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Know Before You IPO: Testing the Investment Waters

By Christopher Coble, Esq. on June 05, 2015 | Last updated on March 21, 2019

It used to be that a business was flying into an IPO blind: you couldn't talk to potential investors until after you filed all of your public offering documents with the SEC. So hundreds of thousands of dollars could be wasted before a company could gauge if there was sufficient interest in their stock on the public market.

Companies were forced to circumvent these requirements through "educational meetings" between investment bankers and large investors, but it appears that those days are done. Companies can now legally "test the waters" before they pursue a mini-IPO. Here's what you need to know about new legislation that regulates the pre-IPO process:


The Jumpstart Our Business Startups Act (JOBS Act) was designed to increase opportunities of equity investment in small businesses and make it easier to go public. The Act's Regulation A+ provisions allow companies to file certain documents with the SEC, and then communicate with potential investors to measure the level of interest in a Mini-IPO.

This kind of communication can also create some marketing momentum that could be beneficial once the IPO happens.


There are, however, still regulations on how a company is allowed to "test the waters." Companies may not solicit or accept a binding order to purchase the proposed securities, so you can't bind anyone pre-IPO. Also, the communications with the proposed customers can't contain material misrepresentations or omissions, so don't mislead anyone either.


Given these restrictions, a company testing the waters will probably want to limit the discussions with prospective investors to only the information contained in the final SEC offering documents. Therefore, you may want to make sure all the materials used to test the waters have been filed with the SEC. And be careful to include the SEC-mandated legal disclaimers for prospective investors.

You may need to contact an attorney concerning an IPO, and especially if you want to test the waters first, you want to make sure you do it legally and in a way that best protects your business and all its potential.

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