SEC Rule 163: What It Is and How to Comply

Securities and Exchange Commission (SEC) Rule 163 provides an exemption for a class of large, established public companies, allowing them to communicate with potential investors before filing a registration statement for a securities offering. This process, known as “testing the waters,” helps companies gauge market interest and make informed decisions about the timing, size, and structure of a potential offering. Rule 163 balances the benefits of this early communication with investor protection by setting clear parameters for who can use the exemption and what obligations they must follow.

Issuer Eligibility Requirements

To use Rule 163, a company must qualify as a “Well-Known Seasoned Issuer,” or WKSI. This designation is for companies with a significant market presence and a history of timely SEC reporting. The SEC uses quantitative tests to determine WKSI status, which must be met within 60 days of the determination date, typically the filing date of the company’s annual Form 10-K. These tests ensure that only large, widely followed companies can engage in pre-filing communications.

The primary method for qualifying as a WKSI is the public float test. A company meets this requirement if it has a worldwide market value of outstanding voting and non-voting common equity held by non-affiliates of $700 million or more. This figure, known as the public float, represents the shares in the hands of the public and not held by insiders like executives, directors, or large controlling shareholders.

An alternative path to WKSI status is available for frequent debt issuers. A company can qualify if it has issued at least $1 billion in aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash over the past three years. This allows large companies that are significant players in the capital markets, but may not have a massive stock float, to qualify.

Beyond the financial thresholds, a company must be eligible to use Form S-3 or Form F-3 for primary offerings, which requires a record of timely SEC report filings for the preceding 12 months. The company also cannot be an “ineligible issuer,” a category that includes shell companies, those that have recently filed for bankruptcy, or those convicted of certain felonies or misdemeanors.

Permitted Pre-Filing Communications

Once confirmed as a WKSI, a company can use Rule 163 for a broad range of oral and written communications before filing a registration statement. These pre-filing communications can be directed at any type of potential investor, from large institutions to the general public. This allows the WKSI to evaluate interest in a contemplated securities offering and receive feedback on its potential size, pricing, and structure.

Any written offer made under this rule is legally defined as a “free writing prospectus.” This classification subjects the communication to specific legal liabilities and regulatory requirements. A free writing prospectus can take many forms, such as press releases, emails, or presentation slides.

The content of these communications is flexible, allowing the WKSI to provide information it deems relevant for gauging investor interest. This can include details about the company’s business, financial health, and potential offering terms. However, all communications are subject to the anti-fraud provisions of federal securities laws and cannot contain material misstatements or omissions.

Communication Conditions and Obligations

A WKSI using Rule 163 must adhere to specific conditions to protect investors, and failure to comply can result in losing the exemption. The primary obligations are a legend requirement for all written communications and a filing requirement with the SEC.

The first obligation is to include a specific legend on any free writing prospectus. This legend informs the recipient that the communication is not a final prospectus and that more complete information will be available later. The text must state that the issuer may file a registration statement and that investors should read the final prospectus when it becomes available. It must also explain that documents can be obtained for free through the SEC’s EDGAR website.

The second obligation is to file the free writing prospectus with the SEC. This filing makes the communications publicly available and part of the offering’s official record.

Filing Requirements

Under the rule, any such free writing prospectus must be filed with the SEC no later than the date of the filing of the related registration statement or an amendment to it. The submission is done electronically through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The filing must include the file number for the related registration statement, making the document publicly accessible.