To support Emerging Growth Companies (EGCs), the U.S. JOBS Act introduced the Test-the-Waters (TTW) mechanism. This provision allows companies to engage with institutional investors ahead of time, thereby optimizing pricing strategies, mitigating risks, and strengthening confidence in their IPO transactions.
Understanding Test-the-Waters
Test-the-Waters is a mechanism that permits EGCs and their underwriters to communicate with Qualified Institutional Buyers (QIBs) and Institutional Accredited Investors (IAIs) before an IPO takes place. Notably, such engagement may occur either before or after filing the registration statement, whether filed publicly or confidentially.
In practice, Test-the-Waters serves as a “trial run” for companies to gauge the attractiveness of their business models and growth strategies. For example, many U.S. technology companies have leveraged TTW discussions to highlight recurring revenue advantages when meeting with investment funds, which in turn informed adjustments to their prospectuses and resulted in higher valuations upon listing.
Strategic Benefits of Test-the-Waters
1. Accurate Market Demand Assessment
TTW enables companies to directly capture the expectations of large funds instead of relying solely on indirect analysis. This provides a significant advantage in refining offering prices, issuance size, and communication strategies early on. In fact, many U.S. IPOs have leveraged TTW to avoid the common pitfall of overpriced shares followed by sharp declines post-listing—a shock often seen in companies that skipped preliminary market soundings.
2. Risk and Pressure Mitigation During IPO
SEC’s review process can be lengthy and often requires multiple revisions. By gathering investor feedback beforehand through TTW, companies can adjust their filings discreetly, rather than having the market witness frequent amendments. This reduces public scrutiny while projecting an image of thorough preparation and professionalism.
3. Attracting and Securing Strategic Investor Demand
Beyond gauging interest, TTW also provides an opportunity to build relationships with strategic investors. In many cases, venture capital firms and financial institutions have committed to participate as early as the TTW stage, creating stable demand and boosting confidence among retail investors. This is particularly critical in volatile markets, where the confidence of institutional “anchor” investors can draw broader participation.
Legal Framework Governing Test-the-Waters
TTW was first codified under Section 5(d) of the JOBS Act (2012), allowing EGCs to engage with QIBs and IAIs prior to IPO without violating “gun-jumping” rules. In 2019, the SEC adopted Rule 163B, expanding TTW access to all issuers—not just EGCs—provided that communications remain consistent with the final prospectus.
Importantly, TTW communications are considered “offers” under securities law. As such, issuers face legal liability if they provide misleading or materially inaccurate information. Many companies therefore chose to enhance their risk disclosures in IPO filings following TTW engagements to avoid allegations of “window dressing” their business models. Additionally, FINRA amended its rules to allow research reports on EGCs to be published earlier, giving investors more data before IPO.
Practical Implications for EGCs
TTW not only allows EGCs to “read” market expectations but also serves as a strategic tool to maximize IPO value. Through this mechanism, companies can minimize information risks, strengthen institutional investor confidence, and ensure IPOs are supported by robust demand. Consequently, TTW has become a standard feature in most U.S. IPOs since 2012. For Vietnamese companies aspiring to list internationally, understanding and effectively applying TTW could be the key to improving IPO success rates.
Choosing a Trusted Advisory Partner
Executing a Test-the-Waters strategy requires not only legal expertise but also advanced investor relations management capabilities. With extensive experience in international financial and legal advisory, IVLF serves as a strategic partner for companies throughout the IPO journey—from preparing filings, coordinating investor outreach, to executing the official listing. IVLF is committed to delivering a transparent, efficient process and creating sustainable competitive advantages for clients.
Contact information
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