Securities and Exchange Commission: Solicitations of Interest Prior to a Registered Public Offering

B-331470

October 18, 2019

The Honorable Mike Crapo
Chairman
The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Maxine Waters
Chairwoman
The Honorable Patrick McHenry
Ranking Member
Committee on Financial Services
House of Representatives

Subject: Securities and Exchange Commission: Solicitations of Interest Prior to a Registered Public Offering

Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on a major rule promulgated by the Securities and Exchange Commission (the Commission) entitled “Solicitations of Interest Prior to a Registered Public Offering” (RIN: 3235-AM23).  We received the rule on September 30, 2019.  It was published in the Federal Register as a final rule on October 4, 2019.  84 Fed. Reg. 53011.  The effective date of the rule is December 3, 2019.

The final rule permits issuers to engage in oral or written communications with certain potential 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.

Enclosed is our assessment of the Commission’s compliance with the procedural steps required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule.  If you have any questions about this report or wish to contact GAO officials responsible for the evaluation work relating to the subject matter of the rule, please contact Janet Temko-Blinder, Assistant General Counsel, at (202) 512-7104.

  signed

Shirley A. Jones
Managing Associate General Counsel

Enclosure

cc:  Vanessa Countryman
Acting Secretary
Securities and Exchange Commission

ENCLOSURE

REPORT UNDER 5 U.S.C. § 801(a)(2)(A) ON A MAJOR RULE
ISSUED BY THE
Securities and Exchange Commission
ENTITLED
“SOLICITATIONS OF INTEREST PRIOR TO A
REGISTERED PUBLIC OFFERING”
(RIN: 3235-AM23)

(i) Cost-benefit analysis

The Securities and Exchange Commission (the Commission) determined that because the use of the test-the-waters communications will remain voluntary under the final rule, issuers will elect to rely on test-the-waters communications if the benefits anticipated by issuers outweigh the expected costs to issuers.  The Commission estimated issuers who elect to test the waters under the rule will incur costs, including costs of identifying potential investors, costs of hosting events with potential investors, and costs of preparing solicitation materials, among other things.  The Commission further determined the selective solicitation of potential investors may result in those investors having a comparative advantage which may place some investors that are not solicited at a relative competitive disadvantage.

The Commission estimated expanding the availability of the test-the-waters communications could facilitate a more efficient and effective process for raising capital in a registered offering, involving, potentially, a lower risk of withdrawal, a lower cost of capital raising, or a higher amount of capital raised.  The Commission also determined testing the waters before public filing enables issuers to lower the risk of proprietary information disclosure and possibly to avoid the cost of preparing a registration statement.  The Commission further determined, to the extent that the final rule encourages additional issuers to conduct a registered securities offering, a broader set of investors might allocate capital more efficiently among issued securities.  According to the Commission, these efficiency benefits are more likely to accrue to non-accredited investors, whose investments are more reliant on public markets due to their limited ability to invest in exempt offerings.

(ii) Agency actions relevant to the Regulatory Flexibility Act (RFA), 5 U.S.C. §§ 603-605, 607, and 609

The Commission prepared a Final Regulatory Flexibility Analysis.  The analysis included (1) a statement of the reasons for, and objectives of, the final rule; (2) a description of significant issues raised by public comments; (3) a description of small entities subject to the final rule, (4) expected reporting, recordkeeping, and compliance requirements; and (5) a description of agency actions to minimize effect on small entities.

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. §§ 1532-1535

As an independent regulatory agency, the Commission is not subject to the Act.  2 U.S.C §§ 685(1), 1502(1).

(iv) Other relevant information or requirements under acts and executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551et seq.

On February 28, 2019, the Commission published a proposed rule.  84 Fed. Reg. 6713.  The Commission received approximately 20 comment letters from individuals, investment companies, trade associations, and other entities.  The Commission responded to the comments in the final rule.

Paperwork Reduction Act (PRA), 44 U.S.C. §§ 3501-3520

The Commission determined the final rule contains no information collection requirements under the Act.

Statutory authorization for the rule

The Commission promulgated the final rule pursuant to sections 77g, 77j, 77s, 77z–3, 80a–2, 80a–24, and 80a–37 of title 15, United States Code.

Executive Order No. 12,866 (Regulatory Planning and Review)

As an independent regulatory agency, the Commission is not subject to the Order.

Executive Order No. 13,132 (Federalism)

As an independent regulatory agency, the Commission is not subject to the Order.