statement, Section 5(b)(1) limits written offers to a “statutory prospectus” that conforms to the information requirements of Securities Act Section 10.^[19] Under the proposed rule, communications soliciting interest in a registered securities offering with potential investors that are, or are reasonably believed to be, QIBs or IAIs would be exempt from Section 5(b)(1) and Section 5(c). The proposed rule would not be available, however, for any communication that, while in technical compliance with the rule, is part of a plan or scheme to evade the requirements of Section 5 of the Act.

Test-the-waters communications that comply with the proposed rule would not need to be filed with the Commission, nor would they be required to include any specified legends. We do not believe it is necessary to impose such requirements because communications under the proposed rule would be limited to investors that are, or are reasonably believed to be, QIBs and IAIs. These types of investors are generally considered to have the ability to assess investment opportunities, thereby reducing the need for the additional safeguards provided by a filing or legending requirement. Consistent with this approach, we are proposing to amend Rule 405 to exclude a written communication used in reliance on the proposed rule from the definition of free writing prospectus. As a result, any such communication that is limited to gauging interest in a contemplated registered securities offering would not be considered a “free writing prospectus” as that term is defined in Securities Act Rule 405. Furthermore, we are proposing that communications made under the proposed rule would not be required to be filed pursuant to 17 CFR 230.424(a) (“Rule 424(a)”) or 17 CFR 230.497(a) (“Rule 497(a)”) of Regulation C ^[20] under the Securities Act or Section 24(b) of the Investment Company Act of 1940 ^[21] (the “Investment Company Act”) and the rules and regulations thereunder.^[22]

We believe that the flexibility afforded in exempting test-the-waters communications from Sections 5(b)(1) and (c) would still maintain investor protections. The proposed rule would only allow test-the-waters communications with certain institutional investors, which, as noted above, do not need the protections of the Securities Act's registration process. Further, these communications, while exempt from the gun-jumping provisions of Section 5, would nonetheless still be considered “offers” as defined in Section 2(a)(3) of the Securities Act ^[23] and would therefore be subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.^[24]

Additionally, information provided in a test-the-waters communication under the proposed rule must not conflict with material information in the related registration statement. As is currently the practice of Commission staff when reviewing offerings conducted by EGCs, the Commission or its staff could request that an issuer furnish the staff any test-the-waters communication used in connection with an offering.^[25]

Further, issuers subject to Regulation FD would need to consider whether any information in the test-the-waters communication would trigger any obligations under Regulation FD, or whether an exception to Regulation FD would apply.^[26] Regulation FD requires public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders ^[27] if the issuer has a class of securities registered under Section 12 of the Exchange Act or is required to file reports under Section 15(d) of the Exchange Act.^[28] Thus, communications made under the proposed rule that also include material nonpublic information could be subject to 17 CFR 243.100(a) of Regulation FD unless an exclusion under 17 CFR 243.100(b)(2) of Regulation FD applies. For example, Regulation FD generally does not apply if the selective disclosure was made to a person who owes a duty of trust or confidence to the issuer or to a person who expressly agrees to maintain the disclosed information in confidence.^[29] Thus, to avoid the application of Regulation FD, an issuer could consider obtaining confidentiality agreements from any potential investor engaged under the proposed rule.^[30]

Request for Comment

1. Would the proposed exemption from Section 5(b)(1) and Section 5(c) to allow solicitations of interest from QIBs and IAIs prior to and following the filing of a registration statement provide issuers with appropriate flexibility in determining when to proceed with a registered public offering? Do test-the-waters communications aid issuers in assessing demand for their offerings? Do they aid issuers in structuring their offerings? Does this information potentially lead to a lower cost of capital? Would the additional flexibility provided by the proposed rule result in a greater number of issuers pursuing a registered public offering? Why or why not?

2. In what circumstances and how do EGCs currently take advantage of the accommodations of Securities Act Section 5(d)? What are the reasons why an EGC may choose not to avail itself of the accommodations?

3. Does the proposed expansion of permissible test-the-waters communications raise investor protection concerns? If so, how? Does the proposed expansion of permissible test-the-waters communications raise concerns of inappropriate marketing, conditioning, or hyping? How might such concerns be alleviated?

4. Should test-the-waters communications under the proposed rule be deemed “offers” under Securities Act Section 2(a)(3) that are subject to Section 12(a)(2) liability, as proposed? Why or why not?

5. Should we require written communications under the proposed rule to be filed with the Commission, for example, as an exhibit to a registration statement, and to become subject to Section 11 liability? Why or why not? If so, at what point should they be required to be filed?

6. Should legends or disclaimers be required on any written materials used in compliance with the proposed rule? Why or why not? If so, should we prescribe the content of those legends or disclaimers?

7. Should we permit written or oral solicitations of interest to be made by an issuer before and after a registration statement is filed, as proposed? Why or why not? Should we treat pre-filing and post-filing test-the-waters communications differently? If so, how should they be treated?

8. In what circumstances does Regulation FD affect the use of the current accommodation for test-the-waters communications under Section 5(d)? Should there be a specific exception to Regulation FD for some or all communications made in compliance with the proposed rule? If so, under what circumstances and how should such an exception apply?

B. Eligibility

Any issuer, or person authorized to act on behalf of the issuer, would be able to rely on the proposed rule to engage in exempt oral or written communications with potential investors that are, or that the issuer or person authorized to act on behalf of the issuer reasonably believes are, QIBs or IAIs. All issuers—including non-reporting issuers, EGCs, non-EGCs, WKSIs, and investment companies (including registered investment companies and business development companies (“BDCs”)) ^[31] —would be eligible to rely on the proposed rule.^[32] We believe that, in light of our experience with test-the-waters communications for EGCs under Section 5(d), and given the sophisticated nature of the institutional investors to which communications under the proposed rule could be directed, it is appropriate to expand the accommodations to all issuers.^[33]

Request for Comment

9. Should the proposed rule be available to all issuers as proposed? Why or why not?

10. Should certain groups of issuers, such as non-reporting issuers, ABS issuers, certain or all types of “ineligible issuers” as defined in Rule 405, such as blank check issuers or penny stock issuers, be excluded from the rule? If so, which issuers should be excluded and why? Should communications related to certain types of securities offerings be excluded from the rule? If so, which types of offerings and why?

C. Investor Status

If adopted, the rule would permit an issuer to engage in pre- and post-filing solicitations of interest with potential investors that are, or that the issuer reasonably believes to be, QIBs and IAIs.^[34] A QIB is a specified institution that, acting for its own account or the accounts of other QIBs, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers.^[35] Banks and other specified financial institutions must also have a net worth of at least $25 million.^[36] A registered broker-dealer qualifies as a QIB if, in the aggregate, it owns and invests on a discretionary basis at least $10 million in securities of issuers that are not affiliated with the broker-dealer.^[37] IAIs are any institutional investor that is also an accredited investor, as defined in paragraph (a) of Rule 501 of Regulation D. Specifically, for the purposes of the proposed rule, an IAI would be an institution that meets the criteria of Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8). The proposed limitation to these institutional investors is intended to ensure that test-the-waters communications are directed to investors that are financially sophisticated and therefore do not require the same level of protections of the Securities Act's registration process as other types of investors.

Under the proposed rule, any potential investor solicited must meet, or issuers must reasonably believe that the potential investor meets, the requirements of the rule. We believe this standard would avoid imposing an undue burden on issuers compared to requiring issuers to verify investor status, as in 17 CFR 230.506(c) (“Rule 506(c)”) of Regulation D. For example, under the proposed rule, an issuer could reasonably believe that a potential investor is a QIB or IAI even though the investor may have provided false information or documentation to the issuer. We do not believe an issuer should be subject to a violation of Section 5 in such circumstances, so long as the issuer established a reasonable belief with respect to the potential investor's status based on the particular facts and circumstances.

We are not proposing to specify the steps an issuer could or must take to establish a reasonable belief that the intended recipients of test-the-waters communications are QIBs or IAIs.^[38] Identifying specific steps or providing additional guidance that could be used by an issuer to establish a reasonable belief regarding an investor's status could create a risk that such steps or guidance would become a de facto minimum standard. Instead, we believe issuers should continue to rely on the methods they currently use to establish a reasonable belief regarding an investor's status as a QIB or accredited investor pursuant to Securities Act Rules 144A and 501(a), respectively. By not specifying the steps an issuer could or must take to establish a reasonable belief as to investor status, this approach is intended to provide issuers with the flexibility to use methods that are cost-effective but appropriate in light of the facts and circumstances of each contemplated offering and each potential investor.

Request for Comment

11. Should issuers be required to establish a reasonable belief that the potential investors involved in proposed Rule 163B communications are QIBs and IAIs, as proposed? If not, what would be the appropriate standard? Are existing guidance and practice sufficient for issuers to be able to establish a reasonable belief with respect to QIB and IAI status? Should the proposed rule provide a non-exclusive list of methods that could be used to establish a reasonable belief as to whether an investor is a QIB or IAI? Why or why not?

12. Should the proposed exemption limit communications to QIBs and IAIs, as proposed? Why or why not? If not, what different types of investors should issuers be permitted to communicate with? Alternatively, should there be no restrictions on the types of investors that issuers could communicate with under this rule? Why or why not? If there are no restrictions on the types of investors that issuers could communicate with, should the rules impose any filing or legending requirements for the communications? Why or why not?

D. Non-Exclusivity of the Proposed Rule

The proposed rule would be non-exclusive. Attempted compliance with proposed Rule 163B would not act as an exclusive election and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering. An issuer would not be precluded, for instance, from relying on the proposed rule and Securities Act Section 5(d), Securities Act Rules 163, or 17 CFR 230.164 (“Rule 164”), or Rule 255 of Regulation A. The following table summarizes some of the existing provisions that issuers may rely on in addition to, or in lieu of, the proposed rule:

While an issuer contemplating a registered securities offering may solicit interest from QIBs and IAIs without legending or filing those materials in compliance with new Rule 163B, if the same issuer decides to claim the availability of another exemption or communication rule with respect to those communications, the conditions of the other exemption or rule relied upon must be satisfied.

For instance, a WKSI may intend to solicit interest from QIBs under the new rule and, in compliance with the rule, omit any legending. If the issuer decides later during the offering process to expand pre-filing solicitations of interest to include potential investors not within the scope of Rule 163B, for example accredited investors that are natural persons, the issuer may instead be able to claim an exemption under Rule 163. To avail itself of that exemption, the issuer must have complied with Rule 163's legending requirements from the start of any communications with non-QIBs or non-IAIs, and would have to file the legended materials if a registration statement is filed. Similarly, if an issuer engaged in test-the-waters communications with institutional investors to determine whether to pursue either a registered securities offering or an offering under Regulation A, the issuer must comply with the legending and filing requirements of Securities Act Rule 255 until such time that it determines not to pursue the Regulation A offering.^[45]

Request for Comment

13. Should the proposed rule be non-exclusive, as proposed? Why or why not?

14. How would the proposed rule affect reliance on Section 5(d), Rule 163, Rule 164, or Rule 255, if at all? In light of the proposed rule, are there changes that we should consider making to those rules?

15. Are there other rules not addressed above that we should consider that could affect or be affected by the proposed rule? If so, how should we address the interaction between such other rules and the proposed rule?

E. Considerations for Use by Investment Companies

Issuers that are, or are considering becoming, registered investment companies or BDCs (together, “funds”) would be eligible to engage in test-the-waters communications under the proposed rule. Funds and their advisers may have an interest in engaging in test-the-waters communications to help assess market demand for a fund—for example, for a particular investment strategy or fee structure—before incurring the full costs of a registered offering. Thus, we believe it would be appropriate to allow funds to rely on the proposed rule. However, as discussed below, funds' use of test-the-waters communications under the proposed rule, and the associated benefits, may be more limited than for other issuers in practice, particularly with respect to pre-filing communications.

Fund communications contemplated by proposed Rule 163B generally would be considered “sales literature” and are currently subject to their own rules under the Securities Act and Investment Company Act.^[46] Under the current framework, compliance with these rules is generally necessary for certain communications not to be deemed an offer that otherwise could be a non-conforming prospectus whose use may violate Section 5 of the Securities Act.^[47] For example, after a fund has filed a registration statement, it may engage in communications that are advertisements under Rule 482 under the Securities Act,^[48] or that are deemed to be sales literature under Rule 34b-1 under the Investment Company Act.^[49] Communications under Rule 482 and Rule 34b-1 are also subject to certain filing,^[50] disclosure,^[51] and legending requirements.^[52] In addition, Congress has directed the Commission to extend the securities offering rules that are available to other issuers required to file reports under Section 13(a) or Section 15(d) of the Exchange Act (which include certain communications rules) to BDCs and certain registered closed-end investment companies.^[53] Under the proposal, funds could rely on proposed Rule 163B to engage in permissible test-the-waters communications without complying with these other communications rules.

Because funds are primarily investment vehicles (i.e., they are formed to issue securities that provide investors with an interest in the pool of assets held by the fund), a fund typically conducts an exempt or registered offering within a relatively short period of time after it is organized in comparison to most other types of issuers. We understand that, as part of this process, funds typically register as investment companies ^[54] during a seeding period in which the fund's sponsor tests the fund's investment strategy and establishes a performance track record for marketing purposes.^[55] Under the proposed rule, a fund could engage in test-the-waters communications with QIBs and IAIs during the seeding period without filing a Securities Act registration statement. However, if a fund is contemplating a registered offering at the time of its organization, we recognize it is common practice to simultaneously file a registration statement under both the Investment Company Act and the Securities Act to take advantage of certain efficiencies.^[56] If funds collectively continue to prefer to file a single registration statement under both Acts under these circumstances, funds may be less likely to use the proposed rule for pre-filing communications than other issuers.^[57] In any event, however, funds that preliminarily engage in exempt offerings—including certain registered closed-end funds and BDCs—could rely on the proposed rule to engage in pre-filing communications if they are considering a subsequent registered offering.^[58]

In addition, funds may benefit from test-the-waters communications after filing a Securities Act registration statement. Proposed Rule 163B would allow them to communicate with QIBs and IAIs about a contemplated offering without either being an EGC or complying with the requirements of Section 24(b) of the Investment Company Act or Rules 482 or 34b-1, including the associated filing, disclosure, and legending requirements. To promote consistent treatment of different types of issuers' test-the-waters communications under proposed Rule 163B and for similar policy reasons as explained above with respect to other issuers, we are proposing to exclude funds' test-the-waters communications conducted under proposed Rule 163B from the filing requirements in Rule 497 under the Securities Act and in Section 24(b) of the Investment Company Act and the rules thereunder.^[59]

Request for Comment

16. Would funds or persons acting on their behalf rely on the proposed rule in practice? If so, in what contexts would they use the proposed rule, and what would be the associated benefits? For example, would the proposed rule impact communications during the product development stage before a registration statement is filed? Why or why not? Are there ways we should modify the proposed rule with respect to fund issuers in recognition of differences between funds and corporate issuers (e.g., differences in general investor bases)?

17. Would certain types of funds (such as BDCs and registered closed-end funds) be more likely to benefit from the proposed rule than other types of funds (such as open-end funds)? Should certain or all funds be excluded from the scope of the proposed rule? Why or why not?

18. Do BDCs that are EGCs currently engage in test-the-waters communications? If so, under what circumstances have test-the-waters communications been useful? If test-the-waters communications have not been useful to BDCs that are EGCs, why have they not been useful? Have these communications been limited due to any restrictions in the Investment Company Act or other legal requirements? If so, should we provide any exemptions from these requirements? Why or why not?

19. Are there legal or other restrictions that would impede the ability of fund sponsors, underwriters, or others to engage in test-the-waters communications under the proposed rule in connection with forming a new registered investment company or BDC? If so, how should we address such restrictions? For example, could Section 7 of the Investment Company Act restrict or limit the usefulness of test-the-waters communications in practice? ^[60] Should we provide an exemption from Section 7 of the Investment Company Act for test-the-waters communications conducted under the proposed rule, for some or all types of fund issuers? Why or why not?

20. Should we restrict the types of information that funds can provide under the proposed rule? For example, should we limit open-end fund performance information in test-the-waters communications, similar to Rule 482? Why or why not? Should we apply other requirements, such as filing, disclosure, or legending requirements, to funds' written test-the-waters communications?

21. Would a private fund that is considering converting to a registered investment company or BDC benefit from engaging in test-the-waters communications with QIBs and IAIs to inform this decision, or would the decision to convert be driven by communications with existing investors? If a private fund would have a use for test-the-waters communications, are there legal or other restrictions that would limit the ability of the private fund, or persons authorized to act on its behalf, to rely on the proposed rule? For example, would language in Section 3(c)(1) or 3(c)(7) of the Investment Company Act restricting public offerings have a potential chilling effect on otherwise permissible test-the-waters communications under the proposed rule? ^[61] If so, how should we address this issue?

22. To the extent that open-end funds would benefit from the ability to engage in pre- or post-filing test-the-waters communications with QIBs and IAIs, are there differences between series funds (i.e., where a single registrant can create new funds by filing post-effective amendments to its registration statement) ^[62] and non-series funds that the rule should take into account?

III. Economic Analysis

A. Introduction and Broad Economic Considerations

We are mindful of the costs imposed by and the benefits obtained from our rules. Securities Act Section 2(b) ^[63] and Investment Company Act Section 2(c) ^[64] require us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in (or, with respect to the Investment Company Act, consistent with) the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

As noted above, Securities Act Section 5(d) was enacted under the JOBS Act and permits EGCs to engage in communications with QIBs or IAIs to determine their interest in an offering before or after the filing of a registration statement. However, companies that do not presently qualify as EGCs (including companies that previously qualified as EGCs but that have lost EGC status, larger companies, companies that first issued common equity pursuant to a Securities Act registration statement before December 8, 2011, asset-backed issuers, and registered investment companies) cannot avail themselves of Section 5(d) when raising capital through registered offerings, resulting in potential competitive impacts. The lower flexibility in raising capital through registered offerings may contribute to decreased willingness among non-EGCs to rely on registered offerings or impair their ability to raise capital through registered offerings at a lower cost. The proposed rule would expand the permissibility of test-the-waters communications to all issuers and potential issuers in contemplated registered securities offerings, regardless of whether such issuers qualify as EGCs.

Test-the-waters communications would provide issuers, particularly non-EGC issuers that are unable to rely on Section 5(d), with additional tools to gather valuable information about investor interest before a potential registered offering. By allowing issuers to gauge market interest ^[65] in a contemplated registered securities offering, these communications could result in a more efficient and potentially lower-cost and lower-risk capital raising process for issuers. By extending the flexibility presently afforded to EGCs to all issuers, including non-EGCs, the proposed rule would result in greater harmonization of offering process requirements between EGC and non-EGC issuers (including issuers that previously had EGC status but no longer qualify as EGCs). As the use of test-the-waters communications would remain voluntary, we anticipate that the issuers most likely to engage in these communications would be those issuers that expect the benefits of this strategy to outweigh the costs. Specifically, we expect that the issuers that are most likely to use the proposed rule would be those that are seeking to better assess the demand for and valuation of their securities, as well as those that are seeking more information from potential investors regarding the attractiveness of various terms or structural elements of the offering.^[66] This could in turn enhance the ability of issuers to conduct successful offerings and potentially lower their cost of capital.

By reducing the potential costs and risks associated with conducting a registered securities offering, the proposed rule might make registered securities offerings more attractive to certain issuers, particularly non-EGC issuers, that otherwise would have relied on private placements or not pursued a securities offering.^[67] The resulting potential increases in the number of registered offerings and reporting companies may improve capital formation and efficiency of allocation of investor capital. However, because some of the issuers undertaking registered offerings as a result of proposed Rule 163B might have otherwise raised capital in private markets, the net impact on total capital formation is difficult to assess.

The proposed rule also might provide information to some potential investors about a broader range of potential future offerings at an earlier stage, before a registration statement is publicly filed, which might on the margin enable such investors to formulate a more informed investment strategy. However, the proposed rule might have adverse effects on such investors if the test-the-waters communications contain incomplete or misleading information and if solicited investors improperly rely on such communications rather than on the filed offering materials when making investment decisions. We expect such potential adverse effects on investors to be mitigated by several factors, including the general applicability of anti-fraud provisions of the federal securities laws and liability under Section 12(a)(2),^[68] as well as the limitation of permissible test-the-waters communications under the proposed rule to QIBs and IAIs, which generally have a sophisticated ability to process investment information.

By extending to all issuers the flexibility to test the waters currently available only to EGCs, the proposed rule also would eliminate the competitive disadvantage of those non-EGC issuers that might find test-the-waters communications to be of value to their capital raising efforts. This competitive disadvantage is particularly pronounced today for non-EGCs that are close to meeting—but marginally fail to meet—EGC eligibility criteria. In turn, to the extent that EGCs compete with non-EGCs for investor capital and in the product market, the incremental benefits that accrue to non-EGCs under the proposed rule (the ability to pursue a more efficient capital raising strategy while limiting the risk of early disclosure of proprietary information) might have an adverse competitive effect on EGCs.

Potential users of the proposed rule include, for example, issuers contemplating an IPO as well as reporting issuers that are interested in conducting follow-on and other registered offerings. Regulation FD may limit use of the proposed rule by some issuers in the second group. As discussed in Section II.A above, issuers subject to Regulation FD that selectively disclose material nonpublic information regarding the issuer to specified parties are required to disclose such information publicly. Accordingly, reporting issuers that selectively disclose material nonpublic information to QIBs and IAIs in reliance on the proposed rule may be required to disclose publicly certain test-the-waters communications notwithstanding the fact that the proposed rule would not require such disclosure. This may reduce reliance on proposed Rule 163B. However, some issuers that would be able to rely on proposed Rule 163B are not subject to Regulation FD ^[69] or may avail themselves of an exception under Regulation FD, such as the exception involving confidentiality agreements.^[70]

Where possible, we have attempted to quantify the economic effects of the proposed rule. However, in some cases we are unable to do so. For example, it is difficult to quantify the extent to which issuers would elect to test the waters in connection with a contemplated registered securities offering under the proposed rule; the extent to which the option to engage in test-the-waters communications would affect the willingness of potential issuers newly eligible for testing the waters under the proposed rule to undertake registered securities offerings; the effects of test-the-waters communications on the amount and cost of capital raised; and the effect of expanding permissible test-the waters communications on the ability of QIBs and IAIs to form informed assessments of issuer quality and the securities offered for the purposes of determining interest in a contemplated offering.

We have been able to gain some insight into the potential economic effects of the proposed rule based on the experience of EGC issuers that have been permitted to test the waters pursuant to Securities Act Section 5(d) since April 2012. However, these insights are potentially limited by the differences between EGC and non-EGC issuers (including non-EGC issuers that are investment companies) and the offerings they undertake; ^[71] the voluntary nature of reliance on Section 5(d) among EGC issuers; ^[72] the potential confounding effects resulting from reliance on other JOBS Act provisions by EGC issuers simultaneously with reliance on test-the-waters accommodations; and the generally favorable market conditions observed in the post-JOBS Act period.^[73] Moreover, while the flexibility not to pursue a registered offering after gauging investor interest can be valuable to issuers, we do not have information on issuers that test the waters under the existing rules but subsequently do not proceed with a registered offering.

Below we discuss the potential effects of the proposed rule relative to the economic baseline, which includes existing requirements regarding solicitation of investor interest in connection with registered securities offerings; current practices of EGC issuers related to testing the waters; and information about filers and other parties affected by solicitation requirements.

B. Baseline and Affected Parties

1. Baseline

Section 5(c) of the Securities Act generally prohibits issuers or other persons from offering securities prior to the filing of a registration statement. Once a registration statement has been filed, Section 5(b)(1) generally requires issuers to use a prospectus that complies with Securities Act Section 10 for any written offers of securities. As noted above, Securities Act Section 5(d) nonetheless allows EGCs to engage in test-the-waters communications with QIBs and IAIs both before and after filing the registration statement. Under the current rules, only issuers that qualify for EGC status can rely on a test-the-waters provision in advance of a contemplated registered offering.^[74] Registered investment companies are ineligible for EGC status.^[75] Permissible test-the-waters solicitations, in oral or written form, may be used before or after the filing of a Securities Act registration statement for an initial or follow-on registered offering.

There is some evidence related to the use of test-the-waters communications by EGC issuers in IPOs. Because disclosure of whether the issuer has tested the waters is not required in the registration statement, studies have used various alternative sources of information to estimate the incidence of test-the-waters communications. Thus, estimates have varied depending on the sources used, the interpretation of references to testing the waters in those sources, and sample construction.^[76] Some studies have estimated the incidence of test-the-waters communications by IPO issuers based on issuer responses to staff comment letters associated with IPO registration statement filings.^[77] Using this method, recent industry studies found that in 2015 and 2016, respectively, 38% and 23% of EGC IPOs referenced testing the waters in comment letter responses.^[78] Based on the analysis of comment letter responses, staff has estimated that approximately 35% of EGC IPOs during 2012-2017 have used the test-the-waters provision.^[79] Other studies have estimated the use of the test-the-waters provision based on whether the underwriting agreement mentions allowing the underwriter to test the waters. One academic study found, based on an analysis of underwriting agreements filed as exhibits to registration statements, that approximately 71% of EGC IPOs authorized underwriters to test the waters.^[80] Another academic study found that approximately 68% of EGC IPOs authorized underwriters to test the waters or, where information was not available in the underwriting agreement, mentioned testing the waters in comment letter responses.^[81] Because underwriting agreement data does not indicate whether the underwriter actually engaged in test-the-waters communications, those estimates are considerably higher than the estimates based solely on staff comment letters. Because estimates based on staff comment letters reference actual use of test-the-waters materials, we believe they are more relevant for the purposes of this baseline analysis.

The practice of testing the waters is voluntary. Today it is used by those EGCs that may be most likely to benefit from it, for example, because of a high level of uncertainty about potential investor demand for their securities offering.^[82] The estimated rate of use of the test-the-waters provision has varied by sector, with heavy concentration of EGC IPOs that engaged in testing the waters in the biotechnology, pharmaceutical, technology, media, and telecommunications industries.^[83]

2. Affected Parties

We anticipate that the proposed rule would affect issuers, investors, and intermediaries.

i. Issuers

The proposed rule would affect current and potential issuers in contemplated registered securities offerings. While the proposed rule would be available to all issuers, including EGCs, it would particularly affect non-EGC issuers that are not allowed to test the waters under Section 5(d). EGC issuers would remain eligible to rely on Section 5(d). To the extent that EGC issuers would rely on the proposed rule, the proposed rule would affect such EGC issuers. The proposed rule also would indirectly affect any issuers that do not rely on the proposed rule to the extent that they compete with issuers that rely on the proposed rule for investor capital or in the product market.

We estimate that there were approximately 2,096 EGCs and 8,942 non-EGCs that filed Securities Act registration statements or periodic reports during 2017,^[84] excluding ABS issuers and registered investment companies. We estimate that in 2017 there were approximately 1,672 ABS issuers ^[85] and approximately 12,620 registered investment companies,^[86] which were ineligible for EGC status.^[87] While EGCs made up a minority of all filers with registration statements declared effective, they accounted for a majority of new issuers in traditional IPOs.^[88]

The proposed rule also could affect issuers that are not yet reporting companies but that elect to test the waters as part of exploring the possibility of a future registered securities offering. In addition, because there is no requirement to disclose the use of testing the waters under Section 5(d), we do not have data on EGCs that have tested the waters but have elected not to file a registration statement for the contemplated offering.

In drawing inferences from the experience of EGCs with the use of test-the-waters communications, it is important to recognize that there are considerable differences between an average EGC and an average non-EGC issuer. For example, non-EGC IPO issuers tend to have significantly higher revenues than EGCs due to the size-based eligibility criteria for EGC status.^[89] Further, non-EGC issuers include older companies that first issued common equity pursuant to a Securities Act registration statement before December 8, 2011 ^[90] or that lost their EGC status because more than five fiscal years have elapsed since their first registered common equity sale. Non-EGC issuers also include ABS issuers and registered investment companies, which have unique operational and regulatory characteristics.^[91]

ii. Investors

The proposed rule would affect current and potential QIBs and IAIs that might be solicited in conjunction with contemplated registered securities offerings. Due to their portfolio size and/or investment expertise, we expect that such investors have considerable ability to assess investment opportunities and acquire and analyze information about securities and their issuers. Such investors are generally viewed as sophisticated for purposes of private placements, which are often associated with considerably higher information asymmetry than registered offerings. Under Title I of the JOBS Act, EGCs were provided the flexibility to test the waters with these relatively sophisticated investors.

We lack information necessary to estimate the number of QIBs and IAIs that would be solicited in connection with registered offerings under the proposed rule. Because it is not an item of disclosure required of issuers, we do not have information on the number of QIBs and IAIs that were solicited through test-the-waters communications in connection with EGC offerings in reliance on Section 5(d). We also lack data to generate a comprehensive estimate of the overall number of QIBs and IAIs that may be potentially solicited under the proposed rule because disclosure of investor status across all such investors is not required and because we lack comprehensive data that would cover all categories of potential QIBs and IAIs.

For instance, we can gather limited information about certain investors that may be QIBs from EDGAR filings. Based on staff analysis of these filings, we estimate that for calendar year 2017, 6,111 unique filers filed Form 13F on behalf of 6,580 institutional investment managers. However, a number of QIBs, including large institutions that primarily invest in securities other than Section 13(f) securities (e.g., unregistered equity securities; nontraded registered equity securities; or registered non-equity securities),^[92] as well as certain types of dealers as specified in Rule 144A will not be captured by this estimate. We similarly lack information for a comprehensive estimate of the overall number of IAIs because disclosure of accredited investor status across all institutional investors is not required and because, while we have information to estimate the number of some categories of IAIs (some of which may also be included in the Form 13F estimate), we lack comprehensive data that would allow us to estimate the unique number of investors across all categories of IAIs under Rule 501.^[93]

In addition to QIBs and IAIs, other investors may be indirectly affected by the proposed rule, as discussed in Section III.C below. For example, the proposed rule could increase the shareholder value of affected issuers by lowering the cost of raising capital or enabling issuers to pursue a more efficient capital raising strategy, which would benefit existing investors in these issuers. Furthermore, the proposed rule could encourage additional registered securities offerings. Due to data availability, we cannot estimate the number of investors that might be affected by such indirect benefits. According to a recent study based on the 2016 Survey of Consumer Finances, approximately 65 million households owned stocks directly or indirectly (through other investment instruments).^[94]

iii. Intermediaries

Similar to Section 5(d), proposed Rule 163B would permit the issuer, or any person authorized to act on behalf of an issuer, to engage in test-the-waters communications. EGC issuers commonly authorize underwriters to engage in test-the-waters communications on their behalf with prospective investors.^[95] Thus, the proposed rule would potentially affect such underwriters or other third parties engaged in a similar role.

We estimate that there were approximately 958 registered broker-dealers that reported being underwriters or selling group participants for corporate securities in 2018.^[96] We do not have data on how many underwriters actually engaged in test-the-waters communications in connection with offerings on behalf of EGCs. Further, we lack data on other persons that have engaged in test-the-waters communications on behalf of EGCs. With respect to persons who could be authorized to act on behalf of fund issuers, we estimate that approximately 280 registered broker-dealers reported being mutual fund underwriters or sponsors in 2018 (of which approximately a quarter also reported being underwriters for corporate securities).^[97] We anticipate that fund advisers also might engage in test-the-waters communications on behalf of the funds they advise. We estimate that there are approximately 1,831 investment advisers to registered investment companies and approximately 109 investment advisers to BDCs.^[98] We do not have data to predict how many of these fund intermediaries would actually engage in test-the-waters communications, or how many additional persons authorized to act on behalf of a fund issuer might participate in test-the-waters communications related to fund offerings under the proposed rule.

C. Anticipated Economic Effects

Below we evaluate the anticipated costs and benefits of the proposed rule and the anticipated effects of the proposed rule on efficiency, competition, and capital formation.

On a market-wide basis, providing the option to test the waters to all issuers is expected to improve the efficiency and lower the cost of implementing the capital raising strategy for issuers considering a registered securities offering.^[99] While EGC issuers would also be permitted to rely on proposed Rule 163B, non-EGC issuers are expected to be most affected by the proposed rule because they cannot rely on Section 5(d).

1. Potential Benefits to Issuers

Expanding the availability of test-the-waters communications could improve the likelihood of successfully raising capital in a registered offering and enable a more efficient and potentially lower-cost capital raising process. Specifically, testing the waters could help issuers gauge market interest in a potential offering, determine the categories of investors with the most favorable assessment of the issuer, as well as identify the potential concerns and questions that prospective investors may have regarding the offering and its terms. By gathering this information, issuers may reduce the risk of having to withdraw a publicly filed registration statement and can also tailor offering size and other terms included in the initial filing more closely to market interest.

We expect the greatest benefit of testing the waters to be realized by issuers that solicit investors before public filing. As discussed below, testing the waters before public filing enables issuers to lower the risk of proprietary information disclosure and possibly to avoid incurring the cost of preparing a registration statement. However, testing the waters after public filing may also benefit some issuers.^[100] Specifically, the option to test the waters can benefit the issuers affected by the proposed rule in several ways:

• In the case of issuers that decide after testing the waters not to proceed with a registered securities offering, testing the waters before a public registration statement filing decreases the risk of public disclosure of sensitive or proprietary information about the issuer to competitors (to the extent that the communications are not subject to Regulation FD).^[101]

• In the case of issuers that decide after testing the waters not to proceed with a registered securities offering, testing the waters before the registration statement filing can save such issuers some or all of the cost of preparing and publicly filing a registration statement.
• Testing the waters, particularly before the registration statement filing, can reduce the risk of miscalculating market interest in the offering and having to withdraw the offering, thus reducing potential reputational costs.
• Testing the waters, particularly before the registration statement filing, can help issuers gauge investor demand for purposes of determining offering size and other terms, potentially resulting in a more efficient offering process and a higher likelihood of selling the offered amount more quickly.^[102]

According to one academic study of EGC IPOs, the option to test the waters “reduces the cost of IPO withdrawal because it allows issuers to disclose information exclusively to investors, but not competitors, until the IPO becomes likely to succeed. This would especially benefit issuers with high proprietary disclosure costs.” ^[103] The study also notes that testing the waters “provides issuers with more certainty regarding the prospects of the IPO before publicly filing with the SEC.” ^[104]

In addition, for issuers that elect to proceed with a registered offering, testing the waters may serve as an element of their marketing strategy by allowing them to inform solicited investors about a potential future offering. However, the marketing benefit to such issuers would be limited because communications are only permitted with QIBs and IAIs and investors are not permitted to commit capital at the test-the-waters stage.

Similarly, some fund issuers could use test-the-waters communications to gather information about investors' interest in a particular investment strategy or fee structure or to market a potential future offering. However, as discussed in greater detail in Section III.C.5 below, such benefits may be limited for most funds. To the extent that the proposed rule facilitates the registered offering process and potentially lowers its costs and risks for some issuers, the availability of testing the waters might facilitate capital formation through registered securities offerings, particularly for non-EGC issuers that are ineligible for test-the-waters provisions of Section 5(d). In evaluating the potential benefits of expanded test-the-waters communications under the proposed rule for capital formation, we acknowledge that the issuers affected by the proposed rule already have the flexibility to solicit the same categories of investors in connection with private placements. Nevertheless, even if the net level of capital formation is unchanged, due to affected issuers switching from private placements to registered offerings, the added flexibility under the proposed rule might enable issuers to adopt the most efficient and lowest-cost capital raising strategy.

To the extent that the proposed rule encourages additional issuers to conduct a registered securities offering, issuers may benefit from greater liquidity associated with registered securities, compared to exempt securities, to the extent that greater liquidity makes the issuers' securities potentially more attractive to prospective investors. Any additional issuers that elect to conduct a registered offering in part as a result of the proposed rule also may benefit from the greater ease of raising follow-on financing through future registered offerings.

2. Potential Costs to Issuers

Issuers that elect to test the waters under the proposed rule might incur costs, including the cost of identifying QIBs and IAIs; holding events with QIBs and IAIs to engage in testing the waters; developing test-the waters solicitation materials; indirect costs of potential disclosure of proprietary information to solicited investors (albeit to a limited number of prospective investors); and in some instances, potential legal costs associated with liability arising from test-the-waters communications with prospective investors.^[105] Further, communications made pursuant to the proposed rule may be subject to Regulation FD. Because the use of test-the-waters communications would remain voluntary under the proposed rule, we anticipate that issuers would elect to rely on test-the-waters communications only if the benefits anticipated by issuers outweigh the expected costs to issuers.

3. Potential Benefits to Investors

To the extent that the proposed rule encourages additional issuers to conduct a registered securities offering, a broader set of investors might more efficiently allocate capital among issued securities. These efficiency benefits are more likely to accrue to non-accredited investors, which are more limited in their ability to invest in securities issued in exempt offerings. Further, to the extent that additional issuers consider a registered securities offering instead of a private placement as a result of the proposed rule, investors that would otherwise have invested in unregistered securities of the same issuer might benefit from greater liquidity of registered securities (because resales of such securities would not be restricted and such securities are more likely to have a secondary market). Investors also would benefit from the availability of disclosure and market information about registered securities (resulting in more informationally efficient prices and potentially better informed investment decisions). By increasing shareholder value of affected issuers through cost savings and improved ability to raise external financing, the proposed rule also could benefit existing shareholders of affected issuers.

Test-the-waters communications might offer some prospective investors the potential benefit of additional time to evaluate, understand, and ask questions about potential investment opportunities before the public filing of a registration statement. To the extent that such communications might provide solicited QIBs and IAIs with valuable early information about potential investment opportunities, these communications might enhance the ability of solicited QIBs and IAIs to assess the quality of future investment opportunities, and in some instances, potentially facilitate better informed future investment decisions and efficient allocation of capital. In the context of the proposed rule, such potential informational advantages would be limited by several factors. First, because extensive information about the issuer and the offering must be disclosed in a publicly filed registration statement, should an issuer decide to proceed with an offering, the incremental value of the information conveyed to solicited investors through test-the-waters communications might be small. Second, to the extent that potential issuers newly eligible for testing the waters under the proposed rule would have otherwise provided similar information to QIBs and IAIs in the course of seeking private financing, such potential informational benefits could be reduced. Third, potential informational benefits to solicited investors likely would be smaller for issuers in follow-on offerings (to the extent that issuers have provided disclosures in an IPO registration statement and subsequent Exchange Act reports). Further, communications made pursuant to the proposed rule may be subject to Regulation FD. Finally, even if solicited investors view the potential offering as an attractive investment opportunity on the basis of test-the-waters communications, there is no assurance that an issuer will proceed with an offering, and no investors can invest in the offering until a registration statement has been declared effective.

4. Potential Costs to Investors

If issuers with a traded class of securities test the waters in conjunction with a potential follow-on offering, solicited investors might potentially use the resulting information advantage to realize trading profits at a cost to investors that were not solicited. However, this possibility may be partly mitigated by (1) the requirement that Exchange Act reporting companies disclose specified information in periodic and current reports and (2) the general applicability of Exchange Act Section 10(b) and Rule 10b-5. Further, communications made pursuant to the proposed rule may in some circumstances be subject to Regulation FD, as discussed in Section III.A above.

Selective solicitation of QIBs and IAIs may result in some institutional investors having a relatively greater influence on the offering process and terms, which might potentially place investors that are not solicited at a relative competitive disadvantage. This incremental effect of test-the-waters communications may be less likely to the extent that test-the-waters communications do not involve a mechanism for a credible commitment of capital. Thus, any expressions of interest are likely to be preliminary in nature. Further, similar differences in investor influence might emerge in the course of the book building process in the absence of test-the-waters communications, or in the course of a private placement if the issuer chooses to forgo a registered offering.

The proposed expansion of permissible test-the-waters communications also might result in costs to solicited investors, including potentially less-informed decisions or less efficient capital allocation, if test-the-waters communications contain incomplete or misleading information and if solicited investors improperly rely on test-the-waters communications, and not on the filed offering materials, in their investment decisions.

We expect that any such potential adverse effects on solicited investors might be mitigated by the following factors:

• The issuer would be required to publicly file a registration statement once it determines to proceed with a public offering, enabling solicited investors to review the filed offering materials and to obtain full information about the issuer and the offering before investing. This should serve as a crucial deterrent against the potential for misleading test-the-waters communications at the pre-filing stage because we expect that a QIB or IAI would verify the claims made as part of test-the-waters communications against the complete set of disclosures in the registration statement, which is subject to liability under Section 11 of the Securities Act.
• Test-the-waters communications would be permitted only with QIBs and IAIs. Although the level of investor sophistication may vary across such investors (for example, it may be relatively higher for the larger QIBs and IAIs, which are likely to have more investment and due diligence expertise than the relatively smaller QIBs and IAIs), QIBs and IAIs generally are expected to have a sophisticated ability to process investment information and to review the offering materials, once those materials are filed, before making an investment decision.
• Because test-the-waters communications represent an offer of securities, although they would not be subject to liability under Section 11 of the Securities Act, they would remain subject to general anti-fraud provisions under the Securities Act and the Exchange Act and to liability under Section 12(a)(2) of the Securities Act.^[106] In addition, the associated risk of private securities litigation may further reduce incentives to engage in misleading test-the-waters communications.

• If an issuer proceeds with an offering, written test-the-waters materials generally may be subject to staff review.^[107]

• Reputational concerns of underwriters and/or issuers that may expect to participate in future offerings with the same institutional investors on future deals may reduce the incentives to engage in misleading test-the-waters communications with these investors.
• To the extent that test-the-waters communications are used by issuers in follow-on registered offerings, solicited investors can access the issuers' past filings of registration statements and Exchange Act reports to aid in the interpretation and verification of information in test-the-waters communications.
• The proposed rule might be less likely to be relied upon by micro-cap firms, which are linked to a higher risk of such fraud, because institutions tend to have smaller stakes in such issuers.^[108]

In evaluating any potential adverse effects of the risk of incomplete or misleading test-the-waters communications under the proposed rule on solicited QIBs and IAIs, it is important to recognize that issuers already have the ability to solicit accredited investors in connection with private placements, which are associated with substantially less disclosure and less extensive investor protections and regulatory oversight. Issuers unable to meet their external financing needs through registered offerings commonly sell securities to IAIs and other accredited investors through private placements. To the extent that the expansion of permissible test-the-waters communications under the proposed rule induces some issuers to elect a registered offering instead of a private placement, the amount of disclosure and the level of investor protection afforded to the investors in the issuer's securities would be expected to increase.

5. Variation in Economic Impact Due to Issuer Characteristics

The described economic effects of the proposed rule are expected to vary as a function of issuer and offering characteristics and investors' ability to process information. The incremental benefits of the proposed rule are expected to be smaller for large ^[109] and well-established issuers with low information asymmetries and a history of public disclosures, issuers of securities with low information sensitivity (e.g., straight investment-grade debt), and issuers in follow-on offerings with an established track record of capital raising. Issuers whose communications with investors may be subject to Regulation FD are less likely to benefit from the proposed rule.^[110] In addition, issuers with low costs of proprietary disclosure (e.g., low R&D intensity and limited reliance on proprietary technology) may be less likely to benefit from the proposed rule. In turn, due to greater market scrutiny and lower information asymmetries associated with such issuers, the potential of such issuers' test-the-waters communications to bias investor ability to assess the offering is also expected to be small. All else equal, issuers that predominantly market their offerings to individual investors or non-accredited institutional investors, including many registered investment companies,^[111] might realize relatively smaller benefits from the proposed rule, which only allow test-the-waters communications with QIBs and IAIs. Further, issuers relying upon other rules that permit offering-related communications may be less likely to benefit from the proposed rule.^[112]

In contrast, other types of issuers might realize relatively greater benefits from expanded testing the waters under the proposed rule. Because proposed Rule 163B mitigates the risk of competitors learning potentially valuable proprietary information about the issuer's financing needs, business, products, and R&D, it is expected to particularly benefit issuers with high costs of proprietary disclosure (e.g., issuers in R&D-intensive industries, such as life sciences and technology). In addition, issuers not subject to Regulation FD are more likely to benefit from the proposed rule.^[113] As described above, test-the-waters communications offer a low-risk, low-cost way of obtaining information about investor interest in a potential registered offering and evaluating whether such an offering could be successful. Thus, the flexibility to test the waters under the proposed rule is expected to be most valuable for issuers that have greater uncertainty about the interest of prospective investors in the offering, investor valuation of the issuer's securities, and investor concerns and questions about the issuer's business or the planned offering, in particular, IPO issuers, small and development-stage issuers with limited operating history and high information asymmetries, and issuers of securities with high information sensitivity (e.g., equity, convertible debt, speculative-grade straight debt) and securities with difficult to value, complex payoffs (e.g., structured finance products and other innovative financial instruments). At the same time, due to lower market scrutiny applied to such issuers, higher information asymmetries or greater complexity of valuing such securities, the potential of test-the-waters communications to bias investor ability to assess information about the offering might be relatively higher.^[114] All else equal, issuers that predominantly market their offerings to institutional investors are expected to realize relatively greater benefits from the expansion of test-the-waters communications with QIBs and IAIs.^[115]

The proposed rule would be available to a number of issuers that are not currently eligible to engage in test-the-waters communications under section 5(d) of the Securities Act, including registered investment companies, non-EGC BDCs, and ABS issuers. The extent of reliance of such issuers on test-the-waters communications under the proposed rule is difficult to predict. Generally, as discussed above, testing the waters might be relatively more valuable for issuers with a largely institutional investor base, issuers with high information asymmetries, and issuers of information-sensitive securities and securities with complex payoffs. To the extent that funds on average have a high share of retail rather than institutional ownership, those benefits would likely be limited for funds.^[116] Further, as discussed in Section II.E above, with respect to registered investment companies, a fund typically would register as an investment company and conduct an exempt or registered offering within a relatively short period of time after it is organized. If a fund is contemplating a registered offering at the time of its organization, we recognize it is common practice to simultaneously file a registration statement under both the Investment Company Act and the Securities Act to take advantage of certain efficiencies. To the extent that investment companies required to register under the Investment Company Act continue this practice of simultaneously filing registration statements under the Securities Act and the Investment Company Act, such funds would be less likely to benefit from the option to undertake test-the-waters communications prior to a public registration filing.^[117] Since a BDC is not required to register under the Investment Company Act, it may to some extent be more likely to benefit from the proposed rule with respect to pre-filing communications.

Some funds that preliminarily engage in exempt offerings, including certain registered closed-end funds and BDCs, could rely on the proposed rule to engage in pre-filing communications if they are considering a subsequent registered offering. In addition, funds could realize benefits from relying on proposed Rule 163B for post-filing communications. The proposed rule would allow funds to communicate with QIBs and IAIs about a contemplated offering without complying with the requirements of Section 24(b) of the Investment Company Act or Rules 482 or 34b-1, including the associated filing, disclosure, and legending requirements, which could result in potentially lower costs and greater flexibility for funds seeking to engage in post-filing communications with QIBs and IAIs.

6. Variation in Economic Impact Due to Investor Characteristics

The composition of QIBs and IAIs solicited in conjunction with an issuer's planned offering also might affect the economic impact of the proposed rule. Testing the waters with QIBs and IAIs that have more investment and due diligence expertise might yield more valuable information to issuers, and such investors might be less susceptible to biased information if any is presented while testing the waters. In turn, the presence of QIBs and IAIs with relatively less investment and due diligence expertise might decrease the value of information obtained from investors through test-the-waters communications and might increase the risk of test-the waters communications biasing the ability of solicited investors to adequately assess the offering.

To the extent that certain categories of issuers, including funds, may be less likely to rely on the proposed rule, those QIBs and IAIs that mainly invest in the securities of such issuers may be less affected by the proposed rule.

As a general consideration, the provisions of proposed Rule 163B mostly follow the provisions of the existing Section 5(d) accommodation. Such harmonization of permissible test-the-waters communications across all issuers is expected to minimize confusion among potential investors regarding permissible solicitation of investor interest before registered offerings, irrespective of the issuer's EGC status.

If adopted, the rule would require that the solicited investor is, or that the issuer reasonably believes the investor to be, a QIB or IAI. The reasonable belief provision is expected to reduce the risk for issuers of inadvertently violating the conditions of testing the waters while maintaining a low likelihood that less sophisticated investors are solicited. Proposed Rule 163B does not specify steps that an issuer could or must take to establish a reasonable belief regarding investor QIB or IAI status or otherwise require the issuer to verify investor status, as in Rule 506(c) of Regulation D. This is expected to benefit issuers by allowing issuers the flexibility to use methods that are cost-effective but appropriate in light of the facts and circumstances of each contemplated offering and each potential investor. To the extent that the reasonable belief provision as proposed results in some investors that are not QIBs or IAIs being solicited, less sophisticated investors may be solicited, which may result in less informed investment decisions by some of those investors. These effects are expected to be partly mitigated by the factors discussed in Section III.C.4 above.

D. Reasonable Alternatives

We evaluate reasonable alternatives to the proposed rule and their anticipated economic effects below. The proposed rule would provide the option to engage in test-the-waters communications to all issuers. The conditions of proposed Rule 163B would be generally similar to the requirements presently applicable to EGC issuers under Section 5(d). As an alternative, we could apply different requirements to test-the-waters communications under proposed Rule 163B. Compared to the proposed rule, applying less extensive (more extensive) requirements to test-the-waters communications under the proposed rule would increase (decrease) the benefits related to the level, efficiency, and cost of capital raising for issuers that would have sought to test the waters under the proposed rule. Further, compared to the proposed rule, applying more extensive requirements to test-the-waters communications under proposed Rule 163B could place non-EGC issuers at a relative competitive disadvantage to EGC issuers, which would remain eligible to test the waters under Section 5(d). The effects specific to individual reasonable alternatives are discussed in greater detail below.

If adopted, the rule would permit all issuers to test the waters. As an alternative, the proposed rule could exclude certain categories of issuers,^[118] such as blank check issuers,^[119] penny stock issuers,^[120] ABS issuers,^[121] or all or some registered investment companies.^[122] If some solicited investors make less informed decisions as a result of test-the-waters communications by these categories of issuers, the alternative of excluding these categories of issuers might potentially result in more efficient investor decisions compared to the proposed rule. However, because solicited investors can review the registration statement in addition to any test-the-waters communications prior to investing and because QIBs and IAIs generally have a high level of sophistication in processing information, as well as in light of the other considerations discussed in Section III.C.4 above, this concern is likely to have a minor impact, if any. To the extent that these categories of issuers would have elected to test the waters under the proposed rule, this alternative would not allow such issuers to realize the benefits of the proposed rule (e.g., potentially more efficient and lower cost of capital raising), particularly non-EGC issuers ineligible under Section 5(d). To the extent that some of these issuers may be less likely to rely on proposed Rule 163B as discussed in Section III.C.5 above, the effects of excluding them from proposed Rule 163B would be more limited.

Similar to Section 5(d), the proposed rule would permit solicitation of investor interest both before and after the filing of a registration statement. As an alternative, the proposed rule could permit issuers to test the waters only before or only after the public filing of the registration statement. Compared to the proposed rule, this alternative would afford less flexibility to affected issuers, and fewer potential benefits for the level, efficiency, and cost of capital raising for affected issuers, particularly non-EGC issuers ineligible under Section 5(d).^[123]

Similar to Section 5(d), the proposed rule would not require issuers to publicly file test-the-waters communications, nor would it require the use of legends. As an alternative, the proposed rule could require issuers to include certain legends or to file test-the-waters communications with the registration statement. Compared to the proposed rule, the alternative of requiring legends on test-the-waters communications under the proposed rule could impose small incremental costs on issuers. However, given the investment and due diligence expertise of QIBs and IAIs, such an alternative likely would not result in significant additional benefits compared to the proposed rule. Compared to the proposed rule, the alternative of requiring the filing of test-the-waters materials could impose additional costs on issuers that elect to test the waters under proposed Rule 163B (including the direct cost of filing additional exhibits and, in instances where test-the-waters materials contain proprietary information, the disclosure of which could cause competitive harm, potential costs of requesting confidential treatment for that information pursuant to Securities Act Rule 406, or alternatively, the risk of disclosure of proprietary information to competitors in instances where confidential treatment of test-the-waters communications is not requested, or requested but not granted). This alternative also could decrease the benefits for the level, efficiency, and cost of capital raising for affected issuers, particularly non-EGC issuers ineligible under Section 5(d). Compared to the proposed rule, by subjecting test-the-waters communications to Section 11 liability applicable to registration statements, this alternative could improve the accuracy of information provided as part of test-the-waters communications. However, this benefit is expected to be limited by the factors discussed in Section III.C.4 above, including the ability of investors to review the information in the registration statement before investing; the general sophistication of QIBs and IAIs in processing investment information; and the applicability of Section 12(a)(2) liability and general anti-fraud provisions to test-the-waters communications. Compared to the proposed rule, filing test-the-waters materials with the registration statement under this alternative could offer informational benefits to investors that have not been solicited. However, such benefits, compared to the proposed rule, are likely minimal because issuers already are required to disclose extensive information in a registration statement and because issuers would retain the option to request confidential treatment for proprietary information in such exhibits, subject to the provisions of Rule 406, under this alternative. Further, in certain circumstances, communications under the proposed rule may be subject to Regulation FD, as discussed in Section III.A above.

Similar to Section 5(d), if adopted, the rule would permit issuers to test the waters only with QIBs and IAIs. As an alternative, the proposed rule could permit issuers to test the waters with all investors.^[124] This alternative might benefit issuers, particularly issuers whose offerings attract investors that are neither QIBs nor IAIs, by providing additional flexibility and enabling issuers to reduce the costs of a registered offering. This alternative could therefore facilitate capital formation efforts of such issuers. At the same time, by exposing individual and small institutional investors to pre-offering information that is not required to be publicly filed and is not subject to Section 11 liability, this alternative might decrease investor protection to the extent that some of the solicited individual and small institutional investors might be susceptible to misleading test-the-waters communications. This concern is expected to be partly mitigated by the ability of all investors to review the filed registration statement, in addition to any test-the-waters communications, prior to investing, as well as other factors discussed in Section III.C.4 above. However, to the extent that individual and small institutional investors are less sophisticated than QIBs and IAIs and may fail to review the information in the registration statement, this alternative may result in less informed investment decisions by such investors.

Similar to Section 5(d), the rule, if adopted, would not restrict issuers from relying on other communications provisions, such as Rules 163 or 255 under the Securities Act (depending on the nature and timing of the communication and the issuer's ability to meet the eligibility and other rule requirements). Those rules contain investor safeguards specific to the circumstances in which such communications are permitted. As an alternative, we could have restricted issuers relying on the proposed rule from engaging in other communications under the existing rules. Compared to the proposed rule, this alternative would restrict the ability of issuers to tailor their solicitation strategy to their needs, which might result in decreased capital formation and a less efficient or costlier capital raising process for some issuers, without a corresponding benefit to investors. For example, issuers might have to choose between incurring costs of early public disclosure of a contemplated offering and forgoing the option of subsequent offering-related communications with a broader range of investors. The extent to which such an alternative reduces the flexibility afforded to issuers would depend on whether in practice affected issuers would have elected to combine multiple types of communications.

The proposed rule does not limit the scope of the content that may be a part of test-the-waters communications. As an alternative, we could limit the scope of permissible test-the-waters communications to certain types of information about the issuer or offering. For instance, we could limit the scope of communications in a manner similar to Securities Act Rules 17 CFR 230.134 or Rule 482 with respect to advertising and sales literature, for all or some of the issuers eligible to rely on the proposed rule. For instance, we could limit how open-end funds, or all registered investment companies, present performance information in test-the-waters communications. Limiting the scope of test-the-waters communications may strengthen investor protection compared to the proposed rule, by lowering the potential for incomplete or misleading information to be included in such materials. However, these benefits to investors may be small given the mitigating factors analyzed in Section III.C.4. Such restrictions also may reduce the utility of test-the-waters communications to issuers and the associated benefits for capital formation, compared to the proposed rule.

Proposed Rule 163B contains a reasonable belief provision but does not require issuers to take specified steps to determine that the solicited investor is a QIB or IAI or specify steps that an issuer could or must take to establish a reasonable belief. As an alternative, we could require issuers to determine that the investor is a QIB or IAI or specify steps that an issuer could or must take to establish a reasonable belief. Compared to the proposed rule, these alternatives might result in a lower risk of solicitation of investors that are neither QIBs nor IAIs. However, they also might significantly increase costs for issuers electing to rely on the proposed rule and as a result decrease the use of test-the-waters communications and the benefits for the level, efficiency, and cost of capital raising, compared to the proposed rule.

E. Request for Comment

We request comment on all aspects of our economic analysis, including the potential costs and benefits of the proposed rule and alternatives to it, and whether the proposed rule, if adopted, would promote efficiency, competition, and capital formation or have an impact on investor protection. Commenters are requested to provide empirical data, estimation methodologies, and other factual support for their views, in particular, on the estimates of costs and benefits for the affected parties.

1. Would the ability to undertake test-the-waters communications under proposed Rule 163B facilitate capital formation? If so, how? Would the proposed rule result in additional capital formation, or would issuers switch between registered and exempt offerings?

2. Which categories of issuers would realize the greatest benefits from proposed Rule 163B? Would issuers in follow-on offerings realize benefits from proposed Rule 163B? What factors would affect the ability of issuers to realize benefits from the proposed rule? For instance, what effect would the application of Regulation FD have on the use of the proposed rule?

3. Would registered investment companies realize benefits from being able to engage in test-the-waters communications? If so, which categories of registered investment companies would realize the greatest benefits? What factors would affect the ability of registered investment companies to realize benefits from the proposed rule?

4. Would ABS issuers realize benefits from being able to engage in test-the-waters communications?

5. Would proposed Rule 163B benefit investors?

6. Would proposed Rule 163B have adverse effects on investors? If so, in which circumstances would such adverse effects be most likely?

7. What steps could we take to mitigate potential adverse effects on investors? How would such changes affect the likelihood that issuers would rely on the proposed rule and the costs and benefits of the proposed rule?

8. What are the benefits and costs of the reasonable belief approach in proposed Rule 163B? What are the benefits and costs of an alternative approach requiring an issuer to take specified steps to determine an investor's status?

9. Would proposed Rule 163B have effects on competition among issuers? Would proposed Rule 163B have effects on competition among investors?

10. What other economic effects would proposed Rule 163B have?

IV. Paperwork Reduction Act

We do not believe that the proposed rule would impose any new “collection of information” requirement as defined by the Paperwork Reduction Act of 1995 (“PRA”),^[125] nor create any new filing, reporting, recordkeeping, or disclosure requirements. Accordingly, we are not submitting the proposed rule to the Office of Management and Budget for review under the PRA.^[126] We request comment on our assertion that the proposed rule would not create any new, or revise any existing, collection of information pursuant to the Paperwork Reduction Act.

V. Small Business Regulatory Enforcement Fairness Act

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”),^[127] we solicit data to determine whether the proposed rule constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results or is likely to result in:

• An annual effect on the economy of $100 million or more (either in the form of an increase or a decrease);
• A major increase in costs or prices for consumers or individual industries; or
• Significant adverse effects on competition, investment, or innovation.

The Commission requests comment on the potential annual effect on the U.S. economy; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment, or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible.

VI. Initial Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (“RFA”) ^[128] requires the Commission, in promulgating rules under Section 553 of the Administrative Procedure Act, to consider the impact of those rules on small entities. The Commission has prepared this Initial Regulatory Flexibility Analysis (“IRFA”) in accordance with Section 603 of the RFA.^[129] This IRFA relates to proposed Rule 163B and proposed amendments to Rule 405 of the Securities Act.

A. Reasons for, and Objectives of, the Proposed Action

The primary objective of the proposed rule is to enable all issuers to engage in solicitations of interest prior to a registered public offering to determine potential investors' interest in an offering before or after the filing of a registration statement, provided that the potential investors are QIBs or IAIs. Pre-filing communications under our rules are currently limited to specific types of issuers and offerings.^[130] By liberalizing pre-filing and post-filing communications for all issuers, we are also providing them with a cost-effective means for gauging market interest prior to incurring the full costs of a registered offering. The reasons for, and objectives of, the proposed rule are discussed in more detail in Sections I and II above.

B. Legal Basis

We are proposing the amendments pursuant to Sections 7, 10, 19(a), and 28 of the Securities Act of 1933, as amended, and Sections 6, 24, and 38 of the Investment Company Act of 1940, as amended.

C. Small Entities Subject to the Proposed Rule

The proposed rule would affect issuers that are small entities. The RFA defines “small entity” to mean “small business,” “small organization,” or “small governmental jurisdiction.” ¹³¹For purposes of the RFA, under 17 CFR 230.157 an issuer, other than an investment company, is a “small business” or “small organization” if it had total assets of $5 million or less on the last day of its most recent fiscal year and is engaged or proposing to engage in an offering of securities not exceeding $5 million. Under 17 CFR 240.0-10(a), an investment company, including a business development company, is considered to be a small entity if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year.

The proposed rule would permit all issuers, including small entities, to engage in test-the-waters communications. We estimate that there are currently 1,163 entities, other than investment companies, that would be eligible to rely on the proposed rule that may be considered small entities.^[132] In addition, we estimate that, as of June 2018, there were 116 registered investment companies and BDCs that would be eligible to rely on the proposed rule that may be considered small entities.^[133]

Small entities meeting the definition of EGC are currently eligible to engage in test-the-waters communications pursuant to Section 5(d) of the Securities Act. These small entities and other small entities that do not meet the definition of EGC would be eligible to rely on the proposed rule if it is adopted. Because reliance on the proposed rule would be voluntary, we cannot accurately estimate the number of small entities that would choose to test the waters, though we anticipate that the small entities most likely to engage in these communications would be those that expect the benefits of this strategy to outweigh the costs.

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

The purpose of the proposed rule is to allow all issuers, not solely EGCs, to engage in communications with certain potential investors to determine their interest in an offering before or after the filing of a Securities Act registration statement. Under the proposed rule, the use of test-the-waters communications would be voluntary and any communications that comply with the proposed rule would not need to include a legend or be filed with the Commission, provided that the communications do not trigger a disclosure obligation pursuant to any other rules.

Given the voluntary nature of the test-the-waters communications and that the proposed rule would not impose a filing requirement, we do not expect the proposed rule to significantly impact existing reporting, recordkeeping and other compliance burdens. Small entities choosing to avail themselves of the proposed rule may seek the advice of legal or accounting professionals in connection with making test-the-waters communications. We discuss the economic impact, including the estimated costs and benefits, of the proposed rule to all issuers, including small entities, in Section III above.

E. Duplicative, Overlapping, or Conflicting Federal Rules

For the reasons discussed above, we believe that the proposed rule would partially overlap with Securities Act Section 5(d) and Rule 163. We do not believe the proposed rule would otherwise duplicate, overlap or conflict with federal rules.

F. Significant Alternatives

The RFA directs us to consider alternatives that would accomplish our stated objectives, while minimizing any significant adverse impact on small entities. In connection with the proposed rule, we considered the following alternatives:

• Establishing different compliance or reporting requirements that take into account the resources available to small entities;
• Clarifying, consolidating, or simplifying compliance and reporting requirements under the rules for small entities;
• Using performance rather than design standards; and
• Exempting small entities from all or part of the requirements.

We believe that different compliance or reporting requirements for small entities are not necessary because, while the proposed rule would broaden the number of issuers eligible to engage in communications before and after filing a registration statement, including the number of small entity issuers, it would not establish any new reporting, recordkeeping or compliance requirements for small entities. We do not believe that the proposed rule would impose any significant new compliance obligations. Accordingly, we do not believe it is necessary to exempt small entities from all or part of the proposed rule.

Finally, with respect to using performance rather than design standards, the proposed rule generally contains elements similar to performance standards, which we believe is appropriate because issuers would have the flexibility to tailor their communications when assessing market interest in their securities offerings.

G. Request for Comment

We encourage the submission of comments with respect to any aspect of this Initial Regulatory Flexibility Analysis. In particular, we request comments regarding:

• The number of small entities that may be affected by the proposed rule;
• The existence or nature of the potential impact of the proposed rule on small entity issuers discussed in the analysis; and
• How to quantify the impact of the proposed rule.

Commenters are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact. Comments will be considered in the preparation of the Final Regulatory Flexibility Analysis, if the proposed rule is adopted, and will be placed in the same public file as comments on the proposed rule itself.

VII. Statutory Authority

We are adopting the rule amendments contained in this document under the authority set forth in Sections 7, 10, 19(a), and 28 of the Securities Act of 1933, as amended, and Sections 6, 24, and 38 of the Investment Company Act of 1940, as amended.

List of Subjects in 17 CFR Part 230

• Reporting and recordkeeping requirements
• Securities

Text of the Proposed Amendments

In accordance with the foregoing, we are proposing to amend title 17, chapter II of the Code of Federal Regulations as follows:

PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for part 230 continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78 l, 78m, 78n, 78 o, 78 o-7 note, 78t, 78w, 78 ll (d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted.

2. Add § 230.163B to read as follows:

3. In § 230.405 amend the definition of “Free writing prospectus” by revising paragraphs (2) and (3) and adding paragraph (4) to read as follows:

Footnotes